Do it yourself

 The Federal Open Market Committee (FOMC) of the US Federal Reserve (Fed) maintained its policy rates at 4.25% to 4.5% range, by a majority vote. It was the first occasion since 1993 when two Fed governors voted against the majority decision. Fed governors, Michelle Bowman and Christopher Waller, wanted a 25bps rate cut at the meeting, concluded on Wednesday.

The current results season (1QFY26) has been rather underwhelming so far. The market expectations for this quarter were already muted. The consensus estimates projected 1QFY26e Nifty50 revenue and profits to grow around 5% yoy, while the broader market earnings were expected to grow at a better 11-12% yoy rate. However, the results declared so far indicate an aggregate revenue growth less than even the nominal GDP growth of ~10%.

Antimicrobial resistance becoming ominous

Antimicrobial resistance (AMR) is fast emerging as one of the most ominous health concerns at global level.

As per the World Health Organization (WHO), “Antimicrobials – including antibiotics, antivirals, antifungals, and antiparasitic – are medicines used to prevent and treat infectious diseases in humans, animals and plants. Antimicrobial Resistance (AMR) occurs when bacteria, viruses, fungi and parasites no longer respond to antimicrobial medicines. As a result of drug resistance, antibiotics and other antimicrobial medicines become ineffective and infections become difficult or impossible to treat, increasing the risk of disease spread, severe illness, disability and death.

AMR is a natural process that happens over time through genetic changes in pathogens. Its emergence and spread are accelerated by human activity, mainly the misuse and overuse of antimicrobials to treat, prevent or control infections in humans, animals and plants.

Antimicrobial medicines are the cornerstone of modern medicine. The emergence and spread of drug-resistant pathogens threaten our ability to treat common infections and to perform life-saving procedures including cancer chemotherapy and caesarean section, hip replacements, organ transplantation and other surgeries.

In addition, drug-resistant infections impact the health of animals and plants, reduce productivity in farms, and threaten food security.”

Please note that AMR is not a future threat. It is unfolding now—insidiously, incrementally, and globally.

Wolf may enter the barn unnoticed

There’s another kind of resistance building—this time in global financial markets.

President Trump is seeking to alter the global terms of trade through tariffs. In a massive exercise his administration is undertaking a review of the US’s trade terms with all countries (except perhaps Russia and North Korea), regardless of the size of their economy and quantum of trade with the US.

Initially, the global markets were reacting with a good deal of volatility to each tariff related announcement coming out of the White House. The Trump administration would take note of such volatility and take a step back. Of late, something has changed - Markets have "priced in" chaos. Markets are becoming immune to such announcements, assuming the proposed tariffs will not be implemented, as has been the case previously. Taking advantage of this market complacency, the US administration has already implemented some tariff proposals, including a 50% tariff on copper imports into the US. Trade deals have been reportedly signed with key trade partners like UK, China, Vietnam, Japan, Indonesia, and Philippines, materially altering the US’s terms of trade with these countries.

It's a classic “boy who cried wolf” dynamic playing out. Markets are becoming resistant to all threatening news, be it trade, geopolitics or climate.

The question to be examined is whether this resistance is materially different from AMR; or it is similar and would eventually weaken the resilience of markets, making them susceptible to sudden collapses?

As of this morning, I have no view on markets susceptibility to sudden collapses, but I do believe that mindless use of Antimicrobial in India (both through prescription and self-medication) is fast assuming epidemic proportions, and could have catastrophic consequences.

Continuing from yesterday…(see In search of Leadership)

As I see it, the current settings of the Indian economy and market are as follows:

Macroeconomic conditions are stable – inflation is under control, fiscal balance is improving, primary deficit is improving faster leaving room for further fiscal stimulus (may be GST rationalization on the top of income tax concessions already announced); terms of trade may improve as more bilateral trade agreements and free trade agreements begin to yield results; monetary policy is growth supportive – liquidity conditions are comfortable, rates cuts have been frontloaded, and current account position is stable.

Financial stability – The health of the financial system is very good. Bank’s balance sheets are stronger than ever with adequate capital and excellent asset quality. Corporates balance sheets are also stronger with accelerated deleveraging in the past 3 years. The government balance sheet is also improving, against the global trend. Settings are thus good for credit and investment cycles.

