Moneycontrol Pro Panorama | In the New Year, some old worries persist

Despite the volatility, equities will likely remain a favourite asset class of Indian investors in 2025.

Dear Reader,

A New Year has just begun! It's a time for wishes and New Year resolutions.

The start of a new year gives good vibes to every single person. That’s when everyone, regardless of their social and economic status, takes a break from all kinds of worries and looks forward to a better year. The air is filled with hopes and prayers. That’s how it should be.

Yet, one must have a realistic perspective towards what is likely to pan out in the year ahead and plan accordingly. Some old worries that persist need to be understood.

For the Indian economy, not all is well at this moment. On the ground, there are signs of a visible growth slowdown. The latest numbers on consumption and loan repayment records suggest a downturn and deepening stress.

That’s something the policymakers need to be sensitive about.

These fresh signals of worries demand rethinking and action, not a life in denial. As this MC Pro piece points out, gold loans are showing an unusual trend. 

A golden puzzle

Banks’ gold loan portfolios have shot up in the last year, almost 56 per cent year-on-year that many attribute to high gold prices. But, at the same time, the loan defaults in these loans too have risen a lot.

What does this tell us? Something is going terribly wrong at the bottom of the economic pyramid. People are in distress due to falling income levels, job losses, stagnant wages, all of which are a persisting drag on the economy.

Remember, most Indian households treat gold ornaments as family jewels and an object of pride handed over from generations to generations. If they default and let go of the pledged ornaments, there must be a valid reason.

My sense is this must be on account of weak financials of households due to one of the/ all the reasons mentioned above.

In fact, this goes well with the downtrend in the India consumption story. Most companies in the FMCG space and elsewhere have reported a demand lull. The second quarter GDP shocker corroborates this scenario. 

Rupee’s woes

At this point, no one can say that the new year will be good for the Indian rupee. The Rupee’s fortunes don’t look good in the foreseeable future. The local currency has fallen quite a bit (nearly 3 percent year-to-date) in the previous year.

And the weakness is likely to persist. The volatile rupee has forced the RBI to intervene in the forex market heavily both in spot and forward markets.

That’s evident from the sale of dollars in the forward market by the RBI in the last 7-8 months and a drop in foreign exchange reserves.

All this intervention has helped the Indian rupee, but the RBI’s ability to continuously support the rupee will be tested in the months ahead. The key factors to watch for will be the strength of the dollar driven by the US Federal Reserve’s rate trajectory and US government policies under the new President. 

Rate cut hopes

In 2025, the trajectory of retail inflation will be closely watched. That holds the key for rate cuts. A fall in food prices, which constitute around 46 percent in the CPI basket, is critical for the MPC to reverse the rate approach.

If inflation falls and stays below 5 percent, the first rate cut in this cycle can happen in the next few months. The CPI inflation eased to 5.5 percent in November from a 14-month high of 6.2 percent in the previous month, as food prices cooled. 

Food inflation had eased to 9 percent for the month compared with 10.9 percent in October.

The RBI has a new leadership. Shaktikanta Das, who helmed the central bank for the last six years, has been replaced by veteran bureaucrat Sanjay Malhotra. The markets are eager to watch Malhotra’s views on the growth-inflation trade-off.

Where will the money go in 2025?

The year 2024 wasn’t a very good year for Indian stock markets. Equities (Nifty) showed slower growth in 2024 (9 percent) compared to 2023 (20 percent) while gold performed exceptionally well in 2024 (20 percent) compared to 2023 (15 percent).

On other hand, real estate showed slower growth in 2024 (4.1 percent) compared to 2023 (5-7 percent) while fixed deposits, the favourite of most Indians, remained stable but provided modest returns compared to more dynamic asset classes.

Despite the volatility, equities will likely remain a favourite asset class of Indian investors in 2025 with mutual funds likely to continue as the preferred investment choice for fresh investors.

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Dinesh Unnikrishnan Moneycontrol Pro