Do it yourself

Despite notable stability there are few areas of concern that investors should be mindful of. In particular, I shall be watching the development of external situations closely.

External situation - not worrying presently, but could deteriorate

India's external sector has shown resilience in recent years, but there are signs of strain. The merchandise trade deficit hit a near-record high of $26.42 billion in April 2025, driven by a 19.12% surge in imports outpacing a 9.03% export growth. This reflects a structural issue in India's trade balance, with heavy reliance on imported crude oil, gold, and electronics. While presently foreign exchange reserves are ~US$686 billion in January 2025, covering over 10 months of imports, the creeping depreciation of the rupee and global uncertainties (e.g., aggressive trade negotiation and geopolitics) add pressure.

The situation isn't critical yet, thanks to robust reserves and services exports, but the trend warrants caution as external vulnerabilities could escalate if global conditions worsen

Trade balance remains delicate

India's merchandise trade deficit for FY25 (April 2024–March 2025) has widened significantly, reaching $202.42 billion for the first eight months (April–November 2024), compared to $194.6 billion in the same period of FY24. This deterioration is driven by a faster rise in imports (8.3% growth to $486.73 billion) than exports (2.2% growth to $284.31 billion). November 2024 alone saw a record-high monthly deficit of $37.8 billion, fueled by a 27% surge in imports to $69.95 billion, largely due to a 4.3-fold jump in gold imports, alongside increases in electronics (17.4%), petroleum products (7.9%), and vegetable oil (87.8%). Exports, however, contracted by 4.8% to $32.1 billion in November, a 25-month low, partly due to declining petroleum prices.

The overall trade deficit (goods and services combined) is estimated at $94 billion for FY25, per posts on X, reflecting a structural imbalance. The trade deficit with China has surged to $99.2 billion, driven by an 11.5% rise in imports ($113.5 billion) and a 14.5% drop in exports ($14.25 billion). Conversely, India’s trade surplus with the US grew to $41.18 billion, with exports up 11.6% to $86.51 billion. The services trade surplus, estimated at $131.3 billion for April–December 2024, provides some relief, driven by strong IT and financial services exports. However, the current account deficit (CAD) is projected to widen to 1.4–2% of GDP in FY25, with Q3 FY25 potentially hitting 2.8% due to the November trade shock.

Trade deals with the UK, and potential trade deal with the US could impact trade balance negatively in the short term.

Despite intense efforts, India’s reliance on imported crude oil (88% of energy needs), gold, and electronics, alongside structural manufacturing gap, has not diminished materially. There have been some efforts to boost domestic manufacturing through monetary and fiscal incentives, but so far most of the investment has occurred in low value add businesses.

BoP Challenges

H1 FY25 (April–September 2024) BoP surplus was $23.8 billion, but 3QFY25 negative BoP of US$37.7bn on persistent FPI outflows and poor net FDI flows, raise some concerns over BoP for FY25; even though the projected current account surplus and potential stabilization in capital flows have shown promise in 4QFY25.

The BoP is expected to remain manageable, with a full-year CAD of 0.8–1.4% of GDP ($30–55 billion). A Q4 current account surplus could offset earlier deficits, but sustained FPI outflows and trade imbalances pose risks.

Global uncertainties (widening trade deficit, FDI slowdown, remittances slowdown due to the proposed remittance tax in the US, and domestic structural gaps pose strong headwinds for India’s BoP.

FDI slowing

Gross FDI Inflows in India were $81.04 billion in FY25, a 14% increase from $71.1 billion in FY24. FDI equity inflows rose by 45% to $29.8 billion (Rs. 2,58,873 crore) in H1 FY25 (April–September 2024), reversing three years of contraction.

However, net FDI inflows dropped to a record low of $0.353 billion in FY25, down 96.5% from $10 billion in FY24, due to large-scale repatriations and increased outward investments by Indian firms. Repatriations surged to $44.5 billion in FY24 and continued to be significant in FY25, driven by profitable exits through initial public offerings (IPOs) like Hyundai Motor and Swiggy, and divestments (e.g., Singtel’s Airtel stake, BAT’s ITC divestment). A key Swiggy investor reportedly earned over $2 billion post-IPO.

