Edelweiss Financial Services Ltd Management Discussions

Macro Economic Review and Outlook

Globally, 2024 has been an eventful year. The year witnessed significant electoral activity and saw over half the worlds population participate in major elections, triggering significant policy volatility as newly elected governments implemented swift domestic and international strategy shifts. These elections, coupled with heightened geopolitical tensions, reshaped international alliances, creating both opportunities and challenges for global stability. Notably, the return of the Trump administration in the US intensified this volatility, instigating a marked shift towards protectionist trade policies. The imposition of "reciprocal" tariffs by the US, designed to mirror those of other nations, fuelled concerns about escalating trade tensions and supply chain disruptions. Consequently, market volatility increased, and nations were compelled to reassess established trade and diplomatic relationships, navigating a more fragmented and unpredictable global landscape.

Amidst these complexities of geoeconomic fragmentation, tariff disputes, and persistent global uncertainties, India has demonstrated remarkable resilience. Through a combination of inherent dynamism, strategic policy interventions, and a well-calibrated foreign affairs approach, India has not only navigated the challenging landscape but also solidified its position as a pivotal force in the evolving global economic order. This adept navigation, built upon a foundation of structural reforms and sustainable development, has enabled India to forge ahead while others have experienced setbacks.

Looking back at 2024, the global economic environment was marked by a gradual moderation of inflationary pressures, though many advanced economies still grappled with elevated price levels. Geopolitical tensions persisted, contributing to supply chain disruptions and market volatility. Central banks globally adopted a cautious monetary policy stance, balancing the need to curb inflation with the imperative of supporting economic growth. Recent strength in the US dollar and rethinking in the Federal Reserve about the path of policy rates in America have caused emerging market currencies to weaken. Fiscal strains and low real rates relative to history have led to rapid erosion of value in some currencies compared to others. Borrowing costs for sovereigns are also rising as financial markets re-evaluate the outlook for inflation, policy rates and fiscal prudence. Looking ahead, the International

Monetary Fund (IMF) projects global growth of 3.3% for 2025, with an average of around 3.2% expected over the next five years a pace considered modest by historical standards. While the overall global outlook remains steady, growth paths diverge significantly across regions.

For India too, growth momentum encountered headwinds in the first quarter of FY25, largely attributed to the general election and a dip in capital expenditure. Nevertheless, the nations growth trajectory proved resilient, albeit moderating, with provisional MoSPI estimates showing FY25 GDP growth at 6.5% the slowest since the pandemic-affected FY21. A strong fourth quarter rebound, recording 7.4% GDP growth, was crucial in lifting the annual figures, though it remained below the 8.4% seen in the same quarter of the previous year. Sectoral performance varied: agriculture made a robust recovery (5.4% in Q4, 4.6% annual), manufacturing moderated to 4.5% annually, and construction saw a powerful Q4 resurgence (10.8%), contributing to a 9.4% full-year expansion. Services sector registered 7.2% growth for the year, down from 9% in FY24. Demand-side analysis reveals improved private consumption growth at 7.2%, reflecting increased household spending, even as capital formation growth eased to 7.1%, indicating a moderation in investment activity despite a year-end boost. Crucially, Indias macroeconomic stability endured, underpinned by strong fiscal discipline, a thriving services trade surplus, and robust remittance inflows. The RBIs measured monetary policy has been instrumental in inflation management, while widespread infrastructure development continues to boost connectivity and economic dynamism. The growing digital economy further strengthens this foundation, fostering innovation and inclusion, thereby enabling sustained growth despite external uncertainties.

Crucially, Indias macroeconomic stability endured, underpinned by strong scal discipline, a thriving services trade surplus, and robust remittance in ows.

