Daily Voice: RBI may hold rates, maintain inflation and growth outlook in August policy, says Bank of India MF CIO

The Indian equity market has been in a consolidation mode mainly because of the deterioration in its earnings profiles. While there has been a decent EPS growth, barring the first two quarters of the last financial year, most of this EPS growth was led by expansion in profit margins because of operating efficiencies, input cost reduction, lower tax, etc, and not because of good revenue growth. The revenue growth so far has been only 6-8% and till this doesn’t inch up, the market may continue with its current consolidation phase.

The government's decision to reduce tax, the RBI decision to cut interest rate and increase liquidity, and the potential salary increase of government employees next year should potentially trigger the demand growth in the second half of the year. This potentially can cheer up the market. A favourable trade deal with the USA will also have a positive impact on the market.

Do you anticipate the RBI will deliver a 50-basis-point rate cut over the remainder of 2025, including in the August policy meeting? Do you expect any revisions to the full-year inflation and growth forecasts in the upcoming meeting?

After front-loading the rate cut in the last policy meet, we believe that the RBI would like to wait and watch the incoming inflation and growth data before taking any further action. While the recent inflation data is at a multi-year low, and if it continues to remain benign in the coming months, it certainly opens a window to lower the rates in the latter part of the year by 25bps.

However, considering the uncertainties in the external environment, we believe that the RBI may not make any rate change in the August policy and may not revise the inflation and growth forecast.

Given the current US economic environment, particularly considering recent tariff policies, do you believe the Federal Reserve is likely to postpone its next rate cut to Q4 2025?

The US economy is faring quite well, especially in terms of inflation and the labour market. The recent tariff-related issues have implications for the US economy, but we believe that the US Fed would like to wait and see how the tariff policies shape the growth, inflation, and labour market before taking any further rate action. In that scenario, it's fair to believe that the Fed may only look to change the policy rate in the last quarter of this calendar year.

Is the corporate earnings season unfolding in line with your expectations? What have been the key hits and misses so far in the ongoing Q1 FY26 earnings season?

So far, the earnings season has been on the expected line, and since the season has just started, it’s too early to conclude either way. At the same time, two heavyweight sectors, namely banking and IT, were broadly on the expected lines. Consumer space seems to be still struggling with margins; at the same time, industrials and materials are showing promising trends.

Are you increasing exposure to the consumer discretionary sector at this stage?

We would like to decide on our sectoral positioning only after most of the earnings season is over. Therefore, at this stage, we are not considering any major change in our present sectoral positionings.

Are you turning more constructive on NBFCs, given the decline in incremental stress levels?

NBFCs in the last few quarters had been struggling with higher provisioning, especially in the unsecured retail segment. Looking at the current data, it appears that the provisioning number in retail portfolios may remain elevated in this quarter and may witness some moderation in the next quarter only. With that view, we are becoming more constructive on retail-focused NBFCs.

What are the current investment opportunities in the midcap space? Do you expect midcap earnings to outperform those of large-cap companies in the current fiscal year?

The trend of demerging businesses into standalone entities for better focus and efficiencies is increasing. As a result, there are a lot of planned demergers in the large and mega-cap stocks. Many of these demerged entities will end up being midcaps, and many new listings are also happening in the midcaps space. This is making this space interesting.

The earnings profile of the midcap companies has been better in the recent past, and we expect that trend to continue and the midcaps to outperform the large caps in this current fiscal year. At the same time, the recent correction in the midcap space is offering good investment opportunities.

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