Daily Voice: Vikas Khemani believes finance minister has a tough job balancing socialist and capitalist priorities in Budget 2025

Starting with our expectation of markets in 2025 - we believe that the US policy and geopolitical situation will have a huge impact in shaping the market setup for 2025. Further, we believe that domestic factors like liquidity remaining tight, a somewhat slowdown in earnings amid stretched valuations, and an elevated supply of paper in equities will keep the market in check.

However, India's story structurally is very well-placed. Given the recent market corrections, any positive event can be a sentiment booster and markets might rally a bit. However, that is difficult to call, and we do not want to predict short-term market movements.

India’s structural story is facing temporary headwinds and our advice to investors is to keep expectations low, avoid excessive risks, and stay invested. When we see markets 2-3 years down the line, this correction in 2025 will look like a blip in the overall scheme of things.

Do you see the rupee falling towards 90 to the dollar in the coming months?

INR has depreciated by 3-4% against USD over the last 3-4 months. But it’s not just INR, most of the major currencies have weakened as USD strengthened led by better-than-expected job data which has fuelled expectations of slower Federal Reserve rate cuts, keeping the dollar strong.

Volatility in oil prices and lastly foreign fund outflow (over ~Rs 60,000 crore in the January month from equity markets so far) have also contributed to the INR weakness. The US is expected to return to a strong growth trajectory given Trump’s measures – this can lead to further strengthening of the USD. Further, any currency devaluation by China to counter the tariff hikes by the Trump administration can lead to short-term volatility in the financial and currency markets (similar to 2015).

Given all these factors, INR can weaken further versus USD in the future. Whether it will move towards 90 per dollar is difficult to say and it will be an extreme scenario if all the above risks play out.

Do you think the February policy meeting by the RBI, especially after the Union Budget, will be crucial to watch?

Yes, the February policy meeting by the RBI, especially following the Union Budget, will indeed be a crucial event to watch. Union Budget will lay out the fiscal deficit and we need to see how the government balances the socialist and capitalist priorities. Will the government put the accelerator on the capex, or will there be benefits for the public?

RBI has been holding on to the rate cutting for some time. With inflation coming down, the February meeting will be critical as it comes at the crossroads of monetary policy calibration, fiscal priorities, and inflation-growth dynamics. Markets will be watched for:

>>Change in the RBI's tone in this or the next policy meeting.
>>New RBI Governor’s stance over the next few policies.
>>Insights into how the RBI balances fiscal expansion if any with its inflation-targeting mandate.

It will set the tone for India’s economic and financial trajectory in 2025.

Will the government stick to its 4.5% fiscal deficit commitment for FY26 in the Budget?

The government has seen strong GST collections and rising direct tax revenues, which could help it manage its fiscal position. For the current budget, we believe that the Finance minister will have a tough job in balancing the socialist and capitalist priorities. Whether to boost consumer demand and sentiments by major populist reliefs or continue building on the infra and capex growth which has been the focus of this government for the past few years?

How the FM balances these will be interesting to see. If the FM chooses to address both and increase the fiscal deficit slightly, we do not think that it will lead to any major problems. For market participants, while the higher fiscal deficit will be an interim negative, however, economic growth and demand revival are more important from a medium to longer-term point of view. Hence, we do not believe that FM choosing for a higher fiscal deficit target for FY26 will be seen as a major negative by markets, if the measures taken point towards economic growth revival.

Which measures, if announced in the Union Budget, could revive investor and market sentiment?

The slowdown in economic and earnings growth is a major concern of the market. Amid concerns of a consumption slowdown, there is a belief that the government might consider enhancing public expenditure. A rationalization in income tax rates or measures leaving higher disposal income in the hands of the public will go a mile in addressing the current slowdown.

This boost from the budget can lead to an immediate recovery in consumption demand. Further, the government capex was slow in H1 and is back-ended in H2 FY25. This will also help in overall economic recovery. Thus, an immediate boost from the Budget coupled with ongoing capex spending or other reforms can help revive the overall market sentiments.

Which sectors have you taken exposure to during the current market correction?

The current correction has opened lots of interesting opportunities in the market. A lot of our existing stocks which are delivering well on growth and profitability are available at cheaper prices and thus, the risk-reward is more favourable than what it was a few months back. We are adding to those positions and have initiated new positions which we were tracking and have now come near our comfort price.

In terms of sectors, we believe that Manufacturing in India is a structural theme that will continue to do well. Also, given that USD might strengthen further against INR and other currencies going forward, we believe that IT and Pharma will do well this year. Moreover, Banking is a sector that has underperformed for a while and the risk-reward is attractive in some of the stocks. Hence, we believe that these sectors can outperform in 2025 and beyond.

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