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India’s Growth Surprise Seen Adding to Troubles for Stock Market

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A hiccup in India’s world-beating economic growth may exacerbate near-term weakness in stocks, according to strategists.

The economy expanded at the slowest pace in almost two years in the September quarter, data Friday showed. Market participants expect a pickup in growth in the second half of the fiscal year, especially if the Reserve Bank of India cuts interest rates or slashes the share of deposits lenders must set aside.

Concerns about the economy and valuations have India’s NSE Nifty 50 Index about 8% down from a September record. Foreign investors pulled out $2.6 billion from equities last month after a record monthly withdrawal in October. Meanwhile, India’s index-eligible bonds have seen their first monthly outflow since getting added to a key JPMorgan Chase & Co. index.

The stocks gauge fell as much as 0.5% in early trading, while the MSCI Asia Pacific Index gained as much as 0.6%. Meanwhile, the rupee fell 0.1% against the US dollar, on course to mark yet another record low this year.

Here’s a selection of comments on what India’s slowing growth means for its assets.

Emkay Global Financial Services Ltd. analysts including Seshadri Sen, in a note Sunday:

“This should trigger some near-term weakness in the markets, but some of this was already known and partially priced in.”

“We do not see the case for a major market selloff but reiterate that near-term upside is also limited due to earnings weakness and valuations.”

The year-end Nifty target remains 25,000, and “an incremental correction over 5% in the Nifty is an entry opportunity.”

“A silver lining is that the weak growth opens the door for an RBI rate cut” this month.

Vikas Pershad, Asian equities portfolio manager at M&G Investments, in a Bloomberg TV interview:

India “might be the longest-tail growth story in the world today among major markets.”

“I know we had a hiccup,” but “there will be GDP multiplier here. Economy will continue to grow.”

Jefferies Financial Group Inc. analysts including Mahesh Nandurkar wrote in a note Saturday:

A weak GDP print was already getting reflected in corporate earnings and “we believe that the worst of earnings cuts is likely behind.”

Still, a much tighter fiscal 2025 is on the cards, driving yields lower. The possibility of a cut in cash reserve ratio, or a reduction in the share of deposits lenders must set aside, increases.

Michael Wan, a currency strategist at MUFG Bank in Singapore, wrote in a note:

From an FX perspective, the key question is whether this growth blip proves to be short-lived or something more pernicious. The growth slowdown is likely to have been driven also by restrictive monetary policy and the RBI’s moves to tighten macroprudential measures and these factors could continue to weigh on portfolio flows

From a rates perspective, this week’s rate meeting is likely to be a close one, with possible increasing dissent out of some members. There may also be moves to cut the cash reserve ratio requirements to help boost banking system liquidity

Brian Tan, Shreya Sodhani and colleagues at Barclays wrote in a note:

“RBI Governor Das has repeatedly argued the primacy of price stability to support sustained high growth in the medium term.”

“Despite some pullback in food prices in early November, we now expect the RBI MPC to stay on hold in the December policy meeting next week and keep the repo rate at 6.5% and the policy stance neutral.”

Consumer inflation breaching the upper limit of RBI’s tolerance band in October isn’t not a favorable backdrop to start an easing cycle, even though this recent growth reading disappointed expectations “by a wide margin.”

Sonal Varma, chief economist for India and Asia ex Japan at Nomura, said in an interview:

The GDP reading “is a game-changer” for the RBI’s meeting on Friday. “On the face of it, policy tradeoffs may appear stark, but looking at the nuances, we don’t see any tradeoffs and believe easing is long overdue.”

“We now expect a 25 basis point repo rate cut” and are “penciling in a 50 basis point cut in the Cash Reserve Ratio to counter tight banking sector liquidity. We stick to our out-of-consensus view of a deeper easing cycle of 100 basis points cumulatively by mid-2025.”

--With assistance from Karl Lester M. Yap, Shery Ahn and Haidi Lun.

(Updates with market moves in fourth paragraph.)