Brighter lights, measured optimism

Diwali is traditionally a time for optimism and fresh beginnings. As we look at India this festive season, there are reasons to feel constructive, and equally good reasons to stay measured.

What’s encouraging

The festive season has started on a positive note. Consumer demand appears to be holding up reasonably well, even though households are having to navigate inflation, higher borrowing costs and an uncertain global backdrop. Company profits have also been resilient so far, and results have generally been encouraging, which gives us some confidence that underlying domestic demand remains healthy.

It is also encouraging that company earnings, rather than expectations or rising valuations (how much investors are willing to pay for each rupee of profit), are doing more of the heavy lifting for the market. In our view, that is a healthier backdrop than one driven mainly by sentiment.

Oil could help too. As a large energy importer, India feels higher oil prices in inflation, the currency, company margins and, ultimately, household spending power. Oil remains elevated and is still a risk, but if it becomes less of a headwind over time, the backdrop could improve further.

There may also be some scope for greater macro stability following the US midterm election outcome, although it is too early to say how long that support will last.

What we’re watching

That doesn’t mean everything is uniformly strong. Rural demand remains somewhat uneven, and this year’s monsoon season has been weaker and thus, a broader, more sustained recovery in spending will ultimately need both urban and rural India to take part.

Interest rates are another factor. They have already moved higher and may rise further, depending on how inflation, oil and the global environment develop. The second half of the financial year also faces a tougher comparison, as the same period last year included the benefit of tax changes on goods and services (GST). Headline growth (the figures reported) could therefore moderate once the festive and wedding season passes.

Policymakers also remain focused on balancing growth with macro stability (keeping the wider economy steady), and that task could become somewhat easier if external pressures such as oil begin to ease.

The longer view

So perhaps the message this Diwali is not that every light has turned green. Rather, several parts of the economy are showing resilience despite a more challenging backdrop.

The festive consumer is holding up, earnings remain supportive and policymakers remain focused on balancing growth and macro stability. Equally, higher rates, uneven rural demand and tougher comparisons remind us not to extrapolate the current momentum too far.

For long-term investors, India's opportunity has never been about one festive season or one quarter of earnings. It is about the longer-term evolution of consumption, investment, the shift towards a more formal economy and the depth of the domestic economy.

This Diwali, the backdrop looks a little brighter. There are good reasons to be constructive, but equally good reasons to stay measured.
 

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