FDI slowdown could have some structural element as relative to GDP, net GDP has been declining for the past five years, and has fallen to the lowest level in more than two decades.

Net FPI equity flows negative since 2021

Net FPI equity flows (Primary market and secondary market) into India have been negative for the past four and half years (January 2021-YTD2025) now. A strong global liquidity event could perhaps reverse the trend, but so far there is little visibility of net FPI flows improving materially in the near term; notwithstanding the positive flows in the past three months.

Oil price and weaker USD offer some relief

Declining oil prices in early 2025 have eased pressure on India's import bill, given its heavy reliance on imported crude (85% of energy consumption). A weaker USD also reduces the cost of dollar-denominated imports and debt servicing. However, relying on these external factors is risky, as oil prices are volatile (e.g., influenced by OPEC decisions or geopolitical tensions), and the USD's trajectory depends on U.S. monetary policy. India needs to accelerate domestic energy production (e.g., renewables, green hydrogen) to reduce this vulnerability.

…but relying on externalities may not be a great idea

Dependence on favorable oil prices or a weaker USD is unsustainable, as these are beyond India's control. A stronger focus on structural reforms—such aggressive boost to manufacturing, enhancing export competitiveness, and reducing import dependency—would provide a more stable foundation. Additionally, diversifying trade partners and pursuing free trade agreements (e.g., with the EU, Japan) could mitigate risks from global volatility.

In conclusion, India's external situation is not yet alarming but shows clear signs of deterioration. The delicate trade balance, negative BoP, and volatile capital flows highlight structural weaknesses, particularly import dependency and sensitivity to global shocks. While forex reserves and services exports provide resilience, reliance on external factors like oil prices or USD weakness is risky. Fiscal slippages and food inflation add domestic pressures.

This session of the IPL has some valuable lessons for investors, in my view. In particular, I found the following most interesting.

·         Two out of the top four teams have never won the IPL trophy previously. Mumbai Indians, has won it five times (2013, 2015, 2017, 2019, 2020), while Gujarat Titans won it once (2022). Five-time winner Chennai Super Kings (CSK) finished the 2025 season at the bottom of the league table. Three-time winner Kolkata Knight Riders ended at 8^th place.

·         Several of the most successful players of the previous two seasons were either retained or bought at aggressive prices in 2025. Many of these players failed to perform in the current season. Some of the prominent underperformers were Rishabh Pant (Rs27cr), Kagiso Rabada (Rs10.75cr), Venkatesh Iyer (Rs23.75cr), Rashid Khan (Rs18cr), Dhruv Jurel (Rs14cr), Riyan Parag (Rs14cr), Rinku Singh (Rs13cr), Shivam Dube (Rs12cr), Ruturaj Gaikwad (Rs18cr), Mayank Yadav (Rs11cr), Ishan Kishan (Rs11.25cr), Nitish Reddy (Rs8cr) Tilak Varma (Rs8cr).

·         Some players who commanded a low premium at the 2025 auction performed much better than expectations. Some of the prominent outperformers were Karun Nair (Rs0.50 cr), Sai Kishore (Rs2cr), Digvesh Rathi (0.30cr), Ryan Rickelton (Rs1cr), and Ajinkya Rahane (1.5 cr).

·         The owner of Lucknow Super Giants (LSG), snubbed their 2024 captain K. L. Rahul, and opted for a very expensive Rishabh Pant. K. L. Rahul performed extremely well playing for Delhi Capitals, while Rishabh Pant was a massive failure both as a player and captain.

·         Rohit Sharma, M. S. Dhoni, Ravinder Jadeja, Rashid Khan etc. were some legends that failed to perform miserably.

