Markets aren't overheated at current levels: Rahul Arora of Nirmal Bang

Markets have already scaled a wall of worry - from tariff tensions and border skirmishes to unrest in West Asia, says Arora

India is the most richly valued market among developed and emerging economies, but as long as its growth continues to outpace peers and macroeconomic stability holds, it will keep drawing a steady stream of foreign inflows, says Rahul Arora, chief executive officer for institutional equities at Nirmal Bang, in a telephonic conversation with Puneet Wadhwa. Edited excerpts: 

Have markets moved past the Trump tariff threat trade and into TACO (Trump Always Chickens Out) territory? 

In our view, tariffs for most countries are likely to settle in the 10–20 per cent range, and markets have largely priced that in. Where negotiations have not made much headway, threats of steeper tariffs remain, but these appear more like negotiating tactics. We don’t believe tariffs will materially stoke inflation, especially with China still exporting deflation. 

Do markets lack a clear catalyst to move higher in the short-to-medium term? 

Markets have already scaled a wall of worry — from tariff tensions and border skirmishes to unrest in West Asia. Crude oil prices have been well-behaved despite these geopolitical risks. So, the worst may be behind us. But any further upmove will now have to come from earnings. 

How do valuations stack up right now? 

They’re not cheap, but largecap valuations look relatively reasonable. Lower interest rates and subdued bond yields are helping. The bond yield–earnings yield gap across the board — largecaps, midcaps, and smallcaps — is now marginally below the long-term average, suggesting markets aren’t overheated at current levels. 

 

Are markets getting ahead of themselves when it comes to April–June quarter earnings?

 

We don’t expect a breakout in earnings growth. Key sectors like banking, information technology, and fast-moving consumer goods are likely to post either muted (low single-digit growth) or slight declines. Some bright spots may emerge in consumer discretionary — hotels, electronics manufacturing services players like Dixon Technologies (India), and select automotive names like Mahindra & Mahindra. Overall, consensus estimates aren’t wildly optimistic, but they’ll probably see some downward revisions.

 

How is India positioned within emerging markets (EMs)? 

So far in 2025, EMs have actually outpaced developed markets (DMs). With many now questioning the idea of US exceptionalism, EMs could continue to match — or edge past — DMs. Expected rate cuts from the US Federal Reserve and a weaker dollar also support the EM story. India remains the most richly valued market among both DMs and EMs, but as long as its relative growth edge and stable macros persist, it should continue to attract strong inflows.

 

Which sectors in India are likely to draw foreign institutional interest in the rest of 2025?

 

Discretionary consumption looks promising — think durables, services, and automotive. If the festival season goes well, backed by rising rural incomes and tax cuts in Budget 2025 for the urban salaried class, these sectors could benefit. Looking ahead to 2026–27, the Eighth Pay Commission could further lift consumption.

 

Have defence and public sector stocks run ahead of fundamentals?

 

Defence stocks are clearly priced for perfection — many are trading two standard deviations above long-term averages. While strong order books justify some of that, execution is key from here. Public-sector banks, on the other hand, look fairly valued. With healthy credit-to-deposit ratios, they may grow faster than some private banks. There’s evidence they’re slowly chipping away at private-sector market share.

 

How should a first-time investor with moderate risk appetite approach equities?

 

Start with a largecap-oriented portfolio, where valuations offer a degree of comfort. Add select quality midcaps and smallcaps with strong growth trajectories, depending on risk tolerance. A bit of exposure to debt and gold is also wise for diversification. With global and domestic rate cuts on the horizon, debt could offer some capital appreciation as well. Corporate bond spreads currently look appealing. 

Tariffs, TACO, and the end of panic

 

*  10-20% tariffs priced in; higher threats look like posturing

  *  Inflation? Still muted — China’s exporting deflation

  *  Wall of worry scaled: trade wars, border tension, West Asia heat

  *  Crude held steady; markets now numb to noise

  *  No fear left to chase — it’s earnings or nothing from here