Daily Voice: US Fed's next move could open floodgates for FII in India, says Axis MF's Shreyash Devalkar

Consumer discretionary sector is preferable due to low penetration (e.g. AC), premiumization (shift to purchase of larger PV), it being aspirational product there is sustained demand over cycles. On the contrary, some of the staple categories are fairly penetrated, hence ability to grow depends on product innovation, premiumization, advertising budgets.

Consumer discretionary being more expensive has higher sensitivity to income growth. As such, they benefit more during periods of rising income, tax relief, and credit availability. However, the cumulative impact of tax cut, GST cut, benign monetary policy, good monsoon may benefit both discretionary and staples.

Do you expect a further rally in the consumer durables and auto sectors as the festive season begins?

Post the GST rationalisation, premiumization trend likely to get stronger; and we see pick-up in replacement cycle. GST cuts will reduce PV prices by 5-10% and 2W prices by 8%, boosting demand. We believe that premiumization trend is likely to get stronger as demand elasticity will be higher in aspirational product segments.

While higher affordability will lead to an increase in demand from first-time buyers, we see pick-up in replacement demand (tepid over the last few years) as a bigger growth driver in PVs (passenger vehicles). Medium-term growth outlook (FY28E) could further benefit from impending implementation of the Pay Commission and gradual benefit of income tax cuts.

Within consumer durables, we believe that the cut in GST from 28% to 18% will bring room ACs, TVs (greater than 32 inches) and dishwashers will bring them at par with other home appliances. However, one cannot expect an immediate impact of the same. Consumers may want to spread out their purchases depending on their income and need.

On the other hand, given higher channel inventory for ACs (due to weak last summer season) and some postponement of demand, near-term profitability for companies may have some transitory adverse impact. However, Auto Index has already scaled back to 2024 peak rising almost 30% from April 2025. Consumer durable stocks as well have moved up. Further rally will depend on actual delivery on volume growth in festive season, sustenance of the same post festive season, and margin outlook for rest of year.

Is the equity market still in a slow-burn phase? Do you expect momentum to strengthen only after December quarter earnings start coming in?

The markets have entered a consolidation phase amid ongoing uncertainty around tariffs and earning cut since last one year, and elevated valuations. We have witnessed 14% returns in large cap on 3-year CAGR basis and 22% in Mid and Small caps. Long term returns are normally closer to nominal GDP growth.

Since on 3-year-5-year basis the returns are way higher than nominal GDP growth, we expect ongoing time correction to normalize valuations. Persistent FPI outflows and a lacklustre earnings season have as well weighed investor confidence. Macro tailwinds such as GST reforms, interest rate cuts, and tax cuts translate into meaningful volume-led growth, along with more clarity on final tariffs, may lead to improved sentiments.

Do you foresee a significant market reaction if the US Federal Reserve does not cut interest rates in its September policy meeting?

We do believe that the US Federal Reserve could lower interest rates in coming months. While we could see some reaction in India, we do believe that the domestic factors at this juncture outweigh the rate cuts in the US.

To set the context, clarity on the reciprocal tariffs, and currency stability remain the key. A consumption boost and bottoming of earnings cycle may set the positive time for Indian equities. A rate cut by the Fed could add pressure on the US dollar and could lead to some flows in India.

Do you believe India is likely to resolve the issue of US tariffs before December 2025?

While negotiations are likely to continue, both their timeline and outcome remain uncertain. However, a favourable resolution could act as a catalyst for a market rally. Despite the unfavourable outcome so far with the US, India continues to pursue a calibrated and pragmatic trade strategy, focused on expanding market access while protecting domestic interests. Recent progress on major trade agreements—such as the India-UK Comprehensive Economic and Trade Agreement (CETA) and the India-EFTA Trade and Economic Partnership Agreement (TEPA)—highlights this balanced approach.

Ongoing negotiations with partners including the EU, US, Peru, Chile, Oman, and New Zealand further reflect India’s commitment to diversifying its trade relationships and reducing overdependence on any single market. In an increasingly protectionist global environment, where high tariffs can disrupt traditional export channels, India’s proactive engagement in Free Trade Agreements (FTAs) is a strategic move to enhance resilience, secure long-term competitiveness, and ensure continued integration into global value chains.

Do you expect momentum to pick up in the banking and financial space, which has been underperforming the broader market? What are the key reasons behind underperformance?

A key challenge for Indian banks has been muted credit offtake, in absence of the corporate credit growth, the elevated scepticism on room to grow in case of unsecured retail credit, has led to sector underperformance.

Recent data indicates that the trend continues to be sombre, with a revival in private capex likely to be sometime away. Easing regulations & liquidity have been supportive & we expect NIMs may start moving upwards from 2HFY26. With ongoing transmission of cut in interest rate, credit growth may improve.

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