Daily Voice: Despite volatility, India’s growth could surprise in Q3–Q4FY26, says Anil Rego

Anil Rego is the Founder and Fund Manager at Right Horizons PMS

There is a strong case to believe that India’s growth could continue to pleasantly surprise through the December and March quarters of FY26, even after factoring in near-term volatility, said Anil Rego, Founder and Fund Manager at Right Horizons PMS in an interview to Moneycontrol.

According to him, a key reason is that the earnings downgrade cycle appears to be largely behind us, with recent quarters showing a clear easing in the intensity of earnings cuts and even early signs of stabilisation and upgrades in parts of the market.

About the next year’s Union Budget, he is of the view that a broad, across-the-board “stimulus Budget” looks less likely than a mix of targeted support + reform-led measures aimed at keeping demand resilient while protecting fiscal credibility. Here are edited excerpts:

A sustained drop in Brent crude below $60 per barrel is an important positive—but it works best as a supporting tailwind rather than a standalone growth driver.

Lower crude prices directly ease several macro pressures for India. It helps contain inflation, improve the current account balance, and reduce the fiscal burden from fuel subsidies. This gives policymakers greater room to prioritise growth, especially through monetary easing and consumption support. In fact, recent market outlook already highlight weak oil prices alongside GST rationalisation, rate cuts, benign inflation, and a good monsoon as near-term growth enablers for the economy.

Beyond crude, India’s relative strength comes from domestic drivers. Consumption is being supported by tax relief, lower interest rates, and improving rural sentiment, while corporate earnings are expected to stabilise in FY26 and accelerate meaningfully thereafter. Infrastructure investment, manufacturing incentives, and services resilience continue to underpin medium-term growth, even as global growth remains uneven and trade protectionism poses risks.

That said, cheaper oil alone will not insulate India from external shocks. Global demand uncertainty, geopolitics, and capital flow volatility remain key variables to watch. But compared with many peers, India enters the next year with a rare combination of macro stability, policy flexibility, and domestic demand momentum, making the overall outlook constructive—with lower crude prices acting as a meaningful cushion rather than the sole reason for optimism.

There is a strong case to believe that India’s growth could continue to pleasantly surprise through the December and March quarters of FY26, even after factoring in near-term volatility. A key reason is that the earnings downgrade cycle appears to be largely behind us, with recent quarters showing a clear easing in the intensity of earnings cuts and even early signs of stabilisation and upgrades in parts of the market.

This coincides with a much more supportive macro-policy backdrop: surplus system liquidity, cumulative repo rate cuts, CRR reductions, and improving transmission are likely to start reflecting more meaningfully in consumption and investment activity in 2HFY26. In addition, measures such as lower personal tax outgo, potential GST rationalisation, and improving rural sentiment should help underpin domestic demand during the festive and post-festive period.

While global risks and sector-specific challenges remain, the broader economy today is supported by stronger balance sheets, healthier financial system plumbing, and greater policy flexibility than in past cycles. As a result, even if headline growth prints fluctuate quarter to quarter, the underlying momentum into the December and March quarters of FY26 looks resilient, with risks skewed more toward upside surprises than downside shocks.

A broad, across-the-board “stimulus Budget” looks less likely than a mix of targeted support + reform-led measures aimed at keeping demand resilient while protecting fiscal credibility. The policy intent, as it’s shaping up, is to keep the growth engine running through execution (capex + logistics/trade facilitation + manufacturing competitiveness) and consumption reinforcement (tax simplification and higher take-home pay effects), rather than via one large, headline-grabbing spending push.

That said, incremental support is still plausible in three forms: (1) consumption enablers such as further simplification/rationalisation around direct tax/TDS structures to reduce friction and lift disposable income, (2) sector-specific relief/credit support for export- and jobs-linked segments facing tariff or demand headwinds (more “surgical” than blanket), and (3) policy certainty measures for capital markets and financial intermediation to sustain risk capital formation.

Importantly, the macro-policy backdrop is already supportive, rate and liquidity actions are expected to transmit more visibly into 2HFY26 so the Budget may focus on amplifying that transmission rather than substituting it with heavy fiscal stimulus.

India’s valuation gap versus other emerging markets has meaningfully narrowed over the past year, largely because prices have corrected or consolidated while earnings expectations have stabilised rather than deteriorated. India no longer looks like an outlier trading at a rapidly expanding premium; instead, it is now closer to its own long-period average valuations, with the Nifty trading near historical forward multiples even after a phase of relative underperformance versus MSCI EM and developed markets.

What makes this phase different is that a large part of the earnings downgrade cycle appears to be behind us, with the pace of cuts easing and several sectors already seeing stabilisation or upgrades. If earnings growth sustains into FY26–FY27, as current estimates suggest, valuations could start to look attractive on a relative basis, especially against EM peers facing weaker balance sheets, fiscal stress, or policy uncertainty.

In that context, rising earnings visibility rather than valuation rerating alone could be the key trigger for renewed FPI interest in 2026. FPIs typically return when growth is durable, policy risk is low, and earnings delivery improves, and India increasingly checks those boxes, making it well placed to attract incremental global capital as earnings momentum strengthens.

