Daily Voice: India-US trade deal likely within 1-2 months; HDFC Bank looks undervalued, says Anil Rego

The prospect of the India-US trade deal materialising within the next one to two months would sit comfortably within the logic of current developments. Over the past few weeks, the most telling signals have come not from public statements but from India’s sharp rebalancing of its energy basket. Russian crude arrivals have dropped significantly, US crude imports have climbed to multi-year highs, and a major long-term LPG contract has been finalised.

Each of these moves reduces a major strategic irritant for Washington and strengthens India’s position as a more predictable, diversified energy partner. At the same time, the tariff exchanges between New Delhi and Washington, though sharp on the surface, reflect managed pressure rather than a collapse in engagement, with exemptions, calibrated duties, and active discussions on standards and services continuing behind the scenes.

Political language has also shifted meaningfully. India has signalled confidence that progress is close once a balanced arrangement is reached, and the US tone has softened as India’s energy adjustments become more visible. Even though difficult issues remain, digital rules, professional mobility, and agriculture, the overall direction of movement points towards convergence rather than drift.

When energy realignment, tariff posture, and diplomatic signalling all shift in the same direction, they often foreshadow a breakthrough before it becomes publicly visible. Under those conditions, the emergence of a deal within a short window would be a natural extension of the trajectory already in motion.

Do you think India will avoid opening some sectors to foreign players and that tariffs will remain in place, although not at current levels?

India is likely to maintain a calibrated approach, preserving protection for politically sensitive sectors while allowing measured openings where domestic capabilities are strong and competitive. Agriculture, certain MSME-led categories and segments tied to data and digital rules are areas where the government is expected to remain cautious, both to shield local livelihoods and to retain policy flexibility.

At the same time, sectors aligned with global value chains, such as advanced manufacturing, clean energy components and services, are more likely to see incremental easing as part of a balanced arrangement.

Tariffs, too, are unlikely to disappear entirely. Instead, they are expected to settle at moderated, more predictable levels that reduce friction without exposing domestic industries to abrupt shocks. This blend of selective protection and targeted liberalisation fits India’s current strategy: safeguard vulnerable sectors, deepen strategic partnerships and enable foreign participation where it enhances competitiveness.

The outcome is not a sweeping opening, but a structured recalibration that balances economic priorities with political and developmental realities.

Do you think HDFC Bank looks undervalued?

Looking at the bank’s fundamentals and market positioning, the current valuation appears lower relative to its strength across key metrics. The bank continues to deliver steady profit growth, resilient asset quality, and stable return ratios, with RoA holding around the upper end of the large-bank range.

Margins have softened slightly but remain within a healthy band, and the underlying drivers point toward gradual improvement as funding costs normalise and high-cost liabilities run off. Loan growth is tracking well with system demand, supported by broad-based momentum across retail, corporate and MSME segments, while credit costs remain contained with no signs of stress in early indicators.

At the same time, the bank’s valuation multiples have compressed relative to historical averages despite consistent earnings compounding and a clearly articulated path toward restoring its loan–deposit ratio to more comfortable levels. The combination of stable profitability, controlled operating expenses, and a strong capital position creates a financial profile that is stronger than what the current market pricing may imply.

Against this backdrop, the stock appears inexpensive compared with its long-term trading range and the visibility of its medium-term earnings trajectory.

Do you see more steam left in PSU banks even after the sharp rally since September?

Despite the sharp rally since September, the PSU banking space still carries pockets of momentum, but the character of the uptrend is likely to change. Much of the earlier surge was driven by a powerful combination of multi-year balance-sheet clean-up, strong earnings visibility, high provision buffers, and improving credit demand, all of which remain intact.

Return ratios for many large PSU banks are stabilising at levels that were previously thought unsustainable, and their capital positions are far stronger than they were in past cycles. These structural improvements mean the sector is not purely sentiment-driven and still has fundamental support underneath.

Margins are expected to stay under pressure in the near term as deposit costs catch up, and treasury gains, which boosted profitability during falling bond yields, may normalise as rates stabilise. Credit growth is healthy but not accelerating meaningfully, suggesting upgrades will be more measured going forward.

In this backdrop, the sector can still extend its performance into 2026, but the trajectory may be more moderate and selective rather than broad-based. The steam is not entirely exhausted, but the rally is likely to shift from being valuation-led to earnings-led, favouring banks with stronger deposit franchises, better operating leverage and consistent asset quality delivery.

One global expert believes Indian IT services may be a net loser due to automation. Do you agree? Do you see strong value at current levels and potential for a rally going forward?

Automation will undoubtedly reshape parts of the IT services landscape, but the idea that Indian IT will be a “net loser” misses the larger transition underway. Automation and AI are compressing low-value work—manual testing, L1 support, basic coding, but they are simultaneously creating newer, larger service lines around AI integration, application modernization, data engineering, and enterprise-wide transformation.

