Market Outlook

What a fantastic festival season this is turning out to be for the economy! Yesterday a survey by the Confederation of All India Traders (CAIT) announced a record breaking Rs. 6.05 lac crores of Diwali sales so far. That's about 25% rise over the last year! And now we enter another spending extravaganza - the wedding season. Last year it was about Rs. 6 lac crores of economic activity. As the euphoria continues, we will certainly see a 15-20% increase this year. In short, the GDP growth will certainly breach 6.5 - 6.8% projection on the higher side for FY 2026.  

With this, it is quite realistic to expect that the Nifty and Sensex will take out the previous all time high levels very soon. The discussion will then shift to where will it reach after one year. And Sensex @ 100000 or Nifty @ 30000 by December 2026 will start becoming catchy and attention grabbing headlines. We just did a quick back of the envelope calculation to assess if this is really achievable.

We expect NIFTY 50 to close the year at 26300 (yesterday's closing 25868 and previous all time high 26212 on 26 Sept 24). In the last five years post COVID, in CY 21 and CY 23 NIFTY 50 delivered 23 - 24% returns, CY 22 was flat, CY 24 was 8% and CY 25 is likely to be about 12%. For NIFTY 50, last 5 yr CAGR is 16.5% and last 10 yr CAGR is 12%. For NIFTY 50 to close at 30000 in Dec 2026 it should return 14% over the expected close of 26300 in Dec 2025. Similar range of returns works out for Sensex to close at 100000 in Dec 2026. In our opinion this is quite reasonable target for the following reasons:

• Two consecutive years (CY 24 and CY 25) of underperformance compared to the medium term average returns. Usually this is followed by an above average returns year.

• Favourable policy environment : Tax cuts, GST cuts and 100 bp Interest rate cuts.

• Favourable macro : Good monsoon, low CPI and WPI.

• Pace of FII selling reduced substantially in Q3. FII ownership is at 15 years low and in USD terms market is cheaper by 4.5% because of INR depreciation during the year.

The biggest dampener this year was the "Trump Tariffs" on Indian exports to the US, possibly shaving off about 30-50 bp of our GDP growth. With 50% tariffs already in place, the damage is already done and discounted. But if there are any positive developments on trade negotiations with the US, it will boost the market sentiments. Another possible positive factor is any improvement on Russia Ukraine ceasefire efforts. This can also result in President Trump reducing the tariffs as it is in a way linked to Russia war. With US FED almost certain to cut the rates next week and RBI likely to do the same in December, there are good tail winds to propel this rally further.

After a long gap, today we received the daily newspapers without any full page IPO advertisements! May be its a pause, looking at the Diwali holidays next week. But probably addresses the issue of unabated supply of over Rs. 25000 crores per month of IPO issues absorbing the market liquidity for the last few months. This amount is comparable to the monthly SIP inflows in Mutual Funds and hence allowed the exiting FPIs to influence the market levels for the last few months. In our opinion, this is one of the main reasons for the Indian markets to remain under pressure when globally most other markets are hitting all time high levels.

Shifting the focus to some extremely positive recent developments:

• IMF raised India's FY26 growth outlook from 6.4% to 6.6%. This is the highest growth rate amongst advanced, emerging or developing economies. If Tariff situation improves, it can be even better in our opinion.

• Financial sector is buzzing with mega deals : Emirates NBD - RBL Bank, SMBC - Yes Bank, MUFG - Shriram Finance etc. Signs of valuations getting attractive. We expect the FPI outflow to reduce now as the FPI holding in Indian markets is at 15 years low and the market is about 5% cheaper in USD terms because of Rupee depreciation.

• Google has committed an investment of USD 15 bln in Vizag over next 5 years for its largest AI hub outside of US and a Gigawatt-scale datacentre. 

• Maruti has announced bookings of about 400000 cars since GST rationalisation on 22nd September. This is almost double of 2.06 lacs cars they sold in October last year! Dealers have reduced the discounts on popular models like Wagon R. 

• In September WPI has declined to 0.13%. CPI already at 8 year low. US FED indicating further rate cuts increasing the probability of a cut in the month end meeting to almost 100%. We expect RBI to deliver 25 bp cut in December policy.

We believe these and more such developments are yet to be discounted in the market levels, which has remained flat for the last year. With the previous all time high just about 3.5% away, we firmly believe that a new all time high is in the making soon.