Growth moderate but stable – The Indian economy is expected to grow at a steady 6.5% annual rate in FY26e. Corporate earnings are expected to grow in the low double digit, accelerating to high teens in FY27. This may not augur well for significant new capacity addition; but nonetheless may keep employment conditions stable.

Consumer demand outlook improving – There are several factors that support an improvement in the domestic consumption demand in the next couple of years. For example, the southwest monsoon that is critical for rural income growth is progressing well. Two, the fiscal stimulus in the form of an effective tax rate cut is beginning to show an impact, as the advance tax collections have shown a decline. Third, the GST rate rationalization on essential household consumption is expected. Fourth, 8^th pay commission recommendations are expected to be implemented wef FY26, substantially increasing the disposable income of government and public sector employees. Fifth, the soft commodity disinflation is under progress, making staples more affordable. Sixth, the consumption demand has lagged for the past couple of years, hence providing a favorable base for growth.

From an investor’s viewpoint, these settings, in my view, imply-

·         The market should trade with an upward bias for most of the 2HFY26 and FY27.

·         The participation should be broader, with most sectors participating.

·         Financials, especially consumer finance, may remain in the lead.

·         Exports may do selectively well, depending on the contours of the trade deals. A global growth recovery in FY27 may improve broader outlook for exports.

·         Domestic consumption growth accelerates. Earnings of the consumer sector that have been on a downward trajectory during the past few quarters, should reverse and become positive. Discretionary consumption (Textile, alcohol, beauty, personal care, healthcare, white goods, etc.) may improve. Up-trading in staples may also be witnessed. Mobile data, budget fashion, food delivery services, quick commerce service, and budget international travel are some areas of consumption with stronger outlook.

·         New capacity addition may not be in focus. Capex may be focused on modernization, optimization (debottlenecking) and automation. Power T&D and mining are the two sectors with high capex visibility.

Consumption may be the new leader

From the above summary, it is reasonable to conclude that consumption could be the dominant theme for the next market up move. I find the following consumption ideas worth closely examining:

Consumer finance – NBFCs, private banks

Aspirational consumption – Mobile data, budget fashion, IMFL, and budget international travel, health insurance, preventive healthcare

Consumer services - food delivery, quick commerce

Also read

In search of new leadership

The benchmark indices in India have been directionless for almost two months now. In fact, Nifty50 has yielded a return of less than 2% in the past one year. Broader market indices have also not done any better. However, there has been a significant divergence in the sectoral performances. Some sectors like financials (+13%) and pharma (+8%) have outperformed the benchmark indices in the past one year, sectors like Media (-17%), Energy (-16%), Realty (-13%), FMCG (-7.5%), and Auto (-7.5%) have materially underperformed.

After several years of corporate & bank balance sheet repair and fiscal correction, the contours of India's next economic growth cycle are beginning to emerge. With the Reserve Bank of India (RBI) maintaining a growth-supportive stance; union government showing strong commitment to fiscal consolidation, easing financing pressures for the private sector; and global markets showing signs of stabilization as geopolitical confrontations ease and trade disputes settled; the stage is set for a potential economic upswing.

The spotlight is now on three competing themes — corporate consolidation, private capex, and household consumption — each pulling investor attention in different directions.

Corporate begin to re-leverage

After many years of deleveraging, corporate debt in India appears to have bottomed out and is now beginning to rise. This shift in trajectory marks a significant departure from the post-2016 era, where Indian companies focused on strengthening balance sheets following a wave of over-leveraged investments. According to recent analyses, corporate borrowing is rising as businesses seek to capitalize on emerging opportunities.

This shift is supported by a monetary environment that remains broadly pro-growth. The Reserve Bank of India (RBI) has maintained a balancing act between containing inflation and supporting economic momentum. Rates have been cut aggressively and RBI is pushing for a quick transmission.

Fiscal consolidation by the union government is also helping to ease crowding-out pressures in the credit markets. With the Centre projecting a glide path toward more sustainable fiscal deficits, room is being created for the private sector to tap into financial resources more freely.

