Daily Voice: Generali Central Life CIO Niraj Kumar sees early-stage banking rally, turns bullish on microfinance

Niraj Kumar is the Chief Investment Officer at Generali Central Life Insurance

Niraj Kumar, the Chief Investment Officer at Generali Central Life Insurance believes the rally in the banking and broader lending sector is still in its early stages. The macroeconomic backdrop has turned considerably more supportive compared to a year ago, he said in an interview to Moneycontrol.

According to him, a coordinated policy approach – marked by fiscal stimulus, liquidity support, accommodative monetary policy, and regulatory easing by the RBI - is expected to act as a catalyst for credit growth. Margins appear to have bottomed out, with asset-side repricing largely complete, he said.

Meanwhile, he sees contrarian opportunity in the microfinance sector. As the newly originated book – post implementation of tighter underwriting standards – becomes a larger part of the portfolio, he expects a meaningful improvement in asset quality and profitability. Here are edited excerpts:

Is the ongoing earnings season broadly in line with your expectations?

The Q2FY26 earnings season began under muted expectations, with the Nifty 50 projected to deliver mid-single-digit growth, supported by sectors such as oil & gas, metals, cement, telecom, capital goods, and healthcare.

This cautious outlook was shaped by three key factors i.e i) Deferred technology spending amid tariff-related uncertainties, ii) Soft domestic demand impacted by monsoon disruptions, and iii) Transitional challenges following recent GST rate rationalization. Despite these headwinds, the season so far has performed slightly better than anticipated.

The IT sector, while still weak, exceeded expectations, though commentary remains cautious. Financials delivered a positive surprise, driven by a smaller-than-expected margin decline, stable asset quality, and encouraging forward guidance. Notably, PSU banks reported strong earnings momentum and have been duly rewarded by the markets.

Conversely, consumption trends remain mixed, with no clear signs of a broad-based recovery. We had expected Q2FY26 to be a transitional quarter—marking the bottoming out of earnings and paving the way for a broader recovery in H2FY26.

In that context, the current trajectory aligns well with our expectations. We continue to project high single-digit EPS growth in FY26 and a strong mid-teens EPS growth in FY27.

Do you think the market is showing confidence in a strong earnings recovery starting with the Q3 numbers?

Markets posted a robust performance in October 2025, with the Nifty 50 and broader indices advancing over 5 percent. A broad-based recovery in aggregate demand is expected in the second half of FY26, driven by a confluence of supportive policy measures. Recent GST rate rationalization, earlier cuts in personal income tax, regulatory easing, and an accommodative monetary policy stance are collectively poised to stimulate consumption and investment.

Investor sentiment is increasingly optimistic, with the market recognizing that the earnings cycle is nearing its trough. Expectations of a rebound into double-digit growth suggest a favourable setup for sustained momentum and further upside.

While global developments – such as easing US-China trade tensions and progress on the India-US trade deal – remain key variables and could induce volatility, domestic fundamentals continue to underpin market strength.

India’s improving corporate earnings outlook, steady domestic flows, and a low base of FII participation over the past few years present a compelling case for continued market support.

What could be the reason behind the slowdown in FII outflows this month? Is the Indian market appearing more attractive compared to others, or is it due to the possibility of an impending India–US trade deal?

FII sell off in India has been influenced by three main factors- a) Slowing EPS growth which made the valuations look expensive, b) Lack of AI plays in India while the regional peers like Korea, Taiwan etc. offered AI opportunities and c) imposition of unanticipated 50% tariff on India. These factors along with India being a consensus overweight last year led to significant sell off by FIIs in Indian Equities.

FIIs sold over $29 billion over last 12 months in cash segment while their net short position in Index derivative reached an all-time high of $5 Billion. In fact, FII ownership in Indian Equities has fallen to a decadal low level of ~15 percent. Hence, FII positioning had reached an extreme level post the sell off.