The hardware-heavy phase of the AI cycle is already peaking, and the next phase, the services-led deployment, begins once capex intensity flattens. That is typically when Indian IT revenue cycles bottom out and begin to accelerate.

In fact, the sector is approaching a potential inflection point over the next 6–9 months as enterprises move from pilots to full-scale AI adoption. Global digital engineering leaders are already reporting a shift from experimentation to deployment programs, indicating rising discretionary budgets and stronger deal pipelines.

For Indian IT, this transition mirrors the early cloud cycle, where an initial short-term headwind eventually gives way to a multi-year growth phase driven by modernization, cloud-native development, and data workloads.

At current market levels, the value argument is also strengthening. The sector’s weight in the benchmark index has fallen to a decadal low even though its contribution to aggregate profits remains stable, suggesting that scepticism around AI-led deflation is largely priced in. Earnings growth is subdued today, but the visibility improves meaningfully from FY27 onward as AI-led services begin contributing more materially. This setup leaves room for re-rating once growth normalises.

Overall, automation is not eliminating demand; it is redirecting it. The companies best placed to capture this shift are those with strong AI stacks, hyperscaler partnerships, modernization depth and the ability to convert services into platforms. With the business cycle near its bottom and the AI deployment phase approaching, the sector does exhibit value and the potential for a broader-based rally as the next spending cycle unfolds.

Do you think there will be no macro risks for India going ahead? If not, what could be the key risk factors in the year ahead?

India’s macro backdrop has been exceptionally stable, but that does not eliminate risks. Growth momentum, fiscal consolidation, and external balances all look healthier than previous cycles, yet the economy is still exposed to a handful of structural and global factors that could influence the outlook over the next year.

The most important external risk remains global volatility. A sharper-than-expected slowdown in the US or Europe, or any prolongation of high-for-longer interest rate cycles, can weigh on exports, capital flows and corporate investment.

Oil prices continue to be a swing variable; any sustained move above comfort levels would pressure inflation, the fiscal math, and the current account. Financial market disruptions, especially if global liquidity tightens suddenly, can also spill over into domestic bond yields and equity markets.

Domestically, inflation, though under control, remains sensitive to weather patterns, food supply disruptions, and commodity swings, which can delay rate cuts and affect consumption. A slower recovery in private capex or any pause in the government’s infrastructure push could soften growth impulses.

Finally, labour market formalisation and policy transitions, such as the implementation of new labour codes, may carry short-term adjustment challenges even though they strengthen the medium-term outlook.

Overall, the macro environment remains fundamentally resilient, but the year ahead will require navigating global economic uncertainty, commodity risks and domestic inflation dynamics. These are not destabilising risks, but they are important factors that can alter the smoothness of the growth trajectory.

Do you expect further correction in the US markets, considering the recent decline appears to be only a partial correction?

A further correction cannot be ruled out, but the balance of evidence still suggests that the recent pullback resembles a sentiment-driven correction rather than the beginning of a deeper, fundamentals-led bear market. The decline so far has been swift, narrative-linked, and has unfolded against a backdrop of strong corporate earnings, easing inflation, and ongoing AI-driven capital expenditure, all characteristics typically associated with short-term corrections instead of prolonged downturns.

From a macro perspective, the outlook remains anchored by resilient US growth, supported by high corporate profitability, elevated investment cycles, and the early but powerful phase of widespread AI deployment. These factors continue to provide a meaningful cushion against sustained downside risk.

Even so, several short-term pressures could keep volatility elevated and potentially extend the correction phase. The high concentration of market gains within the top ten US stocks has increased sensitivity to earnings surprises and shifts in market narratives.

Policy uncertainty from the Federal Reserve, particularly as labour-market trends evolve, may add to near-term swings. Tariff-related pricing adjustments, the renewed wave of fiscal activism, and political developments ahead of the 2026 US midterm elections could also intermittently weigh on sentiment.

Moreover, valuations remain elevated, and such starting points naturally allow for periodic pullbacks, even within a healthy bull market.

Importantly, the underlying fundamentals still do not point to a structural downturn. Earnings strength remains broad-based across sectors, corporate capex, especially in AI-linked areas, is firmly in an early-cycle phase, and credit conditions continue to reflect a mid-cycle environment rather than emerging stress.

At the same time, fiscal policy across major economies remains expansionary, providing additional support to growth and limiting the risk of a deeper contraction.

Overall, while a deeper correction is possible as markets recalibrate to stretched valuations and shifting macro narratives, the probability of a full-scale bear market appears low at this stage. The broader investment backdrop heading into 2026 continues to favour expansion, punctuated by episodes of volatility rather than a lasting trend reversal.

Sentiment indicators are also at lows. In the past, one has seen rallies when sentiment indicators are at such lows. In the medium to long term, one needs to be watching the growth of AI-linked stocks for cues of a larger cycle turning correction.

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