Daily Voice: RBI may lower inflation forecast in June policy; FY26 growth upside limited, says this investment officer

P Krishnan is the Managing Director & Chief Investment Officer – Equity Asset Management at Spark Asia Impact Managers

According to P Krishnan of Spark Asia Impact Managers, it is likely that the inflation forecast will be revised down by the Reserve Bank of India in its June policy meeting.

On GDP growth, "We cannot expect a materially higher growth in FY26 as against FY25. Let us bear in mind that FY25 growth had to be revised down," he said in an interview to Moneycontrol.

On the recent sharp rally from April lows, Krishnan is of the view that the extent of the rebound from the lows is unwarranted in many instances. "The bubble is living dangerously, fed by low-quality hot air. Volatility is very likely. There are no easy exits," said the Managing Director & Chief Investment Officer – Equity Asset Management at Spark Asia Impact Managers.

Do you still see major risks to the equity markets arising from trade tariffs and US bond yields?

The shock & awe effect is behind us. The market may take the incremental news on tariffs in its stride. However, the average tariff levels, which may settle at 10-15 per cent, the best estimate at this stage, are significantly higher than the levels of under 3 per cent in January. This will drag US growth no matter what.

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P Krishnan

Managing Director & Chief Investment Officer – Equity Asset Management|Spark Asia Impact Managers

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Bond yields present a bigger challenge to global & Indian markets. Bond yields should have been falling in the face of slowing growth, but they are firm. There is a rollover challenge for US debt. This is not an event but a fundamental drag and is difficult to resolve. It is not about a cliff effect on markets, which is what investors are scared about, that cannot be predicted. There will be a persistent drag, and the derating trigger is alive and will not go away.

For India, the challenge is on equity valuations and on asset prices. From the flow data, it seems that Indian investors refuse to accept that Indian valuations are unsustainable. Valuations went up over the last 15 years due to lower global interest rates, and the converse is inevitable.

Portfolios are riding on the thesis of relative valuations, while the ground has slipped away from under their feet. There is this tendency to chase even a feeble momentum. This is because of the funds flow to equities in India, perceived lack of alternatives, refusal to accept high single-digit returns as reasonable in the current context of elevated risk and greed from the recency effect of the post-COVID surge in returns. Many expensive parts of the market are in a slow-motion train wreck or are about to get there. Whether there will be dramatic resets is hard to forecast.

Do you think the US Federal Reserve may hold off on further rate cuts until September?

It is highly unlikely that the US Fed will reduce rates without assessing the inflationary impact of the tariff hikes. Tariff hikes are inflationary. There is a high likelihood that the US Fed will be knowingly behind the curve on rate cuts despite the threat of recession. If 10-year bond yields go beyond 4.8 percent, the US Fed may be forced to pivot. Forecasting is hard now, but the US Fed is between several rocks and hard spots. Further, rate cuts may not lead to much lower bond yields and that is a potent risk.

Do you believe much of the froth has already been cleared from the broader markets?

Unless valuations go down meaningfully, the froth will not clear. Earnings growth is unlikely to compensate for the valuation excesses in general. The extent of the rebound from the lows is unwarranted in many instances. The bubble is living dangerously, fed by low-quality hot air. Volatility is very likely. There are no easy exits.

Broader markets are accident-prone, where earnings support is non-existent or grossly inadequate. Some stocks may buck the trend, but the probabilities are not on the side of investors in many pockets.

Do you expect the equity market to consolidate for the remainder of the calendar year, or do you anticipate it ending the year with a 15 percent return?

Equity markets are likely to consolidate. If they go up higher than the level of nominal GDP growth, that will be because of excesses. That will make the markets very risky. The writing is on the wall.

Do you expect the RBI to lower its inflation forecast and revise its growth outlook for FY26 in the upcoming June policy meeting? What are your expectations for the interest rate decision?

The inflation forecast will likely be revised down. Heightened risk to global growth is the primary driver. Other positive triggers are not the reason. But India need not look at the gift horse in its mouth. This is positive for India. It can support modest rate cuts. However, the bond rate differentials with the US may narrow further and limit the scope.

On GDP growth, we cannot expect a materially higher growth in FY26 as against FY25. Let us bear in mind that FY25 growth had to be revised down. The drag from global growth cannot be wished away. The slowdown in IT will hit domestic consumption. Trade disruptions will weigh in too. Indian growth will remain steady. The challenge is in setting expectations. We cannot set high expectations because of the perceived pressure to talk up asset markets.

Are you bullish on the power equipment sector?

The outlook is good. However, we would look at the broader opportunities in the power sector and not just at the equipment space.

Which themes do you consider worth betting on for the current financial year?

Domestic-centric segments will stand out. This is not the best time for theme-based optimism. The more powerful themes are equity negative. The sub-text around evergreen Indian themes, such as new age consumption and channel disruption, financialization of savings, and clean energy, is more critical than the headlines. We need to be stock-specific. All the bullish themes on India remain intact, but the storytelling has been too shrill. We are emphasising earnings visibility, earnings resilience, valuations, and risk.

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