Daily Voice: 8.2% GDP and steady demand to boost banking growth in 2025, says Smallcase manager

At this stage, we do not expect the RBI to cut the repo rate in the upcoming December policy. The latest macro numbers support a status quo stance: India’s Q2 FY26 GDP expanded 8.2 percent YoY, beating both market forecasts and the RBI’s own 7 percent estimate. Growth has been broad-based— manufacturing rose 9.1 percent, services 9.2 percent, and financial services 10.2 percent.

With economic momentum strong and inflation still above comfort levels, the Monetary Policy Committee (MPC) is likely to maintain its “higher-for-longer” narrative. The focus will remain on anchoring inflation expectations and ensuring orderly liquidity conditions rather than initiating an early rate pivot.

Do you expect the Federal Reserve to cut its benchmark rate by 25 bps next month?

Yes. A 25 bps cut remains the most probable scenario. The US economy is showing signs of moderation—wage growth has softened, the labour market is stabilising, and demand indicators are gradually cooling. These trends allow the Fed to begin a cautious easing cycle without risking a resurgence in inflation. A measured cut would also stabilise global financial conditions and help sentiment in emerging markets, including India.

Are you bullish on the auto ancillary sector?

We remain constructive on the auto ancillary space. Several multi-year forces electrification, premiumisation, higher value-added per vehicle, and diversified exports, continue to support long-term earnings visibility. That said, valuations have moved up sharply in recent quarters.

The sector’s growth outlook is strong, but investor participation should be selective. Companies with operating leverage, localisation benefits, and balanced customer portfolios are likely to outperform within the broader sector trend.

Are NIM compression and asset-quality pressures behind for the banking sector? Will 2026 be strong?

Yes, the heaviest phase of NIM compression and asset-quality stress appears largely behind us. While the first half of the year saw higher funding costs and slower deposit traction, credit costs have stabilised and liquidity conditions are gradually normalising.

Supported by 8.2 percent GDP growth, steady consumption at 7.9 percent, and resilient investment activity, the banking sector is positioned for a stronger trajectory. We expect H1 2026 to reflect improved margins, healthier treasury performance, and more stable balance-sheet dynamics.

Have you seen more upgrades than downgrades in Q2 results? Will Q3 be stronger?

Yes, upgrades have outpaced downgrades, especially in sectors where demand visibility has improved. Q2 marked a clear improvement after multiple subdued quarters. Q3 may not deliver dramatic surprises, but underlying data suggests earnings resilience will strengthen into H1 2026, driven by better margins and more normalised demand patterns.

Should investors hold consumer discretionary and consumer fintech?

Yes. With supportive tax structures and improving purchasing power, consumption momentum is recovering. Q2’s 7.9 percent consumption growth signals rising confidence.

By early 2026, consumer discretionary and consumer fintech should benefit from affordability tailwinds, digital adoption, and stronger income growth across households.

What are your top investment themes for 2026?

Our preferred themes align with India’s structural growth cycle, capital-market infrastructure businesses, which benefit from rising financial participation, and renewable energy ecosystems, where policy support, capacity expansion, and global capital inflows are driving a long runway of opportunity. These themes offer scalability, visibility, and strong long-term relevance without excessive valuation risk.

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