Mahesh Patil, CIO, Aditya Birla Sun Life AMC
Economic cues appear mixed for India. Steady domestic GDP growth, revival in consumption due to GST reforms and income tax cuts, and modest inflation are positive indicators. On the other hand, continuing penal US trade tariffs, geopolitical tensions, and AI-led disruptions are all hurting. How should retail investors read these mixed signals?
India is emerging from a lean phase of slower growth that has played out over the past year. Some factors such as the GST reforms, income tax cuts, and earlier rate reductions are clearly positive and are expected to stimulate economic activity. However, other challenges continue to weigh on growth, particularly the punitive trade tariffs of around 50 per cent, which are hurting exporters. There is hope that a trade resolution will materialise by the end of December, bringing tariffs down, which would help restore competitiveness. These opposing forces mean that the pace of recovery is likely to be slow, gradual, and somewhat sluggish in the immediate term, possibly through the September quarter, before picking up as the year progresses.
Corporate earnings have also felt the impact of weaker nominal GDP growth, which recently touched a low of around 8.8 per cent, leading to earnings expansion in only the mid-single digits for several quarters. However, based on our bottom-up analysis, earnings growth is expected to recover to double digits, closer to around 11–12 per cent, in the second half of the year. This improvement should lend stability to the equity markets, which have underperformed global peers. For retail investors, this period of volatility presents an opportunity to gradually build equity exposure with a three- to five-year perspective, as valuations in several segments have corrected meaningfully.
Gold and silver have been rallying relentlessly for extended periods. How sustainable is this rally? Are there hidden concerns being ignored?
Gold and silver have both enjoyed a stellar run this year, with gold gaining around 65 per cent and silver more than 80 per cent in rupee terms. The rally has been underpinned by a weaker US dollar, which has fallen by nearly 10 per cent during the year, leading global investors to shift funds into real assets such as precious metals. In addition, many central banks, including those of China and other large economies, have been diversifying their reserves away from dollar-denominated assets and increasing their holdings of gold, creating structural demand even as supply remains constrained. Silver, meanwhile, has seen its own surge in demand from the renewable energy, electronics and battery sectors.
Geopolitical tensions and trade uncertainties have also reinforced the safe-haven appeal of gold and silver. While the demand from central banks is likely to continue, the risk premium embedded in prices may moderate as the global environment stabilises. Nonetheless, gold is expected to retain its position as a core defensive asset in investor portfolios.
Despite the correction in mid- and small-caps, their valuations continue to be at a premium to large-caps. Is this a cause for concern?
While the broader market has corrected meaningfully, mid- and small-cap stocks, which had reached elevated valuations earlier, continue to trade at a premium relative to large-caps. Mid-cap valuations remain elevated compared to historical averages, largely due to limited supply and increased domestic participation. The scarcity value of quality mid-cap names has kept these valuations high.
From a risk-reward standpoint, large-caps appear more favourably positioned in the near term. Mid- and small-caps valuation, despite the correction in the last year, are still trading 15-20 per cent above their long-term averages, while large-cap valuations are closer to historical norms. In a period of global uncertainty and softer domestic growth, the stability and earnings predictability of large-caps makes them the safer choice. That said, as the economy regains traction over the next year, mid- and small-caps could bounce back with a long-term perspective on improved earnings visibility.
Which segments or sectors of the market are you positive on for the foreseeable future?
We remain constructive on domestic consumption-oriented sectors that stand to benefit from policy and fiscal measures such as GST cuts, lower interest rates, personal income tax reductions, and the expected implementation of the Eighth Pay Commission next year. These factors together should boost discretionary spending and consumption demand.
Accordingly, we are positive on consumer discretionary sectors such as retail, automobiles, travel, and durables. Among contrarian plays, the cement and FMCG sectors, which underperformed last year, appear well-positioned to recover as demand strengthens. Within defensives, hospitality and insurance are expected to do well. Furthermore, we see opportunities in private sector banks and select non-banking financial companies, supported by improving retail credit growth and healthy balance sheets.
The RBI has maintained a neutral stance despite benign inflation, with no rate cuts expected immediately. G-Sec yields have inched up again. What would be a good bond strategy for investors?
The RBI’s Monetary Policy Committee (MPC) kept the repo rate unchanged at 5.5 per cent with a neutral stance, signalling a dovish pause amid easing inflation and global uncertainties. FY26 inflation has been revised down to 2.6 per cent, supported by low food and core prices, while recent GST rate cuts are expected to further ease price pressures. The central bank is taking a cautious approach, awaiting clarity on US tariffs and trade developments before considering further action.
The RBI is also monitoring the rupee, which has weakened towards 89 against the dollar, and a cautious rate stance helps contain further currency pressure. With inflation under control and growth support measures in place, December could mark the start of a rate-cut cycle, providing a boost to bonds — where 10 year yields may ease toward 6.25 per cent.
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Published on October 18, 2025
