Nilesh Shah of Kotak Highlights Challenges to 2025 Growth, Advocates Key Reforms

Nilesh Shah, Managing Director of Kotak Mahindra AMC, emphasized in an interview with Moneycontrol that 2025 presents several challenges that could hinder economic growth. He pointed to global issues such as heightened geopolitical tensions, the second term of President Trump, and evolving Indo-China relations as significant factors affecting growth prospects.

Shah remains optimistic about India's potential, expecting it to remain the fastest-growing major economy, achieving mid-to-high single-digit GDP growth in the coming years. However, he stressed that without tackling key reforms in land, labor, agriculture, and the judiciary—and eliminating the remnants of "Inspector Raj"—India will struggle to achieve double-digit growth.

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Interest Rates and Gold Outlook

While many analysts foresee the Reserve Bank of India initiating a rate-cut cycle as early as February or April 2025, Shah predicts a more cautious approach, with rate reductions likely in the latter half of 2025 (2HCY25). However, he anticipates a shallow rate-cut cycle overall. From an investment perspective, Shah recommends a medium-term overweight position on gold, highlighting central banks' continued appetite for the metal and its potential to benefit from a drop in U.S. interest rates.

Sectors to Watch in 2025

When selecting portfolio sectors, Shah advocates prioritizing quality over momentum, favoring reasonable valuations over expensive ones, and targeting companies with high-floating stocks. He identified private banks with strong credit cultures and limited exposure to microfinance or unsecured loans, IT companies leveraging AI and ML for efficiency, and the pharma, telecom, consumer staples, and cement sectors as likely outperformers. In particular, telecom companies could see substantial benefits from price revisions, while rural-focused consumer staples and consolidation in the cement industry present attractive opportunities.

Inflation and U.S. Federal Reserve Dynamics

Shah noted that U.S. inflation in 2025 would depend on several factors, including government spending and monetary policy. Reducing government expenses could lower inflation, while expansionary fiscal measures and faster rate cuts by the Federal Reserve could keep inflation elevated. He anticipates a stimulative fiscal policy combined with accommodative monetary measures will sustain higher inflation levels.

Banking and Financial Sector Insights

Shah maintains an overweight stance on the BFSI sector, excluding entities heavily reliant on microfinance or unsecured lending. He believes stable NPAs, attractive valuations, and a return of foreign portfolio investments (FPIs) could provide positive momentum. Despite expected margin reductions, robust deposit and credit growth in the low double-digits offers a favorable outlook for the sector.

Challenges and Reforms Needed

Acknowledging numerous obstacles in 2025, Shah highlighted both global and domestic factors. Geopolitical tensions, U.S. politics, and unresolved Indo-China issues present external risks, while the lack of essential reforms in land, labor, agriculture, and the judiciary hampers medium-term growth domestically. He reiterated that addressing these challenges is vital for achieving sustained high growth.

Expectations from the Union Budget

Shah expressed hope for a budget that balances fiscal discipline with increased capital expenditure. He suggested transformative initiatives such as restructuring railway and agricultural subsidies to boost manufacturing competitiveness, introducing a scheme to monetize gold reserves held by Indian households, and establishing an investment office modeled after Singapore's Temasek. Additionally, Shah advocated for reforms to streamline regulations, eliminate outdated laws, and foster an entrepreneur-friendly environment. Investments in cutting-edge technologies like robotics, AI, ML, and cyber security could also position India as a leader in futuristic industries.