Daily Voice: With expectations of recovery in growth, markets remain broadly healthy despite elevated valuations, says Waterfield’s Vipul Bhowar

The recent downward trend in India's CPI inflation is anticipated to persist in the near term, supported by declining food prices and continued moderation in overall inflation. CPI inflation decreased to 2.1% in June 2025, reaching its lowest level in 78 months, primarily influenced by falling vegetable prices. A gradual increase in inflation is projected towards the conclusion of FY26, as core inflationary pressures remain and the effects of rate reductions on demand become evident.

Do you expect the IT sector to come into the limelight once there is clarity regarding Trump tariffs?

Certainly, US companies, which are the primary clients of Indian IT service providers, have implemented budgetary constraints due to concerns over increased costs and inflation resulting from tariffs. This situation has adversely affected revenue growth within the IT sector.

Although tariffs primarily target manufacturing and hardware sectors rather than IT services directly, the resulting reduction in client budgets has led to diminished demand for IT services.

Consequently, clarification of tariff policies alone will not instantaneously revive demand; instead, overall economic growth and the financial stability of clients are also essential considerations.

Do you believe the equity markets are healthy right now, despite expensive valuations?

One reason Indian markets are presently trading at their valuations is the existence of clean balance sheets across various sectors, which contributes to a higher return on equity (ROE). Valuations have declined in recent quarters due to sluggish growth. Currently, markets expect a resurgence in growth; therefore, despite elevated valuations, the markets continue to demonstrate good overall health.

Do you think the major uncertainty surrounding tariffs will be resolved if India signs a trade deal with the US, or has this uncertainty already started to ease?

India and the United States are nearing finalisation of an interim trade agreement intended to reduce tariffs to below 20%, a decrease from the initially suggested 26% tariff rate. Negotiations are actively progressing, with Indian trade delegations frequently visiting Washington to resolve remaining issues.

The United States has extended the deadline for implementing reciprocal tariffs on India from July 9 to August 1, 2025, providing additional time for discussions. The uncertainty concerning tariffs between India and the United States is presently gradually diminishing but has not yet been completely resolved.

Do you find midcaps more attractive compared to largecaps and smallcaps when it comes to investment?

Mid-cap stocks frequently offer an appealing equilibrium between growth potential and associated risks, rendering them attractive investment options. They are more appealing than large-cap stocks for investors pursuing higher returns and less risky than small-cap stocks for those cautious of significant volatility. A combination of growth and stability is provided by midcaps, rendering them appealing investments.

Is it advisable to have a higher exposure to the financial sector for the remaining part of FY26?

Although the financial sector may present opportunities, increased exposure in FY26 should be undertaken selectively and balanced with an awareness of escalating credit risks, decelerating growth, and margin pressures. It is advisable to adopt a cautious and diversified investment strategy, emphasizing quality and risk management, for the remainder of FY26.

Would you recommend maintaining a low exposure to the auto and ancillary sectors?

Although the sector faces inherent risks and cyclical challenges, the current environment indicates increasing stability and growth prospects, mainly driven by EV adoption and government backing. Consequently, a balanced approach with selective investments in well-managed, innovative auto and auxiliary companies may be preferable to sustaining minimal exposure throughout.

Do you believe the overhang of uncertainty continues to persist in the pharma sector?

While the Indian pharmaceutical industry remains fundamentally robust and well-positioned on the global stage, the prevailing geopolitical and policy uncertainties—particularly concerning US tariffs—continue to overshadow the sector, rendering the overhanging uncertainty a persistent challenge into 2025.

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