MC Interview: Growth impulse from Budget positive for FY26, focus now on corporate earnings, says Kotak AMC's Shibani Kurian

The budget delivered more than expectations in terms of the measures announced aimed at providing impetus to consumption by supporting the urban and middle class demand. This would, in turn, provide more disposable income in the hands of the consumer, thereby boosting consumption. Importantly, the budget support comes at an opportune time when consumption, especially at the bottom of the pyramid and urban consumption were seeing muted trends even while there have been some signs of revival in rural demand.

We have seen a well-coordinated fiscal and monetary response to supporting growth, while ensuring macro stability as well. In this context all eyes would be on the Monetary Policy to be announced later in the week. For equity markets, the growth impulse from the budget should be positive for FY2025-26 though the focus would now shift back to the delivery of corporate earnings. Recent correction in Indian equities over the past few months has resulted in large cap valuations correcting to long term average levels. Relative valuation comfort is more for large cap segment vis-à-vis mid/ small caps.

Do you expect the RBI to begin monetary easing in the February meeting?

The RBI monetary policy to be announced in February 2025 will be critical in shaping interest rate trends in India and monetary policy direction under the new RBI Governor. We believe that the current domestic rate cut cycle would be a shallow one, even while the timing of the rate cut would depend on data points such as the inflation trajectory along with global trends on monetary policy (especially the US Fed). Importantly, the focus of the Central Bank has shifted towards liquidity management with the recently announced measures.

Amidst persistently tight system liquidity (the last LAF print was a deficit of above Rs 3.1 lakh crore), RBI has announced a slew of measures to ease liquidity and reduce part of the deficit. Banking system liquidity has been persistently in a deficit zone since mid-December 2024, after being comfortably in surplus during July-November 2024. The core liquidity (net LAF, including the governments cash balance) had also turned deficit for the first time since July 2019. Thus, steps for liquidity management, would play an important role in improving the lending conditions in the economy.

Is the economy experiencing a cyclical slowdown or just a temporary one?

Notwithstanding the near-term challenges on the macro- economic front, we remain optimistic about India's structural growth outlook in the medium to long run. India, in FY25, remains one of the fastest growing large economies of the world and is expected to remain so in FY26 as well.

Do you think the market will consolidate for a couple of months before regaining strong momentum in FY26?

We continue to be structurally positive on the Indian equity markets in the medium to long term even while we would have to navigate the near term volatility. The recent volatility has been a mix of global and domestic factors. On the domestic front, the Q2FY25 earnings season was a muted one with earnings growth in mid-single digits and the expectations for earnings growth for Q3 also remains in the 6-8% range for the Nifty companies.

Hence, while Indian markets have outperformed in the last 3 years, one must moderate near term return expectations even as the structural opportunity for Indian equities remains intact. Largecaps continue to remain better placed from a risk – reward perspective, trading at a slight premium to historical average multiples while mid and small caps are trading at multiples which are still higher than their long terms average. Delivery of earnings becomes even more critical especially for mid and small caps.

Do you expect earnings upgrades in the pharma and discretionary sectors? Do you expect 15 percent earnings growth in FY26 after the anticipated mid-teen growth in the current fiscal year?

Given that the corporate earnings delivery in H1FY25 has been muted, the consensus earnings growth estimates for FY25 now stands in mid - single digits, while expectations remain of mid-teens earnings growth in FY26. This deceleration in earnings in FY25 can be attributed to the slowdown in consumption (especially urban consumption), near term deceleration in government capex, and credit growth easing from 16-17% to ~11-12% at present. From here on, the trajectory of earnings growth in FY26 would depend to a great extent on the revival of demand and resumption of government spending. In that context, the key driver for earnings in FY26 would have to be topline growth as most of the margin levers has been largely exhausted.

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