As investors navigate the complexities of the financial landscape, many are keen to understand the future of the market and the key factors that will influence it in the medium term. Recent trends indicate that the market has priced in softer growth expectations, with broader indices now aligned with their long-term forward multiples. This adjustment suggests that the excessive exuberance has diminished, paving the way for a more stable investment environment.

Anticipated Support from the RBI

The Reserve Bank of India (RBI) is expected to play a significant role in stabilizing the market. Recent initiatives aimed at enhancing system liquidity, relaxing credit-deposit ratios, and easing provisioning norms signal a potential shift towards rate cuts. These monetary policy adjustments may be complemented by fiscal measures, including tax cuts announced in the Union Budget 2025, which will come into effect in FY26. Such actions are projected to foster a recovery in growth and earnings, making the market outlook more favorable than it was just a few quarters ago.

External Influences and Domestic Concerns

While domestic measures are promising, external factors also loom large. Volatility arising from global events—such as the implications of the “Trump tariffs”—could impact market stability. Additionally, the Indian Meteorological Department’s monsoon forecasts, typically released in late April, will be crucial. The outcome of these forecasts may influence the RBI’s decision-making regarding interest rates.

Market Performance in FY26

Equity performance in FY25 was characterized by a split: strong returns in the first half were overshadowed by losses in the latter half. Looking ahead, FY26 may also experience similar fluctuations. The uncertain global macroeconomic landscape, highlighted by potential reciprocal tariffs from the U.S., adds to the unpredictability. Domestic challenges, including reduced government capital expenditure and lukewarm corporate earnings, further complicate the picture. However, we anticipate that many of these domestic issues could ease in the first half of FY26, leading to improved investor sentiment in the latter half of the year.

Evaluating Mid and Small-Cap Investments

Investing in mid and small-cap (SMID) companies requires a nuanced approach, as these investments are not one-size-fits-all. The real challenge lies not in high valuations but in ambitious earnings growth expectations. Success in the SMID sector hinges on finding companies with strong management, scalability, and sound risk assessment. Despite current market conditions, opportunities abound for discerning investors willing to engage in bottom-up analysis.

Earnings Expectations for Q4

The previous financial year saw modest earnings growth among Nifty 500 companies. However, the third quarter showed signs of improvement, particularly among large-cap and mid-cap firms. Anticipation for the March quarter remains cautiously optimistic, especially given the disappointing first half of FY25. Several factors contribute to this optimism, including a potential increase in domestic consumption, tax cuts from the Union Budget, and the benefits of recent RBI policies.

Rate Cut Projections from the RBI

The RBI has repeatedly stressed that controlling inflation is paramount when making decisions regarding the repo rate. The central bank’s target inflation range of 4% ± 2% remains a critical factor in determining interest rates. Recent monetary policy adjustments, including a 50 basis point reduction in the Cash Reserve Ratio (CRR) and a 25 basis point cut in the repo rate, reflect the RBI’s cautious stance. Future rate cuts will likely depend on the interplay of domestic inflation and global economic conditions.

Sectors to Watch Amid Global Uncertainties

In a climate of global uncertainty, we are turning our attention to sectors with clearer earnings visibility and cash flow growth. Recent market corrections have made valuations across various segments more attractive. Large-cap stocks are currently trading at value levels not seen in seven years, while mid-cap and small-cap stocks are approaching their average valuations. We are particularly interested in domestic sectors and structural themes, as global economic slowdowns may influence market dynamics.

The IT Sector’s Outlook

The IT sector has faced recent corrections due to concerns over U.S. GDP growth and its potential ripple effects on consumer spending. This uncertainty may delay IT budgets and spending by U.S. corporations, which could push revenue recovery back by a quarter. While valuations have become appealing following recent declines, a clearer picture of the U.S. macroeconomic landscape is necessary for a more constructive stance on the sector.

Investment Strategy During Volatility

Equity markets are intrinsically volatile, but history shows that earnings drive market performance. With the Indian economy poised for structural growth, this may present a unique opportunity for investors. By capitalizing on market dips and maintaining a disciplined approach to asset allocation, investors can create wealth during downturns and benefit when markets recover. The recent market volatility is largely influenced by external factors, and once these settle, we expect earnings growth to accelerate, allowing markets to follow suit.

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