As expected by most Economists and Traders, RBI held the Repo rate unchanged at 5.5% in the MPC meeting on 1st October. The Governor, while lowering the CPI inflation forecast for FY25-26 to 2.6%, has admitted that there is a greater leeway for the monetary policy to support growth. Which means favourable impact of good monsoon on food prices and GST rationalisation effectively bringing down the prices of many consumer essentials, will increase the expectations of a cut in the December MPC. 

But this time the RBI Governor has gone beyond the arithmetic of rate cuts and announced many measures which will improve the flow of credit and flexibility for the banking system in general. In our opinion the measures like proposed lower risk weights for loans to MSMEs and residential real estate, risk based charge for DICGC premium, flexibility on the strategic allocation of business streams among the group entities by the banks, permission for Indian banks to finance acquisitions, removal of limits for lending against listed debt securities, increasing LAS limits from Rs. 20 lacs to Rs. 1 cr, enhancing the IPO financing limits from Rs. 10 lacs to Rs. 25 lacs, abolishing the limit of Rs. 10000 cr on lending to corporate borrowers will certainly improve the flow of credit and help in quicker transmission of the rate cuts announced so far. These measures are more effective than a 25 bp rate cut. Though the Equity and Bonds market reaction was lack lustre immediately after the policy announcement, influenced more by the "no change in rates" headlines, both the markets posted handsome gains later on, realizing the true potential of these measures.

The third market - Gold and Silver - continues its mesmerizing run. With this the value of household gold reserves has improved by about 50% in just one year. This has significantly increased the borrowing ability of the households against the gold stock at home. Though RBI has modified the gold lending norms in June 2025, which will be applicable from April 2026, an increase in LTV to 85% for loans up to Rs. 10 lacs (Rs. 2.5 lacs from April 26) and to 80% for loans from Rs. 10 lacs to Rs. 25 lacs (Rs. 2.5 to Rs. 5 lacs from April 26) will further facilitate the value unlocking of household gold reserves and increase the liquidity in the system. And why not make them effective January 2026 instead of April 2026.

Estimated collective gold holdings in Indian households is over 25000 tonnes. High time the rating agencies S & P, Moody's and Fitch change their rating methodology :)

Looking at the price action during the last week where the markets declined on all the days on confusion around H1B visa rules in the beginning of the week and then on inclusion of pharma in the tariff affected sectors towards the end of the week, we wonder if the market is missing the big picture! 

In this incessant selling spree by the FPIs ($2 bln in Sept and $17 bln YTD), which is smoothly absorbed by the DIIs - power of SIP inflows which are now over 28000 Cr ($ 3.1 bln) per month - in the current levels, it seems the market has completely failed to discount the following key measures announced during the year.

• On 1st February the Finance Minister announced the changes in the Income Tax slabs making income up to Rs. 12 lacs per year tax free. This will be adding over Rs. 1 lac crores in the pockets of the consumers - not only in this year but every year from hereon like an SIP - which will lead to a boost in consumption led demand in the economy. Market is up by only 4.9% since then.

• On 6th June RBI surprised the markets with 50 bp Repo rate cut and 1% CRR cut to support the credit growth in the economy. Market is down by 1.4% since then.

• On 15th August the Prime Minister announced the rationalisation of GST regime, which will add over 50000 crores in the pockets of the consumers - not only this year but every year hereon like an SIP - another boost to the consumer demand. Market is down by 1% since then.

In addition to this the facts like current FPI ownership is the lowest in the last 15 years indicating very light positioning of the FPIs, Current Market PE ratio trading below the short term, medium term or long term averages, India being the worst performing market YTD (up only 3.84% when most other markets are up between 10% - 25%) despite posting the highest GDP growth @ 7.8% in Q1 and no major sector is now remaining to get impacted on tariffs announcements, market downside looks limited. Digital and credit card payments surging 10 times the usual daily average at the start of the Navratri certainly indicates a solid festival season ahead of us. Worth accumulating at these levels by investing every week. 

However we must not forget the famous quote by John Maynard Keynes.

“Markets can remain irrational longer than you can remain solvent.”

Yesterday US Federal Reserve Bank has cut the interest rates by 25 bps as per the consensus estimates. From the market's perspective, giving guidance about two more cuts in this year was positive and was not discounted in the levels. Post announcement rally in the US market, particularly the small cap index gaining about 2% is an indicator. Interestingly the most recent addition to the board of governors, Mr. Stephen Miran, a Republican nominated by President Trump, is believed to have voted for five more cuts - 125 bp -by the year end! 