Lessons for investors

(i)    The past performance of a stock/fund (player) or sector/fund house (team) is no guarantee for its continued performance in future. A strong performance in the recent past actually raises the chance of underperformance in the near future.

(ii)   Chasing momentum and paying high price for a stock (player) based only on its recent performance, without evaluating the sustainability and consistency of its good performance in future may cause disappointment and losses. Buying Mayank Yadav for Rs 11cr, without factoring in that his bowling action makes him injury prone, inconsistent and unsustainable player.

(iii)  Never sell a highly promising stock (player) just because it had few bad quarters. LSG owners must be regretting one such mistake, at least.

(iv)  After consistent performance over several years, fatigue sets in even in the best of the players and teams. Good players and teams either reinvigorate themselves or leave the ground for emerging starts. Stocks and sectors that are showing fatigue, but neither reinventing themselves nor leaving the space (M&A), need to be jettisoned from portfolios without much delay. Love your families and friends not stocks.

(v)   It’s a good idea to keep watch on the past favorites, who had fallen out of favor for underperformance. If they begin to show promise again, do not hesitate to invest in them, just because you had a bad experience with them in the past.

(vi)  Paints, Private Banks, Consumer Staples, large IT Services are some examples of the strong past performers experiencing growth fatigue. Watch such stocks/stocks carefully for signs of failing or reinvigoration. Either way, they might provide an actionable idea.

(vii) Keep a close watch on the emerging stocks/sectors, but do not rush to buy (at obscenely priced IPOs, for example). Some of them could become legends, but many of them may fail to deliver on their promises.

(viii)    Last but not the least, there could be top players (stocks) in an underperforming team (sector). Do not lose sight of such stocks (players).

Past four weeks have marked a watershed in the geopolitics of South Asia. A terrorist attack in Pahalgam (J&K, India) on 22^nd April 2025, resulted in the brutal killing of 26 tourists (25 Indian and 1 Nepalese). The terrorists were believed to be from groups actively supported by the Government/Army establishment of Pakistan; and operating from the Pakistan Occupied Jammu & Kashmir (PoJK) and Pakistan.

The Government of India responded to the attack by (i) taking several diplomatic and economic measures against Pakistan over the next couple of weeks, and (ii) targeting terror infrastructure in PoJK and Pakistan, on 7^th may 2025, reportedly killing 70-100 terrorists and their allies. A number of terrorist training camps and hideouts were also destroyed in the targeted precision airstrikes by the Indian Airforce (IAF). The operation was code named “Operation Sindoor”.

Pakistan escalated the conflict by launching artillery and air attacks on civilian areas in the states of J&K and Punjab, killing several civilians. Indian forces retaliated by targeting critical Army and Airforce establishments across Pakistan.

On 10^th May afternoon, the Director Generals of Military Operations (DGMOs) of both sides agreed for a temporary cessation of hostilities. The temporary ceasefire has since been extended thrice on 12^th, 14^th and 18^th May, respectively.

There have been claims and counterclaims of the damage inflicted to each country during this operation. The President of the United States (POTUS) has claimed that he facilitated the “immediate and complete” ceasefire. There are claims of Chinese and Turkish defense experts and equipment actively participating in the conflict from the side of Pakistan. During the conflict, the International Monetary Fund (IMF) approved a US$1.3bn loan to Pakistan, with all members, except India, voting in favor; and India abstaining. This explicit support for Pakistan from several countries is being widely seen as a diplomatic setback for India.

Notwithstanding, subsequent to the ceasefire, Prime Minister Modi has enunciated a “new doctrine” for engagement with Pakistan in future. He categorically stated that any act of Pakistan supported terrorism in India will be treated as an Act of War and accordingly responded by Indian forces; ending the extant policy of retrain.

