Daily Voice: India-Pakistan escalation can trigger 5-6% correction, Nifty support around 22,000, says Narnolia's Shailendra Kumar

Given India's considerably stronger defense, we expect any active conflict to be short-lived. Historically, Indian equities have only experienced temporary declines during such periods. Further escalation could lead to a 5-6 percent market correction with strong Nifty support around 22000. Increased defense spending is not expected to worsen the fiscal deficit materially, and minimal impact is foreseen on trade or supply chains. Any Nifty correction due to heightened conflict concerns would present a favourable opportunity to initiate investments.

Given the consistent FII inflows over the past four weeks, do you expect this trend to continue in the coming months?

The significant economic adjustment triggered by US tariffs and the resulting short-term uncertainties will likely lead to alternating periods of substantial FII inflows and pauses. However, we anticipate strong and consistent FII inflows to begin in the first quarter of next year.

What is your analysis of the March quarter earnings? Have you increased exposure to sectors that reported strong performance in the quarter?

Nifty companies' 4 percent year-over-year profit growth beat the 2 percent forecast. Despite ongoing moderate growth, this positive surprise should limit negative share price movement. Importantly, FY26 earnings estimates have held steady after management comments. BFSI and cyclical (oil & gas, metals) showed strong results, reinforcing our overweight position on BFSI.

Do you expect the US Federal Reserve to announce a rate cut at the next policy meetings, based on recent policy details and Powell's commentary?

Macroeconomic uncertainties, particularly those related to tariffs, explain Powell's current pause. The US economy presents a mixed picture: Q1 2025 GDP contracted, but April's payroll data showed a significant 177,000 increase in employment, and the annual inflation rate has decreased to 2.4 percent.

Considering the upcoming Fed policy on June 18 and the expiration of the 90-day tariff pause on July 8th, the pause is likely to extend into June, with the first rate cut expected at the July meeting. We anticipate more than two 25-basis-point cuts this calendar year as the Fed assesses the complete impact of these tariffs.

Do you anticipate strong consumption growth this year, supported by expansion in the informal sector?

Although we don't anticipate exceptionally strong growth, India's consumption is projected to improve this year compared to the subdued levels of the past 3-4 years. Headwinds from inflationary pressures and stagnant real wages have hampered consumption in recent years. However, easing inflation and the budget's tax relief measures are expected to boost consumption this year.

Consumer companies' recent management commentary during the ongoing quarterly results has been cautiously optimistic. Furthermore, anticipated interest rate cuts by the Reserve Bank of India (RBI) will provide additional support to consumption. Notably, the informal sector, particularly within consumer services, is expected to experience significant growth.

Do you see a possibility of GDP growth falling below the 6 percent mark this year?

The majority of global and policy agencies predict a GDP growth of 6.5 percent for India in FY26, with forecasts ranging between 6.2 percent and 6.8 percent. The finalized India-UK FTA has paved the way for a potential early trade agreement with the EU. Furthermore, India is expected to soon sign a Memorandum of Understanding (MOU) with the US regarding a trade deal. These favourable developments suggest that most global and domestic challenges will be effectively managed. While there might be a quarter with growth slightly below 6 percent, overall, India's GDP growth should exceed 6 percent for the fiscal year.

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