India Strategy – Global factors hamper market momentum

NIFTY has shed most gains made in past couple of months and has been largely flattish. Domestic demand outlook and macro indicators show sustained traction in 3Q and beyond as benefits of cut in interest rates, GST rationalization, income tax cuts, low inflation have started to show in improved consumer sentiments and demand. Global geopolitics is redrawing global power and business equations and threatens to affect geographical boundaries. This is leading to significant increase in business uncertainty and volatility more so for India as sustained tariff row with the USA and related news flows are disturbing the market momentum. We expect economic momentum to sustain as benefits of strong tailwinds emerging from 1) Income tax rate cuts 2) 120bps cut in repo rate 3) normal monsoons 4) 10-year low inflation and 5) GST rates rationalization carries forward to next year. As we approach the 2027 budget, focus will shift to structural economic reforms and don’t expect major tax concessions after significant increase in tax slabs and GST rate cuts last year. NIFTY EEPS has seen a change of -2.6/-2.4/1.0% for FY26/27/28 with 14.8% CAGR over FY26-28. We value NIFTY at 3% discount to 15-year average PE of 18.7x with Dec27 EPS of 1539 and arrive at 12-month target of 28814 (29094 earlier). We remain cautious in the near term where large caps will continue to outperform (16-17% over last 12 months). We believe that domestic oriented sectors like Banks, NBFC, Auto, Select Staples, Jewellery, Defense, Select Durables and Metals can outperform in near to medium term.