India’s next decade of growth is likely to be shaped by a confluence of favourable demographics, sustained policy continuity, and a steady shift towards formalisation and financialisation of the economy. With domestic demand as the primary growth engine, supported by rising incomes, infrastructure investment, and improving institutional depth, India is well positioned for long-duration, structurally driven expansion.

Against this backdrop, several sectors and themes stand out as potential drivers of India’s growth over the coming decade:

India’s wealth management opportunity is structurally driven by rising incomes, a growing HNI population, and a steady shift of household savings from physical assets to financial instruments. Despite strong growth over the past decade, professionally managed wealth remains meaningfully under-penetrated, creating a long runway for AUM expansion.

As highlighted in our internal research, wealth under management in India is expected to triple over the next five years, supported by increasing participation beyond metro cities, revival of B30 incentives, and higher financial awareness. This structural financialisation trend provides long-term visibility for asset and wealth managers through market cycles.

Defence has emerged as a multi-decade structural theme supported by policy continuity, rising capital outlay, and a clear shift towards indigenisation. India’s defence production has reached ~Rs 1.54 lakh crore, with a stated target of Rs 3 lakh crore by 2029, while exports have scaled to Rs 23,000+ crore, reflecting growing global competitiveness. Importantly, defence capital expenditure is expected to grow faster than overall defence spending, favouring domestic manufacturing, electronics, and advanced systems. Increasing participation of private players further strengthens the long-term opportunity set.

India’s EMS sector is benefiting from China+1 supply-chain diversification, PLI incentives, and rising domestic demand. As per internal and industry estimates, the India EMS market is expected to grow at ~30%+ CAGR, increasing its contribution to domestic manufacturing from ~30% currently to 40%+ by FY30.

Within this, OSAT (Outsourced Semiconductor Assembly & Test) represents a critical next step in India’s semiconductor journey, allowing movement up the value chain with lower capital intensity compared to fabs. Given that ~95% of semiconductors are currently imported, OSAT offers a scalable, policy-supported entry point into semiconductor manufacturing.

Rising per-capita incomes are driving premiumisation and formalisation within consumer discretionary. In jewellery, the organised segment continues to gain share, expected to increase from ~37% in FY23 to ~43% by FY28, driven by GST formalisation, hallmarking, and consumer preference for trusted brands. Additionally, the shift towards lightweight and studded jewellery supports margin expansion versus plain gold jewellery.

In value retail, affordable fashion and mass-premium formats are benefiting from aspirational demand, with the Indian apparel market projected to grow at ~15–18% CAGR, supported by favourable GST structures and scale advantages over unorganised players.

Healthcare remains a structurally under-penetrated sector with strong long-term visibility. India currently has only ~1.3 hospital beds per 1,000 people, well below the WHO guideline of 3 beds per 1,000, implying a requirement of ~24 lakh additional beds over time. Rising insurance coverage, ageing demographics, and increasing preference for organised healthcare providers are driving sustained demand across hospitals, diagnostics, and allied services. Recent policy measures, including GST reductions on key medical equipment, further improve affordability and support infrastructure expansion.

Renewable energy is a core pillar of India’s long-term growth strategy, driven by decarbonisation goals, energy security, and falling technology costs. India has set an ambitious target of 500 GW of non-fossil fuel capacity by 2030, up from ~259 GW currently, implying sustained capacity addition over the rest of the decade. Beyond generation, opportunities are emerging across storage, grid modernisation, and green hydrogen, making energy transition a broad-based, long-duration investment theme.

The market is clearly paying up today for visibility rather than outcomes most of the monetisation so far is concentrated in a narrow set of global players where AI has already translated into higher cloud revenues, pricing power, and infrastructure utilisation. Beyond this group, for many companies AI remains more of an option value than a proven earnings driver, with revenues either small, embedded, or still in pilot phases.

That said, this phase is typical of early general-purpose technologies: the capital is deployed first, productivity and monetisation follow with a lag. The key risk the market is now focused on is not adoption, but return on capital whether the scale of AI capex can be justified by durable cash flows over time.

If revenue conversion remains slower than expected or pricing power weakens, valuation compression is possible even without a collapse in AI demand. So, AI is best viewed today as a selective conviction trade, where execution and monetisation matter far more than narrative, rather than a broad, indiscriminate theme driven only by hope.

It is a structurally positive inflection point for the sector, with implications that go well beyond near-term premium growth. At its core, the reform removes a long-standing ownership constraint, enabling insurers to access deeper and more patient global capital, which is critical in a business that requires sustained investment in distribution, underwriting, technology, and claims infrastructure before profitability scales. This is particularly relevant given India’s still-low insurance penetration, leaving ample headroom for multi-year growth.

Equally important is the quality of capital and expertise the sector can now attract. Full foreign ownership allows global insurers to deploy advanced risk-pricing models, data analytics, and product innovation without structural limitations, which should gradually improve loss ratios, product mix, and customer experience. Over time, this can lift the sector’s return profile and reduce volatility, especially in health and general insurance.

That said, the reform is not an immediate valuation trigger. Increased competition, higher compliance standards, and continued focus on affordability mean profitability will still be built gradually. In the medium to long term, however, a combination of regulatory clarity, improving governance, stronger balance sheets, and rising penetration makes insurance one of the cleanest structural compounding stories in the financial sector, with the benefits of this reform likely to accrue over several years rather than quarters.