India's economic growth cycle is showing signs of bottoming out, with strong domestic fundamentals poised to support a pick-up in growth, according to a recent report by HSBC Mutual Fund. The report suggests that several supportive macroeconomic factors are at play, potentially driving a revival in the coming quarters.

Key Factors Supporting Growth

Several factors are contributing to this optimistic outlook. These include:

• Favorable Interest Rate and Liquidity Cycle: An accommodative interest rate environment and stable liquidity conditions are creating a conducive environment for economic activity.
• Declining Crude Oil Prices: Lower crude oil prices can help to reduce inflationary pressures and improve the country's current account balance. ONGC expects crude oil prices to stay around USD 65 per barrel in current market scenario.
• Normal Monsoon Forecast: Expectations of a normal monsoon season are crucial for the agricultural sector, which remains a significant contributor to India's GDP. A good monsoon can boost rural incomes and keep food inflation in check.
• Government Spending: Continued government investment in infrastructure and manufacturing is expected to drive medium-term investment growth. Government capex is projected to grow at 7% year-on-year in FY25 and 10% in FY26.
• Real Estate Recovery: A recovering real estate cycle is also expected to contribute to the uptrend in investment activity.
• Private Investment: Renewed real estate demand and increased private sector participation are anticipated. Emerging areas such as renewable energy and the localization of high-tech manufacturing are also expected to contribute.

Resilience Amidst Global Uncertainties

Despite a challenging global macroeconomic environment marked by geopolitical and economic uncertainties, India's GDP growth reached 6.2% year-on-year in Q3 FY25. More recently, India's GDP growth accelerated further to 7.4% year-on-year in Q4FY25. While global trade-related uncertainty remains a headwind to private capital expenditure in the near term, the report expects India's investment cycle to be on a medium-term uptrend.

Government Initiatives and Policy Support

The government has been actively taking steps to address slowing private consumption, including income tax rate cuts announced in the Union Budget. The Reserve Bank of India (RBI) is also expected to continue its efforts to support economic growth through monetary easing. Easing monetary policy, a weakening dollar, and reduced oil prices have set the stage for further rate cuts, with economists projecting a 50 basis point reduction.

Market Performance and Valuations

Indian equity markets have shown strong performance, with the Bombay Stock Exchange (BSE) Sensex and National Stock Exchange (NSE) Nifty rising 1.7% and 1.9%, respectively, in May 2025. Broader indices, such as NSE Midcap and BSE Smallcap, have also outperformed. Following recent market corrections, Nifty valuations are now aligned with their 5- and 10-year averages.

Manufacturing Sector as a Key Driver

The manufacturing sector is considered a crucial pillar in India's growth story, acting as a catalyst for economic development, job creation, and technological advancement. In June 2024, the Index of Industrial Production (IIP) indicated a year-on-year growth of 4.2%, with the manufacturing sector specifically growing by 2.6%. Government initiatives such as the Production-Linked Incentive (PLI) schemes have been instrumental in boosting manufacturing output and attracting foreign investment.

Long-Term Economic Outlook

India's long-term economic outlook remains robust, with the investment cycle on a steady medium-term uptrend. Increased private investments in renewable energy, high-tech manufacturing, and deeper integration into global supply chains are expected to accelerate India's economic growth. India is also positioning itself as a critical link in global supply chains, encouraging local sourcing and manufacturing.