Daily Voice: India still a top FII bet as Dollar cools; RBI may cut rates, says this fund manager

Yes, we anticipate a stronger earnings trajectory in the latter half of FY26, driven by a combination of supportive macro and policy factors. The recent India-UK Free Trade Agreement signals enhanced export opportunities, particularly benefiting sectors like textiles and manufacturing, which will likely reflect in improved corporate revenues. Meanwhile, the US dollar index (DXY) is showing signs of cooling, and the USD/INR exchange rate has started to stabilise, easing imported inflation pressures, especially on crude oil — which remains steady and manageable. This creates a more stable cost environment for Indian businesses.

On the domestic front, the RBI’s recent infusion of liquidity and a cautious monetary easing cycle, including the 25 basis points repo rate cut and prospects of further easing, should lower borrowing costs and support credit growth. These moves are expected to stimulate consumer demand and capital expenditure. Together, these factors lay a positive foundation for corporate earnings recovery.

Moreover, structural growth themes such as defence modernisation, financialization, and infrastructure spending continue to provide tailwinds. While near-term volatility remains, we believe these combined dynamics will support a meaningful earnings comeback in the second half of FY26, offering attractive opportunities for long-term investors.

Do you think the impact of the middle-class bonanza announced in the Union Budget is yet to be seen?

The Union Budget 2025-26 introduced meaningful tax reliefs for the middle class, notably raising the income tax exemption limit to Rs 12.75 lakh under the new tax regime. This move is designed to boost disposable incomes, which should, in turn, stimulate consumption, savings, and investments, potentially providing a much-needed impetus to economic growth. Increased spending power is expected to revive demand across sectors such as consumer goods, real estate, and services.

However, while the short-term benefits are clear, the full impact on the economy will take time to materialise. Sustained growth depends on complementary structural reforms, enhanced capital expenditure, and productivity improvements. Without these, the boost from tax relief alone may be limited. Therefore, while the middle-class bonanza is a positive step toward empowering households, its effectiveness will hinge on broader economic management and policy execution.

Are you structurally bullish on the defence sector, even though most of the near-term positives are already priced in?

Yes, we remain structurally bullish on India’s defence sector despite much of the near-term positives already being priced in by the market. The sector’s strength goes beyond short-term geopolitical triggers and is anchored in sustained government commitment and strategic priorities under the Atmanirbhar Bharat initiative. The Indian government is aggressively expanding its defence capabilities, especially modernising the Navy and missile systems, while pushing for greater self-reliance through domestic manufacturing.

This long-term focus creates a strong, visible growth runway for defence companies. Take Garden Reach Shipbuilders & Engineers (GRSE) as an example — despite a market capitalisation of around Rs 30,000 crore, it holds an order book of Rs 25,000 crore and has recently secured another Rs 25,000 crore in new contracts. It is also eyeing potential orders worth Rs 40,000 crore, highlighting a robust and growing pipeline that supports stable revenue and cash flows for the years ahead.

Similarly, Bharat Dynamics (BDL) has demonstrated its technological prowess with the Akash surface-to-air missile system, which successfully countered drones and missiles during recent skirmishes. BDL’s proven capabilities have attracted interest from Southeast Asian countries facing regional security challenges, opening promising export opportunities beyond domestic demand.

While near-term gains may have been factored in by the market, the combination of strong order books, continued government spending, and emerging export markets underpins durable earnings growth. Defence is not merely a cyclical sector reacting to immediate geopolitical tensions but a core structural theme aligned with India’s strategic imperatives and geopolitical realities. For investors, this sector offers compelling long-term value, driven by both national priorities and global shifts in security dynamics.

Do you see the possibility of a 50 bps cut in the repo rate by the RBI in the June policy meeting?

The Reserve Bank of India is currently navigating a delicate balance between supporting growth and maintaining price stability. In April 2025, retail inflation has moderated significantly to around 3.16%, its lowest level since mid-2019, aided by easing food prices and subdued demand pressures. At the same time, India’s economy remains on a strong footing, with Q4 FY25 growth expected near 6.9%, driven by agriculture and resilient consumer demand.

