See limited downside for markets from current levels, says Kunal Vora

Despite weak high-frequency data, Vora says tax cuts, strong domestic flows, and easing valuations support markets, with Nifty earnings less vulnerable to US tariffs

Markets have taken recent policy-related and geopolitical developments in stride. Kunal Vora, head of India equity research at BNP Paribas Bank, tells Puneet Wadhwa in an email interview that while Nifty 50 earnings are not highly sensitive to US tariffs, a resolution would improve investor confidence, particularly among foreign investors. Edited excerpts:

 

Is the risk/reward favourable for stock market investors at current levels?

 

The risk/reward looks favourable to us. Indian markets have gone through a consolidation phase, with the Nifty 50 largely flat over the past year, underperforming other emerging markets (EMs). This underperformance can largely be attributed to earnings estimate cuts, with Nifty 50 2025-26 (FY26)/2026-27 (FY27) earnings per share estimates having been lowered by 12–13 per cent from their peaks. 

While the Nifty’s price-to-earnings ratio of 20x is still above the long-term average of 17x, we remain positive due to the likely improvement in the growth trajectory. This is supported by measures such as cuts in direct and indirect taxes, lower interest rates, continued strong domestic flows, moderation in the pace of earnings cuts, and a reduction in India’s valuation premium versus China and other EMs.

 

High-frequency economic indicators remain weak but have yet to fully reflect recent positive developments. Nifty 50 earnings are not very sensitive to US tariffs, but a resolution would enhance investor confidence, particularly among foreign investors.

 

What is the worst we can see on the Sensex and Nifty?

 

The goods and services tax (GST) rate cut is another strong government initiative aimed at driving domestic consumption at a time when the export outlook has weakened due to US tariffs. Unlike the income-tax (I-T) rate cut, the GST benefit will be more widely distributed. We expect this to translate into stronger volume growth and margin improvement for the beneficiary industries.

 

Categories such as fast-moving consumer goods, health insurance, cement, consumer appliance, and two-wheeler have a user base far beyond the 2 per cent of the population that pays I-T. When the I-T rate was lowered, part of the benefit may have gone into savings and investments.

 

GST, being linked to consumption, is expected to boost both volumes and second-order benefits. Assuming an economic recovery and continued strong domestic flows, we see limited downside for markets from current levels.

 

In consumption-oriented sectors, a recovery in earnings could become visible starting the third quarter of FY26, which would support the markets.

 

What strategy do you suggest for mid, small, and microcaps?

 

Mid and smallcaps are trading at historically high premiums relative to largecaps. Although this premium has narrowed in recent months following largecap outperformance, it remains above average. This premium could narrow further; we continue to prefer largecaps over mid and smallcaps at an aggregate level.

 

What further policy response do you/markets expect from the government in the next six months?

 

From a domestic consumption perspective, much of what can be done has already been done. I-T and GST rates, as well as interest rates, have been lowered. Food inflation has eased, and the monsoon has been satisfactory overall. The Eighth Pay Commission could provide another boost to consumption, likely in FY27. Our expectation of a recovery is based on these existing measures rather than further government interventions.

 

How are foreign institutional investors (FIIs) viewing all these developments?

 

Indian markets are increasingly domestic investor-driven, and this trend is expected to continue. FIIs have sold around $16 billion worth of Indian equities this year. India’s valuations remain higher than those of other EMs, but the relative premium has shrunk following recent underperformance. Factors that could renew FII interest include trade deals with the US and improvements in the earnings growth trajectory.

 

Overweight sectors from a 12-month perspective?

 

We favour the domestic consumption theme, particularly in automotive, telecommunications, durables, and consumer internet segments. While consumer staples are well-placed tactically, we see a disconnect between valuations and long-term growth prospects.

 

The outlook for capital expenditure plays and exporters has weakened for now. We continue to favour private sector banks, which are well-positioned to benefit from a recovery in credit growth and are trading at attractive valuations.

 

Flat but not broken: The market balancing act

 

• The calm before the upswing: Nifty flat; EPS cuts priced; P/E 20x versus 17x
• Engines of recovery: Tax cuts, lower rates, strong domestic flows
• Consumption comes alive: Rebound in Q3FY26; largecaps preferred
• Levers pulled, growth lifted: Most levers used; GST boosts consumption and margins
• Foreign eyes, domestic bets: $16 billion outflow; focus on automotive, telecom, durables, consumer internet, private banks