However, the pace of outflows has since then has moderated, supported by three key factors viz. 1) The Indian market has significantly underperformed both emerging and developed market peers over the past year, suggesting potential for mean reversion, 2) Although concerns around the India-US trade deal persist, signs of easing tension and ongoing negotiations have helped reduce uncertainty, and 3) There are early signs of a rebound in corporate earnings, with expectations of double-digit growth in H2FY26 and mid-teens in FY27.

Additionally, domestic consumption and investment are being bolstered by GST rate cuts, personal income tax relief, and an accommodative monetary policy stance. These supportive measures have improved the macroeconomic outlook, prompting foreign investors to reassess their positions in Indian markets.

Which sectors do you believe are at the beginning of their rally, and why?

We believe the rally in the banking and broader lending sector is still in its early stages. Over the past 12-18 months, the sector has undergone a period of consolidation, driven by slowing growth, regulatory challenges, and margin compression following repo rate cuts. These factors weighed on banks’ return ratios and profitability.

Going forward, the macroeconomic backdrop has turned considerably more supportive compared to a year ago. A coordinated policy approach – marked by fiscal stimulus, liquidity support, accommodative monetary policy, and regulatory easing by the RBI is expected to act as a catalyst for credit growth. Margins appear to have bottomed out, with asset-side repricing largely complete.

We expect banks to benefit from lower funding costs from Q3 onwards. As a result, we anticipate high-teens earnings growth for large-cap banks in FY27. Coupled with a constructive outlook on loan growth, improving margins, resilient asset quality, and attractive valuations, we see strong potential for a sustained rally in the banking space.

Beyond banking, we remain constructive on sectors such as Power & Utilities and OMCs. Select names in these segments offer compelling valuations, supported by a robust operating environment and strong balance sheets – providing meaningful upside with a margin of safety.

What is your current contra bet in the market?

The IT sector remains one of our key contrarian plays following a meaningful correction. Post-COVID, the sector experienced a re-rating driven by strong demand for digital transformation. However, as growth has normalized and earnings visibility weakened, frontline IT stocks have corrected by over 20 percent.

A more pressing concern has been the sector’s perceived lack of readiness for an AI-led future, raising questions about its long-term growth prospects as clients increasingly prioritize AI, cloud, and automation over traditional IT services.

Despite these headwinds, we remain constructive on the sector. The resilience of the US economy continues to reduce demand uncertainty, while Indian IT companies maintain strong balance sheets, robust cash flows, attractive dividend yields, and reasonable valuations. Additionally, any strategic moves – whether through organic investments or acquisitions – in the AI space could serve as a catalyst for re-rating.

Another contrarian opportunity we are exploring is the Microfinance sector. The space has faced significant stress over the past 18 months due to borrower over-leverage. However, given the short-cycle nature of microfinance products, the loan book churns rapidly. As the newly originated book – post implementation of tighter underwriting standards – becomes a larger part of the portfolio, we expect a meaningful improvement in asset quality and profitability. This could mark the beginning of a new upcycle for the sector.

Is it still advisable to stay away from the FMCG space, which has been consolidating for over a year now?

Structurally, we continue to favour the Consumer Discretionary space over Consumer Staples, driven by the significant growth runway available as India’s per capita income crosses the US$2,500-US$3,000 threshold. Discretionary categories are well-positioned to benefit from rising affluence and evolving consumption patterns. That said, following a prolonged period of consolidation in the FMCG sector – marked by subdued volume growth and margin pressures due to elevated commodity prices – select opportunities are beginning to emerge.

Recent policy measures, including personal income tax cuts and GST rate reductions, have improved the sector’s growth outlook. Additionally, the moderation in key input costs is expected to support margin recovery. Over the medium term, the combination of tax relief and GST rationalization is likely to accelerate the premiumization trend. Within the FMCG space, we remain selective, favouring companies with strong brand equity, pricing power, reasonable valuations, and a clear competitive advantage – attributes that enable them to navigate margin volatility and capture emerging growth opportunities.

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