The situation as of this morning is filled with an uneasy calm. Tension is palpable on both sides of the border and Line of Actual Control in J&K (LoC). This heightened tension raises some critical questions for investors in India, especially related to India’s security, fiscal policy, and economic strategy. Some of the key questions, from an investor’s viewpoint could be listed as below:

Does the latest conflict, and subsequent response from both sides, increase the geopolitical uncertainty in the region materially, requiring India to be in a state of high continuously, notwithstanding the ceasefire declaration?

In my view, post the 22^nd April 2025, the region has regressed into much greater geopolitical uncertainty. India will likely need to maintain heightened vigilance despite the ceasefire. The underlying issues, particularly Pakistan’s alleged support for terrorism, remain unresolved. India’s new anti-terror doctrine suggests an aggressive and alert stance. Continued cross-border violations and Pakistan’s advanced foreign-origin missile and drone capabilities further underscore the need for constant readiness. The Indian government has explicitly stated it remains “fully prepared” and “ever-vigilant,” indicating that the ceasefire does not equate to a relaxation of security measures.

Frequent escalations, aggressive posturing, and targeted invasions may be the new normal at the Indo-Pak border and LoC.

Does the new normal mean material rise in security and defense spending for India?

Yes, increased spending on internal security and defense capabilities is highly likely. India’s response to the Pahalgam attack, including Operation Sindoor, and the need to counter Pakistan’s evolving military capabilities (e.g., Chinese-supplied drones and missiles) suggest a necessity for enhanced defense infrastructure and equipment. India already ranks fifth globally in military spending, with $86.1 billion in 2024, compared to Pakistan’s $10.2 billion. The recent crisis, coupled with ongoing tensions with China, may necessitate aggressive investments in advanced weaponry, border infrastructure, and cybersecurity, especially given the likely multidomain nature of the future conflict (airstrikes, drones, cyber operations). The Indian Air Force’s (IAF) planned mega military exercise post-ceasefire further indicates sustained or increased defense expenditure.

Could additional defense spending materially impact the fiscal balance of India?

Additional defense spending would definitely have an adverse impact on India’s fiscal balance. The fiscal deficit target, currently set at 4.4% of GDP for FY26BE, might witness some upward revision.

It would be challenging for the government to balance increased defense spending with austerity measures in social sector spending and general government spending (salaries are set to rise materially after the pay commission report next year). Also, the trade deals with the UK and the US may also impact revenue adversely in the short term.

In my view, the capex on non-defense infra could be hit negatively, further impacting the growth potential. The interest coverage ratio of the government of India (FY25AE ~2.65x) is already moderate. A further rise in borrowing may make it unsustainable, possibly impacting the sovereign rating.

What measures could be taken to maintain fiscal balance?

In my view, managing a potential increased fiscal deficit will likely involve a mix of additional revenue generation, expenditure rationalization, and borrowing; though the government will aim to avoid excessive borrowing to maintain investor confidence and avoid credit rating downgrades.

The government may consider higher dividends from cash rich Public Sector Undertakings (PSUs). The Finance Ministry has a history of pressing PSUs for surplus capital to meet fiscal targets; though it may constrict their growth capex and hence affect future growth outlook.

Temporary rise in the incidence of tax on higher income taxpayers and luxury consumption through additional war/infra cess may be implemented. Past budgets have used targeted levies, such as a 1-4% infrastructure cess on cars, increased excise duties on aviation fuel (from 8% to 14%), or higher taxes on tobacco products, to raise revenue without broad tax hikes.

A compliance window (Amnesty Scheme) for undeclared income or a new dispute resolution scheme, as proposed in 2016, could also be used to generate additional funds.

Selling stakes in state-run enterprises could provide funds for additional defense funding. However, it may not be easy considering the past experience. Administrative austerity measures (travel restrictions, equipment purchases, etc.) and capex reallocation by prioritizing defense infra over other infra, and seeking external emergency support could be some of the measures the government may consider.

The government may avoid measures that directly burden rural or middle-class voters, focusing instead on high-income groups, luxury goods, or corporate tax tweaks (e.g., rationalizing corporate tax for new manufacturing firms).