RBI’s Growth-Supportive Stance and Fiscal Consolidation

The Reserve Bank of India has definitely turned growth supportive in the past one year, after maintaining a delicate balance between inflation growth. The rates have been cut aggressively and liquidity conditions have been made favorable. Targeted interventions to support small and medium enterprises (SMEs) and infrastructure projects, have bolstered private sector confidence.

Simultaneously, the Indian government’s commitment to fiscal consolidation has eased pressure on private financing. By reducing the fiscal deficit—projected to decline to 4.4% of GDP in FY26 from 5.6% in FY24—the government is crowding in private investment. Lower government borrowing means more capital is available for private enterprises, reducing competition for funds and potentially lowering borrowing costs. This synergy between monetary and fiscal policy is creating a fertile ground for private capex to flourish.

Global context changing quickly

Globally, financial markets have been navigating turbulent waters for the past some time. Monetary policies remained tight in major economies like the United States and the European Union. Geopolitical concerns were elevated as multiple war fronts were opened. The political regime changes in the US early this year, also triggered an intense trade war.

However, recent developments suggest a quick shift. There are conspicuous signs of geopolitical stability, particularly with noteworthy steps toward peace in conflict zones. The US administration is showing significant flexibility in negotiating trade deals, raising hopes for an early and durable end to tariff related conflicts. Inflationary pressures are also easing, especially with stable energy prices. These all factors combined raise hopes for a global monetary easing cycle. The US Federal Reserve and the European Central Bank have hinted at potential rate cuts in 2025, which could lower global borrowing costs and improve capital flows to emerging markets like India.

For India, this presents an opportunity to attract foreign portfolio investments (FPIs) to boost market sentiments, as well as foreign direct investment (FDI) for long-term projects, especially in manufacturing and green energy. The government’s Production-Linked Incentive (PLI) schemes and “Make in India” initiatives are well-positioned to capitalize on this opportunity, but execution will be key.

Investors’ dilemma

Amidst corporate optimism, supportive policy environment, positively turning global context, investors and traders are facing a dilemma – whether to stay bullish on the capex theme or turn focus towards the consumption theme that has been lagging behind for the past couple of years.

In my view, investors need to examine two things—

1.    What is driving this resurgence in corporate debt?” Is it being used to fund acquisitions of operating or stressed assets, or is it fueling fresh capacity creation?”

2.    Whether easing inflation, lower interest rates, good monsoon, and improved employment prospects due to capex translating to on-ground activity, will accelerate private consumption growth, or households will focus on repairing their balance sheets and increase savings?

What is driving this resurgence in corporate debt – Consolidation or capacity addition?

The distinction is crucial. While the former drives job creation, productivity, and long-term growth, the latter may only temporarily improve capital utilization rates and return metrics. Acquiring distressed assets or merging with competitors may lead to short-term efficiency gains but could delay the broader economic benefits of new capacity creation. Whereas, investments in fresh capacities could signal a long-term commitment to growth, aligning with India’s aspirations to become a global manufacturing hub.

While mergers and acquisitions (M&A) activity has been robust in the past few years, particularly in sectors like infrastructure and manufacturing, greenfield investments have seen limited areas like renewable energy (driven mostly by government incentives) and steel.

Equity markets are evidently betting on a capital investment Supercycle. Stocks of capital goods makers, construction contractors, and building material firms have seen sharp re-rating over the past year. Order books are swelling, and forward guidance from several listed players suggests growing optimism.

Consumption paradox

While the equity markets are bullish on capex-driven sectors, investor enthusiasm for household consumption remains subdued. This is puzzling, given the macroeconomic tailwinds that should theoretically support private consumption. Easing inflation, which dropped to 4.7% in mid-2025, coupled with the prospect of lower interest rates and improving employment prospects due to rising capex, should create a virtuous cycle of demand. Yet, private consumption, which accounts for nearly 60% of India’s GDP, has been lackluster over the past two years.