In this context, the RBI cut the repo rate by 25 basis points to 6.25% on 7th February, marking the first easing move in five years. Market consensus, supported by recent polls, anticipates another 25 bps cut in June. While a 50 bps cut would be bold, it is not impossible if inflation continues to stay benign and growth momentum strengthens.

However, the RBI’s approach will remain data-dependent, factoring in global uncertainties, crude oil prices, and external sector stability. Any aggressive easing will be calibrated carefully to avoid triggering capital outflows or inflationary pressures. Overall, a 25 bps cut seems most likely in June, but a 50 bps move cannot be ruled out if the economic environment continues to improve.

Do you believe India will remain the preferred pick in the emerging markets basket for global investors?

Yes, India is set to remain a preferred destination for global investors within emerging markets. The US Dollar Index (DXY) has cooled significantly, dropping from around 110 in early 2024 to approximately 99.5 by May 2025. This decline lowers the cost of capital and makes emerging markets more attractive for Foreign Institutional Investors (FIIs). In the past two months, FIIs have shown strong interest in Indian equities, turning net buyers with inflows of about Rs 2,735 crore in April and a robust Rs 18,222 crore in May. This influx reflects growing confidence in India’s economic fundamentals and stable policy environment.

Meanwhile, ongoing trade tensions and regulatory challenges in China have prompted many global investors to reconsider their exposure, shifting allocations toward India, which offers a compelling valuation discount alongside solid growth prospects. India’s structural advantages—such as strong domestic consumption, infrastructure investments, and government reforms—combined with easing global liquidity conditions, reinforce its appeal. Against this backdrop, India stands out as a compelling and sustainable investment destination in the emerging markets basket for global investors.

Which sectors are looking strong after the March quarter earnings?

The March quarter earnings presented a nuanced but encouraging outlook for India Inc. Defence stood out with strong government spending on modernisation and heightened geopolitical tensions boosting order books and profitability, though some firms like Mazagon Dock faced profit pressure. Financial Services showed resilience, driven by robust private bank earnings and growing retail loan demand, while certain public sector banks dealt with elevated provisions.

Metals benefited from recovering global demand and sustained infrastructure spending, resulting in volume growth and margin expansion. The Information Technology sector demonstrated steady resilience, supported by strong deal pipelines and accelerating digital transformation, though some companies experienced muted growth amid global macroeconomic headwinds. Oil & Gas firms capitalized on stable crude prices and rising domestic demand, improving refining margins and petrochemical sales.

Beyond these, traditional sectors like manufacturing, railways, power, and defense are gaining renewed interest following recent market corrections. Supported by sustained government capital expenditure and strategic self-reliance efforts, these old economy sectors offer attractive valuations for long-term investors. Real estate also looks promising amid easing monetary policy and improving demand driven by urbanization and affordable housing initiatives. Together, these sectors provide a balanced mix of secular growth and cyclical recovery for investors.

Is the broader market space looking much better than the benchmark indices? Do you think the market is looking expensive now after the recent sharp rally?

The broader market space is showing some improvement but is not yet outperforming the benchmark indices like the Nifty 50. After the recent sharp rally, valuations have become elevated, with the overall market trading at a premium compared to historical averages. This calls for caution as broad-based momentum appears to be slowing, and market breadth is narrowing.

However, we are focusing on sector-specific opportunities where structural growth and relative value play a crucial role. For example, the textile sector looks promising due to the anticipated Free Trade Agreement with the UK, which is expected to boost exports. Similarly, metals are gaining on the back of rising global demand, supported by infrastructure and industrial activity worldwide. Financial intermediaries, including stock exchanges and brokerage firms, are benefiting from increased market participation and rising volumes.

Healthcare remains a key focus area given the long-term demand drivers and innovation in the sector. Within finance, we see value in NBFCs, which are improving asset quality and poised to benefit from credit growth in underpenetrated segments.

In this environment, selective stock picking with a focus on sectors showing clear earnings visibility and growth catalysts is critical, rather than broad market exposure. We believe this targeted approach will help generate sustainable alpha amid elevated valuations.

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.