Obviously, fiscal balancing would be a tightrope walk for the finance minister, especially with global economic uncertainties like U.S. tariffs looming.

Could defense production companies be asked to cut margins in “national interest”?

In my view, asking defense PSUs to cut margins in the name of national interest is plausible, though complex, proposition. These companies have seen sky-high valuation multiples due to strong order books and defense modernization demands. Historically, the government has influenced PSU pricing or margins during crises, as seen in austerity measures or subsidy pressures on OMCs. A patriotic appeal could be made, especially post-Operation Sindoor, to align these firms with national security goals. However, forcing margin cuts risks eroding investor confidence, as these stocks are very popular with investors. It could also impact their ability to invest in R&D or capacity expansion, critical for long-term defense self-reliance. The government would need to balance this with incentives, like guaranteed orders or export support, to mitigate financial strain. While plausible, this move would face resistance from market participants.

Conclusion

The ceasefire, while a temporary de-escalation, does not address the structural instability of India-Pakistan relations, particularly over Kashmir. India’s assertive posture, coupled with domestic political pressures (elections, welfare commitments), suggests a delicate balancing act. Overcommitting to defense spending could strain fiscal discipline, while populist measures risk long-term economic stability. The government’s reliance on PSU dividends and targeted taxes is plausible but not sustainable without structural reforms. The role of U.S. mediation, though downplayed by India, highlights external influences on domestic policy, which could complicate nationalist narratives.

(PS: The South Block of Raisina Hills in New Delhi houses offices of the Prime Minister and Defense Minister, and External Affairs Ministers). The North Block of Raisina Hills Houses office of the Finance Minister)

Unfortunately, in the past 10 years, especially in the wake of demonetization, GST implementation and Covid-19 pandemic, India’s MSME sector has faced serious challenges to growth.

The NITI Aayog in a recent report, “Enhancing Competitiveness of MSMEs in India,” prepared in collaboration with the Institute for Competitiveness, has provided a strategic roadmap to strengthen India’s MSME sector. The report identifies key challenges and proposes reforms across financing, skilling, innovation, and market access, with a focus on textiles, chemicals, automotive, and food processing sectors. The report examines the key challenges faced by the MSME sector in India and makes some good recommendations to overcome these challenges.

Among other things, the report emphasizes the importance of integrating into the global value chains (GVC) for India’s MSMEs. Pertinent to note that India is still a fringe player in GVC, representing only 1.5% of global GVC exports or $241 billion as of 2017, with the largest share, about 10%, heading to the United States.

As per the report, “Integration into GVC refers to the extent to which a nation’s exports are embedded within multi-stage international trade processes. This concept refers to the integration of domestic value added into the exports of other nations, as well as the incorporation of foreign value added into a nation’s exports. The proportion of a nation’s total exports that is comprised of GVC participation provides a quantitative assessment of the extent to which its export sector relies on GVCs. GVC metrics also play a crucial role in assessing the extent to which sectors depend on international manufacturing networks.

GVCs are crucial for engaging with the global market, by concentrating on the development of specialised products and specialising in particular segments of the production chain. Furthermore, GVCs serve as critical facilitators of the international exchange of investment, knowledge, and managerial practices that are in line with global standards, thereby significantly bolstering domestic businesses. Gaining access to these globally recognised best practices offers emerging economies unparalleled prospects for growth and the augmentation of their export capabilities.”

Key Challenges faced by India’s MSMEs:

Financing: Only 19% of MSME credit demand was met by FY21, with an ₹80 lakh crore credit gap due to limited formal loan access and high-risk perception.

Skilling: A significant portion of the workforce lacks formal vocational training, hindering productivity and scalability.

Innovation & Technology: Limited R&D investment, outdated technology, and barriers like poor internet connectivity and high costs impede digital adoption.

Market Access: Low product diversification, weak branding, and inadequate marketing facilities limit competitiveness.

Data Gaps: Inadequate data, especially via the UDYAM portal, hinders policymaking.