Several factors may explain this paradox. First, uneven income distribution means that the benefits of economic growth are not reaching all segments of the population equally. Rural consumption, in particular, has been hampered by volatile agricultural incomes and inadequate infrastructure. Second, high inflation in essential goods like food and fuel, despite overall moderation, continues to erode purchasing power for lower- and middle-income households. Third, policy support in the form of subsidies and cash transfers is being gradually unwound as fiscal discipline returns. Finally, the stress in the household balance sheet, especially in the wake of the Covid-19 pandemic may have also hampered consumption growth.

The equity market’s lack of enthusiasm for consumption-driven sectors like FMCG (fast-moving consumer goods) and retail reflects these concerns. Investors appear to be betting on a capex-led recovery rather than a consumption-driven one, prioritizing sectors poised to benefit from infrastructure spending and industrial growth. However, sustained economic growth will require a revival in household consumption, as capex alone cannot drive inclusive prosperity.

What to do?

The question is what investors should do under the present circumstances? Should they continue to back the obvious beneficiaries of capex — engineering firms, infra developers, lenders to industry? Or should they begin building positions in consumption plays, in anticipation of a cyclical rebound?

In my view, both themes may ultimately play out — but on different timelines. Capex is here and now, led by policy push and balance sheet strength. Consumption is the laggard, but if the macro indicators hold, its turn could come with a lag of a few quarters.

The Indian stock market has once again demonstrated its remarkable ability to weather turbulent times. Despite significant geopolitical headwinds, including the Indo-Pak tensions in April 2025 and the escalating Iran-Israel conflict in June 2025, the benchmark Nifty 50 has shown resilience, recouping losses swiftly and even posting gains. Month-to-date (MTD) in June 2025, the Nifty 50 has its ground firmly , despite threatening news flow, a weakening rupee, and surging oil prices. Trading volumes on the National Stock Exchange (NSE) have surged, even as foreign portfolio investors (FPIs) are only marginal net buyers and promoter entities offloaded over ₹400 billion in shares. Meanwhile, domestic institutional investors (DIIs) have though accelerated their buying and providing support to the market.

One may argue that this tendency to quickly overcome geopolitical shocks isn’t new. Over the past five years, the Nifty 50 and Sensex have delivered annualized returns of 10-12%, navigating challenges like the COVID-19 pandemic, global inflation, and geopolitical tensions.

Notwithstanding, this resilience raises two important questions: (1) Has the market fully priced in the short- to medium-term impacts of these geopolitical and economic challenges? And (2) IS the current investors positioning aligned with this collective wisdom, or are they holding back, waiting for clearer signals?

1.    Has the market fully priced in the short to medium-term impact of the current geopolitical and economic conditions?

The market’s muted reaction to rising oil prices and geopolitical escalation suggests that participants may indeed be looking past the immediate risks. Historically, sustained oil prices above $90/barrel tend to spook emerging markets, especially net importers like India. Yet, the INR and benchmark yields have only weakened modestly, indicating a lack of panic among both equity and debt investors.

There is also precedent for such behavior. During the Russia-Ukraine conflict in early 2022, the Nifty corrected nearly 10% in a month before stabilizing as investors shifted focus to earnings resilience and strong domestic demand. A similar pattern appears to be playing out in 2025, as the market leans on India's improving macro fundamentals: GST collections remain robust (₹1.72 lakh crore in May), credit growth continues to trend above 16%, and manufacturing PMI remains in expansion territory.

It is worth noting that the USDINR has depreciated less than 1% MTD, driven by risk-averse sentiment and dollar demand from oil importers. Crude oil prices, a critical factor for India (which imports over 80% of its crude), spiked over 10% to $76-77 per barrel following the Iran-Israel escalation, raising concerns about inflation and the current account deficit. However, retail inflation remains at a six-year low of 2.82% in May 2025, bolstered by a favorable monsoon and RBI’s recent rate cut, providing a cushion against these pressures.

Overall, the market seems to be assigning a lower probability to these conflicts escalating into scenarios that could derail India’s domestic growth story. The base case appears to be a temporary disruption with limited spillover effects—at least economically.

