As we step into FY26, global jitters like the Trump tariff threat clash with domestic optimism—especially after the RBI’s dovish pivot. How do you assess the broader macro environment for Indian investors, and is the rate cut the start of a larger easing cycle or a one-off?
This is going to be a very interesting year. On the domestic front, we’re in good shape with multiple aiding factors. We have the low base effect of FY25 as earnings in the first two quarters weren’t very strong. With liquidity challenges being addressed and consumption likely to pick up, we can expect double-digit corporate earnings growth this year. Valuations have corrected from September-October highs, giving cushion. The global macro challenges will be difficult to address, but I’m closely watching the rupee-dollar equation, which has stabilised recently. This makes India a better investment destination for foreign investors than six months ago. If currency remains stable, we should see FIIs returning.
The easing cycle in India is never very strong. It happens once in a while, but the key factor isn’t just the rate cut or easing cycle but, more importantly, liquidity in the system. We’ve seen challenges with banks experiencing outflows, sluggish deposit growth, and overall liquidity issues due to delayed government spending during elections. The liquidity situation is now easing, with RBI conducting open market operations. I would view the 25 per cent rate cut as part of an easing phenomenon, but I don’t anticipate huge cuts from here.
With rate transmission taking time and liquidity still easing, which sectors or pockets of the market are poised to benefit most in this environment?
When a rate cut occurs, transmission takes time as banks need to implement changes based on their cost-to income-ratio, borrowing costs, and liquidity challenges. The liquidity situation has eased a bit but is still not as favourable as it was two or three years ago. . NBFCs tend to be immediate beneficiaries as they are more domestic consumption-based. Banks could see some degree of benefit eventually.
Travel and hospitality should report good numbers because of events like Kumbh Mela, where 40-50 crore people visited, driving significant travel activity. I’m not sure about FMCG delivering great numbers this quarter, but the focus will be on sequential improvement as the base gets softer with each passing quarter, positioning the sector well going forward. In the classic CAPEX cycle sector, we should see some degree of improvement in areas like capital goods. Cement will be interesting to watch as this quarter’s numbers should be better.
Should Indian equities view global trade tensions as an overhang or a strategic opening, and how exposed are sectors like IT and chemicals to this risk?
It’s both. The immediate effect concerns how the global economy pans out, with the two largest economies engaging in a trade war, which isn’t good. This could impact domestic exports, lead to China exporting deflation, and create various challenges. Whether it’s a strategic opening depends on how things evolve sector by sector—which sectors are more resilient and can adapt. It’s not a straightforward answer or an easy opening because we’re looking at a very different cycle.
IT has a second-order effect rather than a direct impact, as US economic slowdown will affect the IT sector. Some derating has already happened in IT, but a recession could also mean more outsourcing. It’s an evolving scenario, and I wouldn’t bet on IT at this juncture. Chemicals are separate—we’re more into specialty chemicals rather than bulk chemicals. We’re fairly competitive where we operate, with better cost structures similar to pharma. I’d be cautious about IT right now, but if it corrects more, there could be an opportunity to look at this sector again.
With earnings season in focus and BFSI holding weight in the index, can we meet FY25 EPS expectations for Nifty50?
Let’s see how it pans out. About 40 per cent of earnings is linked to the BFSI sector, which should deliver decent numbers. I’m not sure whether growth will be 14 per cent or 12 per cent, but the more important factor will be sequential improvement—how Q4 numbers compare to Q3. The market has already factored in many challenges as markets are very efficient. You can see today in this fall, banks like HDFC and Axis have done well—they fell much earlier and have recovered faster. Some cycles are still weak, like the petrochemical cycle. The 14 per cent growth looks stretched to me right now, but if results are sequentially better, we should be in a good position.
Do you currently prefer large-caps or mid/small-caps, especially with valuations at a mild discount and risk indicators like VIX edging higher?
It’s become very stock-specific right now. Large caps offer the safety of liquidity—if things go bad, you should be able to liquidate your portfolio, which isn’t possible with small caps in a challenging environment. So large caps tend to do well for this reason. However, asking which category might perform better by the end of FY26, is difficult to answer. Small-caps might deliver good numbers if the economy does well and if the global competitive scenario changes, as they can adapt faster and reconfigure supply chains more quickly than larger companies. From a risk perspective, with VIX in a slightly higher zone indicating greater risk, large-caps are currently favoured.
SIPs and DII activity remain strong, while FII flows are choppy. How important are domestic flows for FY26, and what’s the one theme you’re watching most closely?
Domestic flows have been strong. SIPs tend to have a very high persistency rate. I believe these investments will continue because equities are relatively cheaper now and investors can see absolute upside at these levels. So there will be continued allocation to domestic equities—I don’t think anything will stop that. The critical factor will be how FIIs behave. Demand from domestic institutional investors should remain stable. If FII outflows halt or even turn positive, we might be in very good shape.
In the last couple of years, many themes have played out in the capital goods sector. If I were to pick a dark horse at this point, I believe PSUs could be an area that performs well throughout the year. They’re at reasonable valuations and have corrected quite a bit, but nothing much has changed in terms of their overall strength. If the economy performs adequately, PSUs could do well. Second, consumption could come back —we’ll see how that develops.