“Missing Middle”: A lack of medium-sized enterprises (97.92% micro, 1.89% small, 0.01% medium as of 2023) restricts sector growth.

Recommendations to meet challenges

Financing: Revamp the Credit Guarantee Fund Trust, support NBFCs, and ease state-level subsidy norms.

Skilling: Expand vocational training and address the 3.9% drop in knowledge-based hiring.

Technology & Innovation: Promote AI adoption, subsidize technological upgrades, and invest in Industry 4.0 for textiles and chemicals.

Market Access: Provide export incentives, quality certifications, and digital marketing training, with a focus on northeastern and eastern India.

Policy & Data: Enhance state-level policy awareness, improve data integration (e.g., via PLFS and UDYAM), and engage stakeholders like women-owned enterprises.

The report emphasizes cluster-based development, stronger institutional collaborations, and consistent policy monitoring to integrate MSMEs into global value chains (GVC), fostering sustainable economic growth.

A casual discussion with the rag pickers skimming the household garbage to pick pieces of paper, plastic and metal, etc. was quite intriguing. Out of seven people diligently scanning the nauseating dump, some were children under the age of 14, including girls, and many were youth in the age bracket of 19-27. Incidentally, there was a police PCR vehicle standing just 10mtr from the site. The police personnel on petrol duty were blissfully unaware of the laws relating to right to education, child labor, dumping of garbage in open areas etc.

On being asked why they chose to do this menial, risky (health wise) and hideous job, when they have relatively decent options driving an e-rickshaw, working at a nearby auto garage, cleaning cars in nearby housing societies etc., the youth politely answered, “We are doing this job for past 12-15yrs. How could we change it now.”

On prodding further, one of them admitted that many of their peers live on hope that “someday they will find treasure in the garbage”. “More years you put into the job, the greater the chances of you hitting on a treasure”, one girl smirked. Though, the best they could cite of a treasure find was a gold bangle found by one of their seniors several years ago.

The discussion did two things to me: (a) it prompted me to drop the search of the lost earring of my wife, with the hope that it may complete the treasure hunt of some child; and (b) raised numerous pertinent but extremely disturbing questions in my mind. For example—

·         After seven decades of independence, we are still struggling to eradicate manual scavenging. Though many NGOs work in this area, so far not many policy makers have been seen speaking about eradicating the practice of manual handling of garbage; particularly, employing minor children for the job. It may take many more decades before this issue is addressed.

·         The police force (including traffic police) may not be adequately trained to prevent crimes. They are more focused on detecting and prosecuting criminals rather than taking preventive actions. The system of “no complaint no action” needs to be replaced with proactively protecting peoples’ life, dignity and property.

·         If we want to reap the demographic dividend, beyond selling more and more motorcycles, smart phones, and apparels, we need to overhaul our education and training system. The efforts made so far are inadequate and to a large extent misdirected.

You may ask, “why am I narrating this instance after so many years?” Well, I have three important reasons for doing so.

1.      I happened to pass the same garbage dump over the last weekend. The only changes I noticed were – (i) the number of scavenging kids and youth has increased; and (ii) police patrol van is now parked about 100mtrs away, since the volume and stink of garbage has increased materially.

2.      Recently I had a chance to interact with a group of investors. Their investment behavior sounded uncannily similar to the ragpickers skimming through garbage dumps in the hope of striking gold. Most of them had bought a bunch of poor-quality stocks in the hope of striking a multi-bagger. Their hopes were mostly driven by some reports, primarily circulating on social media, highlighting how some of the stocks had given astronomical returns in the past few years. None of them personally knew an investor who had managed to make 1000% return from a stock or even beaten the index return by more than 10% consistently. Notwithstanding, they keep skimping through the bottom of the stock pyramid.

3.      I met a very popular social media influencer at a social event. During our discussion, I raised a question, “why so many Indian middle-class and lower-middle-class people (women, men, kids, youth, middle aged and old) are spending so much time, energy and resources on making (mostly) frivolous, and many times vulgar and obscene, social media posts (reels)?”

