According to Ajit Banerjee, President and Chief Investment Officer at Shriram Life Insurance, investors may consider increasing or initiating exposure to large private-sector banks, large diversified NBFCs, and select PSU banks at this point.
Banerjee believes the financial sector is poised for further growth. He noted that banking sector valuations, currently at 2x P/B, are still lower than the 10-year average of 2.3x P/B, which appears favourable. He shared these insights in an interview with Moneycontrol.
Additionally, Banerjee expects credit costs to peak soon, with much of the stress in unsecured lending and the microfinance segment likely to ease by the next quarter. This should help stabilise asset quality in the second half of the financial year. With cheaper credit availability and ample liquidity, he sees a strong foundation for robust credit growth in the near future.
Do you expect the RBI to maintain a pause in interest rates during the October policy meeting? What is your outlook on the RBI Governor's commentary?
The minutes of the previous MPC meeting revealed that the benchmark for further rate cuts has moved higher, with the RBI pausing in August and expecting Q4FY26/Q1FY27 inflation to spike up while acknowledging that the near-term inflation trajectory remains benign.
The first quarter GDP growth of 7.8% has taken everyone by surprise on the positive side. Further, with a well-dispersed monsoon this time, rural demand is expected to remain high. To add to this, the GST reforms announced recently, along with the commencement of the festive season, would lead to a growth in consumption and help the GDP growth momentum continue. On the tariff side, the impact on the GDP growth is expected to be 0.5% to 0.6% as stated by some economists.
We are also seeing trade negotiations recommencing with the US, which is positive for both countries. Therefore, the chances of GDP growth getting hampered meaningfully look distant, and inflation remaining within the RBI’s tolerance levels — with an upward bias — seem probable. Considering all these factors into account, we expect a prolonged pause from here on.
The room for further easing will depend on: (1) adverse growth shocks (if any) amid headwinds from the US tariffs without any negotiations or a trade deal, and (2) aggressive policy easing by the US Fed from the September policy may lead the RBI MPC to consider a further rate cut.
Do you believe the ongoing FPI selling will continue until there is a clear recovery in earnings growth in India?
India’s equity market has been one of the underperformers this calendar year, both versus emerging market peers as well as developed markets like the US. One of the key factors behind this underperformance has been the heavy selling by FIIs. The main drivers of persistent FII selling have been a stronger dollar and a weaker rupee, the availability of cheaper alternatives such as China, which is trading at much lower multiples, five consecutive quarters of only mid-single-digit EPS growth in India, and the overhang of US tariff uncertainties.
Against this backdrop, FII selling could continue under the regular course. However, it can pause or even reverse under the following circumstances, in our view:
a) A sustained improvement in corporate earnings, particularly a meaningful pick-up in Nifty EPS growth that justifies the prevailing valuation levels.
b) Lower yields on US Treasuries coupled with a weaker dollar, which would make emerging market allocations relatively more attractive.
c) A trade deal with the US that reduces external uncertainties weighing on Indian equities.
d) Portfolio weight adjustments in favour of India within the EM basket, leading to higher default allocations.
Are you bullish on financials at this point, or do you believe it’s not the right time to increase exposure to the sector?
During the interest rate resetting cycle, the impact on the financial sector always happens with a lag. During the rate cut cycle, there is an initial adverse impact on the financial sector's financials, which gets realigned within a few quarters. With the impact of the CRR rate cut starting to play out from this month, it should lead to the availability of sufficient cheap credit and effective transmission.
The monsoon has been very good and well dispersed; the income tax cut rolled out from this financial year, along with the GST cut, should drive domestic consumption, which in turn will lead to a pickup in retail as well as institutional credit. Therefore, the financial sector is expected to grow further. The valuations of the banking sector at 2x P/B are still lower than its 10-year average of 2.3x P/B, which looks favourable.
An additional positive for the sector is that, as per broader management commentary, credit costs are expected to peak out, with most of the pain in unsecured lending and the micro-finance segment likely to ease by the next quarter. This should help stabilise asset quality starting in the second half of the financial year. Along with cheaper credit availability and ample liquidity, this creates a strong setup for robust credit growth ahead.
Having said that, we have to be selective and need to do a careful analysis of the underlying entity before taking any exposure. Exposure may be taken or increased, as the case may be, in large private sector banks, large diversified NBFCs, and selected PSU banks at this point in time.
Do you think the government is unlikely to announce further reforms until the impact of recent measures—such as the GST reform, interest rate cuts, and tax changes—starts to reflect in growth data?
The designated persons within the government have gone on record and mentioned that they would observe how the present set of measures taken by the Government of India and the Reserve Bank of India, as mentioned above, plays out. However, if the need arises for more policy support to keep the balanced growth momentum of the country going, there is enough ammunition in the store to fire. In fact, we have seen that done by both the RBI and the government in a coordinated way during COVID.
In your view, will equity markets struggle to reach new record highs in the near term?
The broader macro fundamentals of India remain strong, and it still remains the fastest-growing country amongst major economies. That being said, the markets are not in a cheap valuation territory. Therefore, the factors that can propel the market to claim new highs will depend upon recovery in corporate earnings in Q2FY26 onwards, rate cuts by the Fed, which will make the USD weaker, and FIIs can look for reinvesting back in India, and a positive outcome of the trade negotiations between India and the US. Last but not least, if the domestic consumption picks up post the new GST rates coming into play, then we can expect markets to show better returns in the mid-to-long term.
The good part for Indian markets is that a lot of negatives — from tariff-related news to weak corporate results, to geopolitical issues, to persistent FII selling — have already been digested to a large extent. Given that India is still in the middle of a larger bull framework, this phase of consolidation over the last year can ultimately pave the way for a more sustained and positive pick-up in the markets in the mid to long term.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
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