As we move into 2025, recent trade tariff measures have intensified uncertainties surrounding the economic outlook globally, creating new challenges for growth and inflation. In response, central banks are proceeding cautiously, with policy divergence becoming apparent as they prioritise domestic concerns. Governments are expected to increasingly integrate national security concerns with economic competitiveness, using industrial policies and trade protectionism to pursue their objectives. The fragmentation of global trade, driven by US-China tensions and the rise of geoeconomic blocs, is likely to continue reshaping supply chains. In this context, emerging markets with strategic locations and trade agreements across multiple blocs, such as India, Saudi Arabia, Mexico, Brazil, the UAE, and Southeast Asia, are expected to thrive. India is likely to strengthen its trade relations across geopolitical divides and drive South-South trade, while Southeast Asia is expected to remain a leading destination for foreign investment among emerging markets. Ongoing advancements in AI and digital technologies are set to revolutionise industries globally, with innovations like DeepSeeks efficient large language model potentially lowering adoption barriers. For India, this emphasises the need for introspection, focusing on affordable, scalable, and collaborative AI development to strengthen local capabilities.

Economic prospects for India in 2025 look balanced and most agencies forecast an encouraging picture of Indias economy in the coming year. While risks posed by potential U.S. trade policies are real and are expected to impact Asias overall growth outlook, India remains less vulnerable due to its low goods exports as a share of GDP. This reduces its exposure to global trade disruptions. At the same time, Indias services exports continue to perform well and are expected to grow further, providing stability amid global uncertainties. Domestically, the translation of order books of private capital goods sector into sustained investment pick-up, improvements in consumer confidence, and corporate wage pick-up will be key to promoting growth. Real GDP growth in FY26 is expected to range between 6.3% 6.8%, factoring in both upside and downside risks. Rural demand backed by a rebound in agricultural production, an anticipated easing of food inflation and a stable macroeconomic environment provide an upside to near-term growth. In her budget speech on 1st February 2025, Honble Finance Minister has outlined the governments vision, strategy and action plan, focusing on four engines agriculture, MSME, investment and exports. She also underlined major reforms in six domains taxation, power sector, urban development, mining, financial sector, and regulatory reforms. Overall, India will need to improve its global competitiveness through grassroots-level structural reforms and deregulation to reinforce its medium-term growth potential. The expansion of the manufacturing sector, driven by initiatives like "Make in India" and PLI schemes, is expected to gain momentum. The growing middle class and rising disposable incomes will continue to fuel consumption and retail growth. The services sector, particularly in IT, digital services, and tourism, holds immense potential for further expansion. Increased exports, driven by global supply chain diversification, and a surge in private sector investment spurred by government infrastructure spending, will further contribute to economic momentum.

Indias remarkable economic growth over the past decade has propelled its GDP to $4.3 trillion, solidifying its position as the worlds fastest-growing major economy. Projections indicate it will become the third-largest economy globally by overtaking Germany by mid-2027. However, this progress faces headwinds from geopolitical and trade uncertainties, and potential commodity price shocks, necessitating proactive and agile risk management. Persistent inflation above the RBIs target has led to maintained policy rates despite slower recent growth, with rising core inflation posing a risk to consumer demand. Future growth prospects are intertwined with global trends, particularly geopolitical stability and the pace of recovery in the West, as trade disruptions could impact exports. Despite these challenges, Indias economic growth is expected to continue its upward trajectory, increasingly aligning with pre-pandemic growth levels.

India is currently experiencing growth divergence, trending upwards even as advanced economies slow down. This positive divergence is attributed to strategic domestic interventions boosting Indias growth potential, suggesting that with continued right policies, India has the capacity for even faster growth. While macroeconomic health checklist for India looks good, to realise the vision of Viksit Bharat by 2047 India will need to achieve a growth rate of around 8%, on average, for about a decade or two. As the country aims to accelerate its economic growth rate in the coming years, it has the tailwind of strong balance sheets in the domestic corporate and financial sectors. But, with globalisation on the retreat, raising the average growth in the next two decades might require reaping the demographic dividend through a deregulation stimulus.

Indias remarkable economic growth over the past decade has propelled its GDP to $4.3 trillion, solidifying its position as the worlds fastest-growing major economy. Projections indicate it will become the third-largest economy globally by overtaking Germany by mid-2027.

Industry Structure and Developments

Alternative Asset Management

The asset management industry in India comprises of Alternative Asset Management and Mutual Funds. India has witnessed a shift in investment and savings trends from conventional options like Bank FDs to Mutual Funds and Alternative Investments. This change is driven by increasing financial literacy, higher income levels, regulatory support, and the desire for better returns. The growth of digital platforms and easy access to information have also contributed to this shift, enabling investors to explore and invest in diverse asset classes.