A prolonged Middle East conflict could disrupt oil supplies through the Strait of Hormuz, pushing Brent crude to $120 per barrel, which would strain India’s fiscal balance and reignite inflation. Similarly, sustained FPI outflows, driven by high valuations or cheaper Asian markets like China, could cap upside. Still, the market’s ability to hold above key support levels (24,700 for Nifty) and the absence of strong selling pressure suggest that investors are comfortable with current price levels for now.

2.    Are market participants aligned with this view—or are they still waiting for more evidence?

Positioning data tells a mixed story. While domestic institutions (mutual funds, insurance companies) have stepped up their buying—net purchases exceeding ₹600 billion in June so far—retail flows have plateaued. Systematic Investment Plans (SIPs) remain steady (₹20,900 crore in May), but net retail participation has softened somewhat in the derivatives and midcap space.

Moreover, futures & options positioning shows high open interest in index puts, suggesting that institutional players continue to hedge downside risks. Volatility, as measured by the India VIX, has edged up slightly (hovering around 14), indicating guarded optimism rather than outright bullishness.

Promoter selling—over ₹400 billion MTD—further complicates the narrative. While such activity isn’t uncommon ahead of Q2 fundraising or capital reallocation plans, it typically reflects either a valuation comfort zone or a strategic liquidity need. Given that this selling has not dented broader sentiment significantly, one could argue that other market participants are either confident in the underlying fundamentals—or are simply waiting for further clarity before making directional bets.

What does this mean going forward?

The current market resilience could very well be the product of a differentiated outlook: that India’s domestic story is strong enough to weather external shocks. But caution is clearly visible in the way participants are positioned—through hedges, elevated cash levels among HNIs, and selective buying rather than indiscriminate accumulation.

Until there is clarity on crude oil’s trajectory, the rupee’s stability, and the potential policy response from global central banks (especially the Fed’s July meeting), markets are likely to stay range-bound with a mild upward bias. Earnings upgrades in auto, banking, and infra sectors offer a supportive backdrop, but investors will want confirmation via Q1FY26 numbers before going all-in.

Conclusion

The collective wisdom of the market seems to have largely priced in current risks, but positioning suggests that investors are not fully aligned with this outlook—yet. Resilience, yes. Conviction, not quite. A ‘better than expected’ 1QFY26 performance could enhance conviction and pull the fence sitters in.

The weather has changed suddenly. What was dark and grim on Friday evening, became bright and pleasant on Monday morning.

Financial Year 2024-25 (FY25), may be recorded in the annals of history as a watershed year for global politics, geopolitics, markets and the financial system. The events that occurred during the past twelve months have opened up significant possibilities for emergence of a new global order. Although the contours of the likely new global order are yet to begin taking a shape, it appears that fight for dominance over technology; endeavor to gain fiscal strength; interventionist democracy where the state exercises intensive control over citizens; and top priority to energy security would be four key characteristics of the new order.

The markets began to take cognizance of the broader developments and oscillated wildly between the extremes of greed and fear during the year. However, thankfully, markets managed to close the year on a rather satisfactory note. Most asset classes – equity, bonds, precious metals, base metals and real estate yielded decent returns for the year. Moreover, as we begin the new financial year (FY26), some of the key concerns, e.g., wider trade conflicts, geopolitical escalations, and fiscal implosions have peaked and showing some early signs of easing.

In India, the economic growth returned to the normal pre-Covid trajectory, as the base effect of FY20 and FY21 low growth tapered off, and external challenges mounted. Equity markets settled close to their long-term average valuations, after witnessing one round each of euphoria and despondency. Bond markets and INR have also managed to end the year on a rather optimistic note.

The following are some of the highlights of the performance during FY25.

Equity Markets

The Indian equity market managed to end the year in positive territory, despite showing negative in six out of twelve months. Indian equities underperformed the global peers. The benchmark Nifty yielded a return of ~5% (3% in USD terms), which was in line with the US markets (S&P500 +8%), and Europe (Stoxx600 +5%, DAX +21%) but much lower than China (Hang Seng +38%, Shanghai Composite +9%). Asian markets, ex China, were mostly negative, with Japan (Nikkei225 -10%), Indonesia (IDX-10%), Korea (KOSPI -10%) and Singapore (SET -15%) ending the year with decent cuts. The valuation premium of Indian markets to the other emerging markets therefore remained elevated.

