Expert view: Rupen Rajguru, Managing Director and Senior Advisor – Head of Equity Investment and Strategy, Julius Baer India, believes the Indian stock market may hit a record high next calendar year as the corporate earnings should see a strong recovery from Q3FY26 onwards. Talking about mid and small-cap segments, he said these are high beta, but the fundamentals of the companies are strong, and typically these stocks tend to do well in a low-interest-rate, low-inflation, and easy liquidity environment. In an interview with Mint, Rajguru shared his views on the Indian stock market, his expectations about the US Fed rate cut and equity investment strategy for the medium term. Here are edited excerpts of the interview:
What is your short-term view on the Indian stock market? Will we see a record high this year?
Let me begin by stating that three things determine the direction of the equity markets: sentiments, liquidity and fundamentals.
The first two determine the short-term direction, while the medium—to long-term market direction is influenced by the fundamentals ( i.e., economic growth and earnings growth).
In the very near term, whilst the markets got shocked by a 50% US import tariff on Indian goods, it has been partially counter-balanced by the GST 2.0 reforms, which will provide stimulus to consumption by way of a reduction in the GST rates.
Over the next two to three months, the news flow around the India-US tariff will determine the market direction, and any positive development (say removal of 25% additional penal tariffs) might lead to a relief rally.
As far as record high levels are concerned, we believe that they are likely to occur in the next calendar year, as corporate earnings should see a strong recovery from Q3FY26 onwards.
We are not seeing a sustained rally despite favourable growth-inflation dynamics. What can charge up the bulls?
The Indian markets have given negative returns over the last year, and on a relative basis, they have been a huge underperformer vis-à-vis the other EMs (emerging markets).
This is primarily attributed to earnings weakness, compounded further by a series of geopolitical and macro headwinds.
In fact, since last September, the MSCI EM has outperformed the Indian markets by nearly 24%. Consequently, the premium of Indian markets versus EMs (on PE terms) is now down to its long-term average of nearly 60%.
We believe that the earnings slowdown story will reverse from Q3FY26 onwards as the real impact of both monetary easing (rate cuts) and fiscal stimulus (tax cuts—both direct and GST) will be visible in that quarter.
India’s real GDP growth surprised positively, accelerating to 7.8% YoY in Q1FY26 (the highest in five quarters), up from 6.5% in 1QFY25 and well above expectations of 6.5%. The expansion was broad-based, with manufacturing, agriculture, and services all contributing meaningfully to the strong performance.
As they say, growth is the antidote to high valuation. Because earnings growth has faltered over the last year, the markets witnessed a time correction, which we believe will reverse from H2FY26.
Corporate earnings for Q1 FY26 marked a transition from the subdued low-single-digit earnings growth of FY25 to a sustainable double-digit growth trajectory.
A key highlight of the quarter was better sectoral breadth of earnings growth, with about two-thirds of the total 25 sectors delivering double-digit earnings growth and only one sector experiencing a decline in PAT.
Do you think the broader market has a risk of a deeper correction because of elevated valuations?
The flows are strong in SMID (small and midcap) funds/AIFs, indicating high interest from the retail/HNI community.
While the valuations of the SMID index, at nearly 27 times one-year forward PE, appear to be higher versus large caps, at 22 times, the expected earnings growth is also higher, at nearly 15-16% versus 8-9% for the Nifty, indicating that they are cheaper than large caps on a PEG basis.
The combined weightage of high-growth sectors like capital goods and healthcare is nearly 25% in the SMID index versus 6% in the Nifty.
While the earnings are strong, any significant deterioration in macro (on account of extended high US tariffs) can make the SMIDs vulnerable to market drawdowns.
To sum up, SMIDs are high beta, but the fundamentals of the companies are strong (high earnings + healthy balance sheet), and typically these stocks tend to do well in a low interest rate, low inflation, and easy liquidity environment.
What are your expectations of Fed rate cuts? How may it impact the Indian stock market?
Recent unemployment data, slower job growth, and transient inflation in the US have significantly increased the probability of the US Federal Reserve commencing a rate cut cycle at the September policy meeting.
Our global desk expects the US Fed to cut interest rates five times from September through March next year.
Rather than a direct impact, we could see more indirect implications for the markets. First, it could lead to better economic growth in the US, which would support a few sectors that are more dependent on US markets (assuming that the tariff-related issues are resolved).
Secondly, the reduction in rates could lead to a softer dollar index (DXY), which in turn could lead to better equity flows to the Emerging Markets, including India.
Thirdly, the lowering of rates in the US could eventually provide some room for the RBI to further lower rates domestically, which would be supportive for domestic consumption.
Do you see value in the banking and financial space?
BFSI has been one of our preferred sectors over the past year, and the positive view largely stays, albeit with a small phase of near-term challenges.
With the RBI’s recent rate cuts, banks’ net interest margins (NIMs) could be under pressure for a quarter or two.
Also, the credit growth has seen some softness recently, while asset quality stress in some pockets (such as MFI and SME) continues.
However, overall, we remain positive on the financial sector. Bank credit growth is expected to improve from H2FY26, with the RBI ensuring sufficient liquidity in the banking system and selectively lowering the risk-weightage requirements. In addition, the RBI frontloaded the interest rate cuts for better and quicker transmission of lower rates into the economy.
Most banks are expected to see bottoming out of earnings growth in H1FY26, with gradual easing of NIM pressure and improvement in credit costs as stress in unsecured lending subsides.
Valuations also seem supportive for the sector, with most of the BFSI companies (except the capital market plays) trading at or below their historical averages.
Can we take contra bets on IT?
The IT sector has been one of the biggest underperformers in CY25 due to the near-term challenges to growth visibility amid the impact of AI and uncertainty on US economic growth/discretionary spending.
However, we believe valuations, especially for larger IT companies, have started turning attractive (with FCF yields of around 4%) after the recent correction of 20-25% from their highs.
Any uptick in economic activity in the US (aided by rate cuts) and improvement in deal flows should improve sentiment toward the sector.
The longer-term drivers, such as cloud adoption, digital migration, enterprise transformation, security, AI, and IoT, remain where the demand cycle can be much elongated.
With a likely positive risk-reward at the current levels, the sector can be considered a contra bet from an investment perspective.
What should be our equity investment strategy for the medium term?
Indian markets have been trading in a range for almost a year, weighed by muted economic/earnings growth, tight monetary policy, tariff-related uncertainties, weak FPI activity and slightly stretched valuations.
As a result, Indian equity markets have been one of the worst-performing markets this calendar year to date.
One silver lining for the markets has been the strong domestic retail flows, especially from mutual fund investors, which have been at record highs. Albeit the near-term softness, we remain quite sanguine on the markets from a medium to longer-term perspective.
With a very supportive RBI action and the recent GST rationalisation, we expect the domestic consumption, economic activity and corporate earnings to see gradually improving trends.
Post the consolidation/correction in the markets over the past one year, the valuations have also become more reasonable, moving towards the historical averages.
While tariff-related uncertainty remains an overhang for the markets in the near term, any resolution on this front can boost sentiment and result in better FPI flows in the country.
India remains one of the fastest-growing economies in the world, and the ongoing structural reforms will help create wealth for investors through Indian equities.
Hence, we would consider this phase of consolidation/correction an opportunity to build up equity exposure, although one would need to remain cognizant of the valuations of the underlying businesses.
Read all market-related news here
Read more stories by Nishant Kumar
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of the expert, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
