Q3 GDP data strong but buoyant Indian market may have already discounted growth

The strong GDP data may not provide further long term trigger to the already buoyant markets.

The very strong Q3 GDP growth numbers may provide much-needed immediate support to Indian equity market valuations, but may not provide any further trigger to the already buoyant indices. Moreover, markets may not be too excited about the GDP boost since growth seems to have come on the back of base revision, and net tax collection growth without a supporting rise in GVA.

The fiscal third quarter data released by the Ministry of Statistics and Programme Implementation on February 29 showed that GDP (gross domestic product) grew 8.4 percent -- much faster than the expected 6.5 percent. However, the GVA (gross value add) growth at 6.5 percent for Q3 was broadly in line with expectations.

GIFT Nifty was trading muted after the release of the GDP data, and were trading flat-to-mildly negative. GIFT Nifty March futures contract was at 22,140, down about 50 points from the close of the afternoon session.

GDP data may support elevated valuations

“This GDP data might be supportive of valuations,” Deepak Jasani, Head of Retail Research, HDFC Securities, told Moneycontrol. “Valuations-wise, we have been at a high level for a few months now,” he said.

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NSE Nifty 50 has risen nearly 10 percent in the last three months. The markets ended on a cautious note on February 29, with the Nifty closing marginally up at 21,983. The index trades at a P/E of 23.45 at present.

At these levels, the markets have likely already baked in the current economic growth. “Already, fairly high growth is being factored in the current valuations and the better than expected GDP numbers is endorsing the growth. This makes the case for valuations to remain in the current buoyant zone,” said Pawan Bharadia, managing director at Equitree PMS.

Strong GDP may postpone RBI rate cut cycle

“In the longer-term, it doesn't make much difference to the markets," said Sahil Kapoor, head of products and market strategist at DSP mutual fund, citing the revision in the base figures being the reason for strong GDP growth.

Further, the robust data may result in RBI rate cut cycle getting postponed. “That may become a reason to take profits in the markets,” said Jasani.

The fixed income markets, which were anxiously waiting for a rate cut, may get disappointed, as it may not come on an immediate basis, said Marzban Irani, CIO- debt, LIC Mutual Fund. “People were expecting a rate cut probably by June; that could now get pushed to August,” said Irani. He expects yields to remain range-bound.

Earnings support continues to keep markets buoyant

Going forward, investors will be watching how FIIs react tomorrow. While the GDP may not have much impact, other reasons could weigh on the markets, such as profit taking, shrinking risk-appetite, said Jasani. He said that Q3 earnings were a mixed bag, but broadly comfortable.

In the upcoming quarters too, he expects earnings to support equity valuations. “Maybe in Q1 next year there could be some hiccup due to the election, and restrictions in government spending, but that would be expected. Q2 onwards there would again be revival in momentum,” he said.

For now, the Q3 GDP growth figure has prompted a higher growth estimate for the full fiscal year 2023-24. But this will likely be followed by a "much slower, yet healthy FY25E growth of ~6.5%, led by cyclical headwinds such as (i) relatively slower net GoI spending, (ii) fading terms-of-trade gains from lower commodity prices, (iii) patchy agri performance, (iv) tighter lending standards, and (v) relatively weaker exports," said Madhavi Arora, Lead Economist, Emkay Global Financial Services.

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