Alternative Asset Management can be classified as Public alternatives (hedge funds, concentrated public equity strategies), Private Alternatives (Real Assets, Private Credit, Private Equity) and Perpetual Strategies (InvITs and REITs).

The number of High-Net-Worth Individuals (HNIs) and Ultra-High-Net-Worth Individuals (UHNIs) is expected to double by 2027 compared to 2022. Additionally, the increasing corpus of pension funds and insurance companies is expected to provide a substantial pool of capital actively seeking alternative investment options. This is expected to translate into significant growth potential for income and yield products like Real Assets and Private Credit in India.

Within Indias Private Alternatives investment landscape, over the last decade Real Assets and Private Credit have provided investors superior risk-adjusted returns leading to development of this market. Indias projected GDP growth towards $6.7 trillion by 2029 presents a massive $247 billion opportunity for Alternative Assets, creating an attractive investment environment. Within

Mutual Funds

Indias Mutual Fund industry is also making significant strides, characterised by consistent growth and promising indicators. With a strong track record of performance and a diverse range of investment options, it is well-positioned to meet the needs of various investors. In FY25, Mutual Funds Industry AUM grew 23%, reaching 65.74 trillion as of 31 March 2025, compared to 53.40 trillion as of 31 March 2024. (Source: AMFI reports). this, Real Assets and Private Credit in India are expected to reach ~46% of the Indian Alternatives market by 2029 to $114 billion, leading the industrys growth. (source: IMF and Preqin)

Real Assets funds focus on development and monetisation of assets to release productive capital in the country and are a large investment opportunity. This exceptional growth trajectory positions Indias Private Alternative investment space as a preeminent destination for investors seeking risk-adjusted, long-term, high-potential returns.

Private Credit funds look to provide flexible financing solutions for meeting the growth and refinancing requirements for the corporates India. They are becoming an integral part of the financial ecosystem and are playing an important role in development of debt markets in India. Private Credit delivered through Private Alternative funds with matched asset-liability structures solves a tangible problem for the borrowers.

This growth is fuelled by a combination of factors, including the rising financial literacy among the populace, favourable performance of the stock market, and the convenience of digital investing. Notably, there is a rising involvement of young Indians in equity investments, driven by the desire to build wealth in a changing economic landscape. Technology has played a pivotal role in democratising access to mutual funds, offering simplified processes and user-friendly platforms that make investing more accessible to a wider audience.

Looking forward, the outlook for Indias mutual funds industry remains promising. With ample opportunities for expansion and the potential to attract new investors, the industry is poised for further growth. As more participants enter the market and innovative products emerge, we anticipate an exciting journey of wealth creation and financial empowerment. While challenges may arise, the resilience and adaptability of Indias

Mutual Funds industry position it for continued success in the years ahead. With a strong foundation and a commitment to innovation, the industry is well-equipped

Asset Reconstruction

The ARC industry in India is operating within a strengthened regulatory framework emphasising transparency and accountability. The RBIs focus on equitable settlement practices, underscored by mandatory reviews for high-value cases and stringent board oversight, aims to enhance trust and efficiency in distressed asset resolution.

CRISIL, in its report, projects that Asset Reconstruction Companies (ARCs) will see the cumulative recovery rate of security receipts (SRs) increase for the second consecutive year, rising by up to 15% points annually to reach 75 80% by the next fiscal year. This improvement is driven by three main factors: strong performance of stressed assets in key infrastructure sectors such as real estate, thermal power, and roads; a higher proportion of retail and low-vintage assets; and slower growth in new acquisitions relative to incremental recoveries.

Additionally, better performance of stressed infrastructure assets, coupled with the deterrent impact of the Insolvency and Bankruptcy Code (IBC), is encouraging debt restructuring, which is becoming the preferred resolution method. The growing acquisition of to navigate obstacles and capatalise on emerging opportunities, driving sustained growth and prosperity for investors.

retail loan portfolios is also supporting recovery rates, with cumulative ARC recoveries for these assets expected to reach 60 65% next fiscal (about 8% of total recoveries), up from 55 60% this fiscal. This is attributed to faster churn and shorter redemption periods of 2.5 4 years for retail loans, compared to 5 6 years for corporate assets.