The conclusion of a long, and partly heated, discussion was that a large majority of these reel-makers are also very similar to the ragpicker kids and youth in the earlier narration. They do this seemingly unlikeable job in the hope of one of their posts going viral and making them rich overnight. To gain some gold (viral post) they are not only staking their self-esteem, traditional family values, money, time, and energy; but also risking their mental and physical health. After all, they have only heard about the success stories of a few social media influencers; but they are pitifully unaware of the success rate and distressing fate of 99.99% aspirants, who could not strike the gold.

I would like conclude by quoting two dialogues from my most favorite movie – Shawshank Redemption (1994):

“Hope is a dangerous thing. It drives people insane.”

“Hope is a good thing, maybe the best of things, and no good thing ever dies”.

In my view, being hopeful is a great thing, but only after making best efforts in the right direction. Merely hoping, without putting in the required effort, and in the right direction, is a dangerous thing. It can perpetuate cycles of poverty, financial ruin, or emotional distress.

·         India and Pakistan took several steps back from their respective aggressive positions over the weekend. The entire Indian leadership greeted the world on the Birth Anniversary of Lord Buddha, showing commitment to his doctrine of non-violence, tolerance and empathy.

·         The Indian Meteorological Department (IMD) assured that the south west monsoon is on track to enter Kerala coast five days before the scheduled date.

·         Japanese financial giant Sumitomo Mitsui Banking Corp. announced acquisition of 20% stake in Yes Bank, marking one of the most successful revivals of a troubled entity since acquisition of the government managed deal of Satyam Computers by Tech Mahindra.

·         The US and Chinese leaderships agreed on a 90 day pause to the tariff hikes; rationalize tariffs and work on a sustainable terms of trade agenda. USD rallied and a global risk rally ensued.

·         The prospects of a Russia and Ukraine peace accord appear to be improving.

Indian equities rallied hard, marking one of the best trading sessions in many months. Benchmark Nifty gained ~3.82%. The IT Services sector (+6.7%) led the rally on the hope of better global demand prospects. Realty (+5.93%), metals (+5.86%), energy (+4.2%) sectors also did very well. Gold prices (-Rs200/gm) eased.

The question in the minds of several market participants this morning could be “will this risk rally continue or will we gradually retrace back to 22500-24500 range?” A contingent question may be, “should investors be deploying fresh funds or take some money off the table using the latest sharp rally in prices?”

In my view, the Monday stock market rally in India could be a function of three factors – (i) Covering of short positions created last week in anticipation of escalation of hostilities between India and Pakistan; (ii) fear of missing out (FOMO) stimulating the sentiments of investors who were sitting on fence for the past few months; and (iii) good technical and speculative positions by traders as the benchmark indices and several stocks break out of their strong resistance zones.

Notwithstanding, I do not find any reason for a change in investment strategy, at this point in time, since no new evidence has emerged about a material change in the geopolitical or macroeconomic conditions. The events that have driven the latest risk rally have been well within the realm of extant forecast, speculations and/or assessment of market participants. The escalation of Indo-Pak hostilities and a swift de-escalation, may have surprised the markets, but it hardly changes the investment thesis of Indian equities.

I continue to believe that the collective wisdom of the market in India has appeared to have assimilated all the known events and anticipated developments regarding the economy and earnings, that could have sustainable impact on the stock prices. A major surprise, like the outbreak of Indo-Pak conflict escalation last week may only cause the market to breach these extremes temporarily.

The markets may continue to cement the cyclical bottom in the 22500-24500 range, for next few months, as additional evidence of earnings recovery and improvement in the macroeconomic conditions emerges. We may also have more clarity on the global economic and geopolitical conditions in this period. A sustained and strong up move could be expected after a firm bottom is established on the basis of the visibility about the future earnings trajectory and macroeconomic growth and stability.