Neelkanth Mishra, chief economist at Axis Bank and head of global research at Axis Capital, says the economy has definitely slowed, but it is seasonal.

He expects a rebound by January and advises buying private banks and equity pieces.

He explained that investors started moving to safer, “defensive” sectors such as IT, consumer staples and pharmaceuticals from April to June.

These sectors performed well, even though revenues in some, notably IT and pharmaceuticals, were still down. This happened largely because fund managers saw signs of a slowing economy but had to invest steady cash flows.

In an interview to CNBC-TV18, Mishra discussed the outlook for Samvat 2081 and the rest of FY25.

The Nifty index has lost over 7% from its recent peak, but is still trading at nearly 23 times estimated 2024-25 (FY25) earnings.

This is the verbatim transcript of the interview.

Q: Macros and markets are in trouble. First the macros, Goods and Services Tax (GST) collections were the first heart attack, at least for me, 6.5% when nominal gross domestic product (GDP) should be 10-11%. Are you worried that the economy is slowing or is it just seasonal?

A: The economy has slowed, and that’s something we’ve been signaling for some time. For a while, people thought it was just the intense heat or the elections, then there were heavy rains. But no, we have to face reality, most of the high frequency indicators have slowed down very sharply and everything from cement volumes to energy volumes to car sales to commercial vehicle (CV) sales – what do you want to- you say to yourself; I can’t think of any high frequency indicators that have improved in the last six months.

Q: I will show three pieces to counter, to play a strong advocate. Vahan data (auto data) is now available for the first half of the festive season and there, two-wheelers grew by 12%, a pretty damn good number. Not passenger vehicles (PVs), PVs are still outstanding, but two-wheelers at 12% and the core sector data for September is out, cement alone fared well, though it had a very dismal April-August period.

A: 4.7% or something. Cement was growing by 11-12%. This is an investment-led recovery. If GDP has to grow by 7%, cement has to grow by 9-10% and that’s how it went well. Fortunately, it is not zero, which is what our analyst estimates for the quarter that the industry as a whole did not grow; even if it’s 2-3%, I don’t think that suggests a strong economy.

In the Vahan record, more distortions can occur if you only look at 15-20 days of data. The big picture is that the car market is a much bigger market than the two-wheeler market from an overall economic perspective; even the credit impulse is low. So credit growth slowed below 13%. So, across a whole range of metrics, the economy has slowed. The question for all of us is whether this is a temporary slowdown and if it is a temporary slowdown then we should buy the weakness. If it’s a much longer slowdown, then it’s better to take advantage and sit out for a while.

I think the economy has slowed down from what I call an unintentional level of fiscal and monetary tightening. We can see that the corrective actions are underway, and my expectation is that maybe in January-February, the high-frequency indicators will start to improve.

Q: So you’re saying the government’s lack of spending in the first two quarters meant less fiscal stimulus and the tightening of Reserve Bank of India (RBI) liquidity, not so much interest rate but liquidity, which is considerably weakened in Q2, the two will create growth in the second half?

A: Yes, and it was not just the RBI that kept liquidity tight, it was also the discomfort it had with the high loan deposit rates that were communicated to banks in March-April, which meant that I almost started a downward spiral. As you know, deposits are created when loans are made. So if the banks start cutting back on lending or slowing down loan growth, that slows down deposit growth, and then everything goes into a downward spiral. So if you look at the incremental credit growth that is financial year to date (FYTD), which we did, the growth was much lower than what we saw in FY22-FY23 and in FY24. Therefore, this had a very significant impact on the economy as well.

Q: And maybe it was requested, at least in areas like microfinance and unsecured credit.

A: I’m not so sure. We have to be very clear about this, although there were possible excesses that appeared in small buckets, there are tools with broad brushes. So there is Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), Global Credit Growth, Loan-Deposit Ratio (LDR) and Liquidity Coverage Ratio (LCR). But then there are these narrow buckets. So if unsecured personal loans are 7-8% of bank loans or MFIs are all put together, maybe 4-5% of aggregate loans. If they have to be targeted and perhaps there needs to be a slowdown there, then the tools have to be different than an aggregate credit slowdown.

Q: To be fair, they followed macroprudential rules such as, for example, increasing the risk weight for unsecured debt. They didn’t raise rates and raise liquidity…

A: But liquidity has been squeezed

Q: Liquidity was tight in August and that’s because last August food inflation reached 7.7%…

A: Not August. The fact that food inflation is very high and that makes the job of the Monetary Policy Committee (MPC) very difficult, given that there is now evidence that the economy is slowing, but the headline inflation that they have to target is still high. It is, I think, a very complex issue. I don’t think we should underestimate the challenge. The tightening of liquidity and the fact that the central bank has created an action, the M3 action, broad money, only two entities that can create, the commercial banks and the Reserve Bank.

The Reserve Bank of India’s share of incremental money injection in the last two years was 14%. It tends to be around 18-20%. Now, what we have seen since July, because the RBI has started to relax on this front, clearly seeing that there are problems and that banks need time to understand that this is a signal, and with the shift to neutral in October , things are gradual. further decline and my expectation is in the next two months, even the banks that are still, it is a delayed response to the liquidity squeeze a year ago, there is still a rush for bulk deposits, rates are too high, some banks hold in further liquidity that may not be needed. So, as the banking system understands that RBI’s liquidity stance has changed and changed for good – then credit momentum starts to improve.

Q: How do you play this in the market? Do you buy the dip? And when you buy dip, which dips, which sectors?

A: Because flows were happening because now that we’re moving into the market, let’s put things in context. We have seen foreign institutional investor (FII) selling continue throughout October. So we’ve seen about $10-11 billion going out and that’s a very strong outflow rate, which means just 7-8 years ago, a flow of $15-20 billion in a year it was a very good flow. Now we’re seeing $11 billion in outflows in a month. And while domestic flows have been largely steady, there may have been some high net worth (HNI) individual figures, which we’ll see in a few days, but within the Employees’ Provident Fund Organization (EPFO ), the systematic investment plan (SIP). ), insurance, all these flows are 4-5 billion dollars per month, which is a lot, but it is very small compared to the flow of 11 billion dollars. So if you see that exit rhythm, the market will take a break.

Now, which sectors should I prefer? I would say from April-May-June there was a defensive shift, so IT, commodities and pharmaceuticals performed significantly, despite the fact that for some of these sectors, IT and pharmaceuticals, earnings were still tight. And these were the fund managers who responded to the slowdown in high-frequency indicators, but had to deal with steady inflows.

As we begin to see a cyclical recovery; you talked about the private banks doing a little bit better because for the banking system as a whole, the challenge over the last couple of years has been that, quantitatively, I mean the raw material that the banks are working with, which had started to become a issue and so as we start to see the raw material improve and at the margin, warehouse pressures, warehouse rates should start to come down. After all, quantitatively, we’re starting to — I don’t expect any rate cuts, by the way; I mean, I don’t think there will be room for rate cuts until February or April. April may be the earliest we should expect. But quantitatively, things will start to ease and that should help the banks.

I expect and saw yesterday some order books from the big industrial company, at least surprised up. So the capex cycle, at least so far, seems to be intact and as the cyclical recovery happens, those would be the sectors that I think will benefit the most.

Q: Aren’t EMS companies at the discretion of consumers?

A: EMS is doing well and I expect, I mean I’m part of the semiconductor mission in India and I’m seeing it up close, very proud of what the country has achieved and the momentum we’re seeing.

For the full interview, watch the accompanying video

Follow all the latest updates from the stock exchange here