The growth outlook for ARCs in 2025 presents distinct nuances between the wholesale and retail segments. While successful resolution of large corporate NPAs can lead to substantial individual recoveries, growth in the retail and SME sectors hinges on efficiently managing a higher volume of smaller accounts, demanding robust technological infrastructure and widespread collection capabilities. ARCs focusing on wholesale assets may experience growth in spurts tied to significant deals, while those prioritising retail and SME portfolios could see more consistent, incremental growth. Ultimately, the ability of ARCs to strategically navigate these diverse market segments, adapt to the evolving regulatory environment, and leverage technological advancements will be crucial determinants of their sustained growth and value creation within the Indian financial ecosystem.

ARCs focusing on wholesale assets may experience growth in spurts tied to significant deals, while those prioritising retail and SME portfolios could see more consistent, incremental growth.

MSME Finance

Indias economic growth remains robust, underpinned by strong domestic demand and accelerated expansion in both manufacturing and services sectors. This positive momentum is expected to drive continued credit growth, particularly within the Micro, Small, and Medium

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Enterprises (MSME) segment and retail lending. These sectors present compelling investment opportunities, supported by increasing financial inclusion, digital adoption, and favourable structural reforms.

The MSME sector has emerged as a highly vibrant and dynamic sector of the Indian economy over the last five decades and is expected to play a significant role in Indias growth story. The MSME sector plays a crucial role and continues to be a cornerstone of Indias economic growth, contributing significantly to employment, manufacturing, and exports, accounting for over 30% of Indias GDP and is expected to contribute to over 40% of the GDP by FY30.

The Union Budget 2025-26 introduces a series of measures aimed at strengthening the MSME sector by enhancing credit access, supporting first-time entrepreneurs, and promoting labour-intensive industries. Formal credit deployment will play a crucial role in the growth of this sector and NBFCs will be a critical contributor. Between FY19 and FY21, secured MSME disbursements witnessed a decline from 2.01 trillion to 1.55 trillion, after bouncing back in FY22 and increasing to 3.29 trillion as of FY23 and 4.04 trillion in

Here are the key updates for the industry:

The Union Budget 2025-26 introduced series of measures aimed at strengthening the MSME sector by enhancing credit access, supporting first-time entrepreneurs, and promoting labour-intensive industries. To help MSMEs scale operations and access better resources, the investment and turnover limits for classification have been increased by 2.5 times and 2 times, respectively. This is expected to improve efficiency, technological adoption, and employment generation.

Housing Finance

The Indian housing finance sector appears to be entering a phase of sustained structural growth. As of September 2024, individual housing loans have expanded to 33.54 lakh crore, reflecting a 14% YoY increase. This growth is driven in part by the demand from a younger demographic and the continued

FY24. Secured MSME portfolio (<5 million) is expected to grow at 18-20% CAGR from FY24 to FY27.

Secured MSME portfolio (<0.5 million) is expected to grow at 18-20% CAGR from FY24 to FY27.

Non-Banking Financial Companies (NBFCs) have emerged as crucial pillars in the Indian financial landscape, offering alternative financing solutions to a wide array of borrowers. Unlike traditional banks, NBFCs possess the agility to address the nuanced financial needs of underserved segments, including Small and Medium Enterprises (SMEs), Micro, Small and Medium Enterprises (MSMEs), and self-employed individuals. NBFCs have played a significant role in fostering entrepreneurship, enabling business expansion, and ultimately promoting financial inclusion. The deep understanding of regional markets and customer-centric approach have further solidified the position as enablers of inclusive economic growth.

The MSME budget allocation has seen consistent growth, with 23,168 crore allocated in FY26.

With the RBI reducing the repo rate, banks have started passing on the benefits of lower rates resulting in reduced borrowing costs for NBFCs.

MSME Budget FY26

23,168 Cr

development of the credit infrastructure. Disbursements remain healthy, with 4.1 lakh crore disbursed in the first half of FY25. Notably, there has been a steady increase in credit flow to the EWS and LIG segments, suggesting that financial inclusion efforts are progressing. Meanwhile, housing prices have seen a