Declining oil intensity, rising exports signal sustainably lower real interest rates ahead; household wealth shift accelerates
India’s improving macroeconomic fundamentals are creating conditions for a structural re-rating of the country’s equity markets, with declining oil dependency, rising service exports, and stabilizing inflation setting the stage for a multi-year transformation in how global investors value Indian assets, according to a comprehensive Morgan Stanley analysis released Monday.
The report, which examines decades of economic data, highlights that India’s oil intensity—measured as barrels imported per unit of GDP—has fallen by nearly 40% since 2007, fundamentally altering the country’s vulnerability to global commodity shocks. Simultaneously, the share of exports in GDP continues to rise, particularly in high-value services, creating a more balanced external account.
“The falling intensity of oil in GDP and rising share of exports in GDP, especially services, and fiscal consolidation imply a lower savings imbalance,” the report noted. “This will allow structurally lower real rates. At the same time, lower inflation volatility as a result of both supply-side and policy changes mean that volatility in interest rates and growth rates are likely to fall in the coming years.”
These structural shifts are already manifesting in improved economic indicators. The yield curve has begun steepening in a bullish pattern, the money multiplier is rising after years of decline, and nominal GDP growth is accelerating relative to nominal interest rates—historically a powerful combination for equity returns.
MS also pointed to improving geopolitical dynamics as potential catalysts. The “thawing of relations with China” and Beijing’s own stimulus efforts could benefit Indian companies, while the possibility of a U.S.-India trade deal under the new administration could lead to lower tariffs on Indian exports.
Perhaps most significantly, the report documents a historic shift in Indian household savings patterns. Equity allocations as a percentage of household savings have risen dramatically, with systematic investment plan (SIP) flows surging past Rs 250 billion monthly—a tenfold increase from levels seen a decade ago. The number of SIP accounts has exploded to over 100 million, reflecting broadening retail participation.
“The low beta itself emanates from improved macro stability and the structural shifts in household balance sheet toward equities,” the strategists wrote, noting that India’s correlation with global markets has declined to multi-year lows.
The upcoming Union Budget could provide additional reform momentum, with Morgan Stanley expecting announcements on privatization, capital market reforms, and potentially significant changes to investment regulations. The report suggests several state-owned enterprises could be candidates for strategic divestment.
On monetary policy, the Reserve Bank of India’s stance is expected to turn accommodative after maintaining a hawkish bias post-pandemic. Inflation volatility, measured by the three-year standard deviation of CPI, has fallen to its lowest level since the early 1990s, providing room for policy support.
The primary deficit has declined to near-zero levels, while the consolidated fiscal deficit including state borrowing has shown consistent improvement. This fiscal consolidation, combined with India’s growing foreign exchange reserves, provides significant policy flexibility.
However, the report acknowledges risks, including slowing global growth, potential oil price spikes, and the possibility of renewed geopolitical tensions. The firm notes that while domestic institutional investors have become dominant buyers, sustaining the rally will eventually require foreign institutional investors to return as net purchasers.
“High growth with low volatility and falling interest rates and low beta equals higher P/E,” the strategists concluded, arguing this environment supports both continued household allocation shifts and a structural re-rating of Indian equities relative to both emerging and developed markets.
The transformation is particularly evident in India’s corporate sector, where balance sheet health has improved dramatically. The debt-to-equity ratio for Indian companies has fallen to multi-year lows, while return on equity has stabilized despite global headwinds, positioning companies for a new investment cycle.