Banks saved the day for Indian benchmark indices

The benchmark Nifty (+5.3%) performed in line with broader markets (NSE500 +5.4%, Smallcap 100 +5.4%); though midcap stock did somewhat better (Midcap100 +7.5%). The gains in benchmark indices were mostly led by banks (Nifty Bank +9.3%). Overall market cap of NSE was higher by 6.9%, explained by many new listings and outperformance of midcap stocks.

Sector-wise, Financials, Services, Private Banks, Pharma and Metals were top outperformers. Media, IT Services, PSU Banks, Realty, FMCG, Auto, Infra and Commodities were notable underperformers. Micro-sector-wise, Ship builders and EMS were outstanding. Renewable energy and real estate builders were notable losers.

2HFY25 witnessed 5/6 negative months

The benchmark Nifty50 yielded negative month-on-month (MoM) returns for five out of six months in FY25. The second half of the year was worst with five out of six months resulting in negative MoM return. However, the market breadth was negative in nine out of twelve months implying much higher volatility in the broader markets.

Institutional flows positive

Over institutional flows were materially positive for FY25. Net domestic and foreign flows in the secondary equity market amounted to Rs3591bn. Foreign Portfolio Investors (FPIs) were however net sellers of Rs2480bn in the secondary market, while domestic institutions pumped in a record Rs6071bn. FPIs were net sellers in eight out of the twelve months. The nifty-institutional flow correlation (73%) was decent in FY25.

Debt and Currency Markets

Indian debt and currency markets were volatile in tandem with the global trend. However, both bonds and INR managed to close the year on a buoyant note.

RBI cut the policy rates by 25bps and Cash Reserve Ratio for commercial banks by 50bps. The benchmark 10-year treasury bond yields eased to 6.58% from 7.11% a year earlier. USDINR weakened 2.6% to 85.59 from 83.35 a year earlier. Lending and term deposit rates were higher by up to 10-20bps. The yield curve shifted lower and flattened completely.

The RBI changed its policy stance to “neutral” from “withdrawal of accommodation” in FY24. The liquidity position however continued to remain tight, with banking system liquidity remaining in deficit for most part of the 2HFY25. The credit growth outstripped the deposit growth. Overnight and call money rates cooled 25bps in 4QFY25, due to aggressive open market operations carried out by the RBI.

Economic conditions

Overall FY25E GDP growth slowed down to ~6.2% as the effects of the low base of FY21 and FY22 tapered off and fiscal correction progressed further. The consensus estimates for FY26E GDP growth is slightly better at ~6.5%. Nominal GDP growth for FY25E has been materially lower at ~9.1%, and is expected to pick up to ~10.5% in FY26E.

·         CPI Inflation mostly remained within the RBI’s tolerance band of 4-6% (except for a short spike in October 2024). Core inflation eased below 4% in August and then February 2024.

·         Real rates have mostly remained in positive territory during FY24.

·         Fiscal deficit remained high despite moderation over the past few years.

·         The private sector investments failed to gather the desired pace, despite several government incentives. The government capex also slowed down in FY25. 9MFY25 investment to GDP ratio dropped to 32.6%. Private consumption recovered in FY25E from the sharp dip in FY24.

·         External conditions worsened during FY25. Merchandise trade balance deteriorated to USD292bn. Exports were lower yoy, while imports were higher by 6% yoy. External debt was higher by 10%. Net FDI flows continued to slow for the third consecutive year.

Commodities

FY25 was a mixed year for commodities. Precious metals (Gold +40%, Silver 39%) and Industrial metals (Zinc +17%, Copper +10%) recorded good gains, while energy (Brent Crude -17%, Coal -20%) and agri commodities (Wheat -16%, Soy -14%) ended the year with strong losses.

Crypto shine

Cryptocurrencies further strengthened their position with material rise in trading volumes and market capitalization. Bitcoin ended the year FY25 with a strong 21% yoy gain. More jurisdiction accepted cryptocurrencies as a valid medium of exchange, financial asset and/or tradeable asset.