Synopsis
India: growth stronger than expected
India’s domestic engine is proving more resilient than anticipated. The RBI has nudged its FY27 GDP growth forecast up to 6.7%, and high-frequency indicators point to broad-based momentum across both rural and urban demand. The investment cycle is firming on public and private legs, credit growth remains strong, the monsoon has normalised after a weak start, and a reviving rural economy — supported by GST rationalisation and festive demand — adds a further tailwind into the second half of the year. Encouragingly, the recovery is increasingly self-funded, though elevated crude prices, inflation and tighter financial conditions remain the key risks to watch.
Inflation and rates: a shallow hike cycle ahead
Core inflation remains subdued for now, but headline CPI is expected to move above 5% from September. The RBI’s tone has turned more watchful, and policy rates are likely headed modestly higher — with the first hike possible as early as October and around 50 bps of tightening anticipated over FY27. Globally, rising long-end yields remain the dominant theme as fiscal concerns outweigh central banks.
Earnings and valuations: a strong beat, a taller climb ahead
The June-quarter earnings season delivered a broad-based beat, with aggregate profit growth for the wider market reaching a three-year high and small- and mid-caps leading the way. This validates the earnings recovery — but it is confirmation of the turn, not the full-year trajectory, and the second half faces tougher comparisons. On valuations, large-caps look relatively attractive near the lower end of their historical range, mid-caps sit close to their five-year average, and small-caps remain elevated, warranting a more selective approach.
Flows and sentiment: domestic strength anchors the market
Resilient domestic flows — led by steady SIP contributions and retail participation — continue to anchor the market and absorb elevated share supply, while foreign flows have turned positive at the margin after a heavy first-half sell-off. India remains deeply under-owned within Asia, which leaves room for mean reversion should earnings and macro fundamentals hold.
Portfolio strategy
Equities — marginally constructive. We retain a constructive but disciplined stance, favouring high-active-share, benchmark-agnostic managers, a tilt towards cyclicals, and select small- and mid-cap strategies. With valuations fair to full, returns are likely to track earnings growth, making stock selection and staggered deployment central.
Fixed income — accrual first. With the scope for further duration gains fading and long-end yields under pressure, we prefer high-quality short- to medium-term accrual and 2–3 year roll-down / target-maturity strategies, alongside income-oriented REITs, InvITs and hybrid structures.
Gold — a strategic allocation. Near-term performance may stay range-bound, but the medium-term structural case — persistent inflation risk, geopolitical uncertainty and continued diversification away from the dollar — keeps gold an important part of a balanced portfolio.
Investing is simple, but not easy.
