2024 Outlook - Softish Landing; Smooth Pivot; Swift Recovery: Nirmal Bang

Nirmal Bang Report

A 2023 recession has thankfully been averted, but some slowdown is inevitable. Our base case in 2024 would be something between a ‘soft’ landing and a ‘shallow recession’ in the U.S. Even in a worst-case scenario, Fed-induced recessions are usually shallow (less than 1% decline) and short-lived (two-three quarters).

We see greater probability of the Euro-area going into a sharp slowdown/recession, which along with moderating inflation may be sufficient to trigger a ‘pivot’ by the Fed. India will not be immune to a global slowdown and consequently we are factoring in marginal moderation in gross domestic product growth to 6.2% in FY25 from an estimated 6.5% in FY24.

Moderating global growth implies benign commodity prices and consequently a ‘goldilocks’ scenario for India with the current account deficit estimated at 1.5% of GDP in FY25; wholesale price index inflation at 2.5% and consumer price index at 4.8%.

We anticipate a shallow rate cut cycle from the Reserve Bank of India in FY25 (50 basis points beginning in June 2023). We are pencilling in some fiscal slippage in FY24 (6.1%of GDP) as we see the need for higher spending on rural schemes and expect some fiscal consolidation in FY25 (5.5% of GDP) on slower growth in government capex.

We expect the 10-year yield to moderate to ~7% levels on average in FY25, supported by rate cuts, moderating global yields and JP Morgan bond-index inclusion. We expect the Indian rupee to remain range-bound (with a depreciation bias) although a global slowdown could lead to volatility.

A turn in the rate cycle is favorable for equities and yet the risk-reward is more favorable for large caps. A sharp slowdown/shallow recession could lead to a market correction, but we anticipate a swift recovery. The recovery will depend on the extent of easing.

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