With this, a big event for the global markets is over. For the non-Dollar asset classes i.e. Emerging markets and commodities, US rate cuts usually result in capital reallocation from US and they also benefit from relative weakening of USD vs other currencies. This should be applicable to the Indian market as well, particularly when it has witnessed about USD 16 bln sell-off from FPIs in this year so far. The last time when FED had started cutting rates in July 2024, FPIs had invested about USD 11.5 bln in Indian markets in July - Sept quarter, taking our market to a new all time high. This time Indian market is even more attractive in USD terms because of about 7% INR depreciation and it has not delivered any returns YTD. We believe that the negatives like wars, tariffs and poor corporate results in Q1 and Q2 are fully discounted in the market. Start of the festival season with Navratri from next week with rationalised GST rates will certainly be a consumption booster. Sectors like Auto have already clocked a significant gains during the month but the broader markets are yet to react. Small cap Index has underperformed NIFTY by almost 9% YTD. Historically low volatility VIX level of 10.25 and a healthy put call ratio of  over 1.2 indicates further upside potential for the market. Low inflation, good monsoon and benign oil prices are supportive for the RBI to deliver another 25 bp cut in October MPC meeting and support the impending consumption boom. 

On the US relationship front, President Trump wishing PM Modi on his birthday over a phone call, both the leaders exchanging pleasantries and US trade delegation visiting New Delhi are certainly steps in the positive direction. A possible improvement on that front will certainly take the markets to a new all time high soon. 

RBI did not oblige with 25 bp cut in the August policy and the benchmark 10 year yields moved higher by almost 17-18 bp to touch 6.5 during the week. CPI print of 1.55 and S&P upgrading India Sovereign Rating to BBB brought back some buying interest resulting in about 10 bp rally yesterday. Looking at the most challenging Q1 for the corporate results in the recent history and headwinds ahead for some sectors because of the Trump tariffs, the expectations of a rate cut will get built in as we move towards the October policy. As a result, lower CPI levels and benign crude oil prices coupled with the demand related to the rating upgrade can trigger another 10-15 bp rally in the benchmark bond yields ahead of the October RBI policy meeting. A contrarian view as of now as most analysts / economists have taken the bets off on further rate cuts.

Trump Putin summit in Alaska seems to have progressed well today going by the way both of them - particularly President Putin - spoke at the press conference. Though there is no concrete deal as of today, its a relief that the summit has ended on a "to be continued" note rather than stalling the conciliation efforts completely. In short nothing negative for the markets from Alaska. While the other negative news (wars, tariffs, poor Q1 results, disappointment over RBI rate cut etc) is fully discounted in the current NIFTY and SENSEX levels, GST reforms promised by PM Modi during the Independence Day speech, start of the festival season with Janmashtami, impending rate cuts in the USA and the India rating upgrade by S&P has the potential to bring some cheer to the market in the next week. In about two months the Indian market has lost almost 7% in USD terms. Large enough for some smart FPIs to take a re-look!

Very important monetary policy meeting tomorrow. Though RBI has changed the stance to neutral in the June policy, they have admitted that the next course of action will be data dependent. And they can't ignore the following data points:

• The growth challenges as observed from not so encouraging Q1 results so far 

• Trump tariffs likely to further drag the growth momentum down a bit 

• Inflation undershooting their forecast 

With Oil prices remaining range-bound in $65-70 per barrel and US FED almost certainly going to cut the rates further from September, its a good opportunity for the RBI to give a strong message by cutting 25 bp tomorrow and communicate that they are not done yet. Expect the bonds to rally tomorrow as a result and 10 year to close under 6.25 again. 

In the evening today President Trump announced 25% tariff on Indian exports to the US because India continues to buy oil and defence equipment from Russia. As a knee jerk reaction, the Gift NIFTY futures crashed about 170 points (0.7%). Expect the markets in India also to fall 1 to 1.5% tomorrow. But its important to analyse the relative size of the impacted revenues from the US trade. Indian exports to the US is about USD 80 bln per year which is roughly INR 6.9 trln. Gross revenue of top 500 companies in India is roughly INR 125 trln. While all this 6.9 trln is not contributed by top 500 companies (for example gems and jewellery) it is just about 5.5% of the gross revenue of top 500 companies. If we assume that this tariff will lower the profitability of these exports by 25%, the impact on total profits will probably be about 1.25%. And going by the earlier track record of President Trump's backtracking on the tariffs there is certainly a reasonable probability of these tariffs being re-negotiated as well. Having already corrected by about 3 % during the month, any further correction over 1% tomorrow is a level where one can start accumulating.