Monetary easing helps, yet mkts take their cue from earnings: Gautam Duggad

While the Reserve Bank of India’s (RBI’s) rate cut met market expectations, investors will welcome the monetary easing and look forward to further liquidity measures, says GAUTAM DUGGAD, head of research — institutional equities, Motilal Oswal Financial Services (MOFSL). In an email interview with Sundar Sethuraman, Duggad says the benefits of the ₹1 trillion tax stimulus announced in the Union Budget will start to take effect from the first quarter (Q1) of 2025-26 (FY26). Edited excerpts:

 

How does the RBI rate cut impact the equities market?

 

The RBI’s rate cut was in line with market expectations. This step towards monetary easing should provide relief to investors, who will now look for additional measures to improve liquidity. However, the immediate market trajectory will be shaped primarily by corporate earnings and global macroeconomic factors.

 

What’s your assessment of the October-December quarter earnings?

 

The earnings of 238 companies in our universe grew 5 per cent year-on-year, in line with our estimates. Among these, 96 reported lower-than-expected profits, 72 exceeded expectations, and 70 matched forecasts. The aggregate performance was weighed down by the global commodities sector. Excluding metals and oil and gas, our universe posted earnings growth of 9 per cent. Meanwhile, 27 companies in our coverage saw upgrades, while 103 were downgraded by more than 3 per cent each.

 

The modest earnings growth was largely driven by the financial sector, with support from technology, real estate, healthcare, and capital goods. Conversely, global cyclicals — particularly oil and gas, metals, cement, automotive, and consumer goods — dragged down overall growth. Nifty earnings per share for FY26 is now at ₹1,203, a 15 per cent increase, and at ₹1,374 for 2026-27, up 14 per cent.

 

Have the Budget announcements changed the market outlook for 2025?

 

The standout measure in the FY26 Union Budget was the ₹1 trillion stimulus for middle-class taxpayers. For the first time in 11 years, the Budget shifted focus away from a heavy emphasis on capital expenditure (capex) and towards boosting consumption and savings.

 

Key beneficiaries of this shift include fast-moving consumer goods (FMCG), retail, discretionary spending sectors, real estate, two-wheelers, entry-level vehicles, and capital market plays. Given the limited fiscal headroom, the finance minister delivered a pragmatic Budget that reassured markets. Moving forward, attention will turn to earnings trends, global macroeconomic developments, and corporate growth guidance.

 

How much will the tax cuts help revive the earnings slowdown?

 

We expect a recovery in earnings for consumer-facing companies, supported by increased demand from the stimulus and subsequent flow-through of operating leverage benefits. The impact of this stimulus should start materialising from Q1FY26 as households adjust their budgets to account for tax savings. Meanwhile, the flat growth in central government capex (for roads and railways) could take longer to reflect in the earnings of industrials.

 

Have valuations moderated after the recent correction?

 

The Nifty 50, Midcap 100, and Smallcap 100 indices have fallen 10 per cent, 12 per cent, and 13 per cent, respectively, from their September 2024 highs. While the overall index declines appear moderate, individual stock corrections have been more pronounced.

 

Following the market pullback, the Nifty 50 is now trading at a 12-month forward price-to-earnings (P/E) ratio of 19.5x, about 7 per cent below its long-term average. The Nifty Midcap is at a P/E of around 30x, reflecting a 50 per cent premium to the Nifty 50, while the Nifty Smallcap is trading at around 22x, a 13 per cent premium to the Nifty 50.

 

What’s your outlook for foreign portfolio investor (FPI) flows?

 

The recent selloff in domestic equities began in October 2024, with FPIs pulling out about $20 billion net since then. This marks the sharpest four-month FPI outflow, suggesting that a significant portion of the selling may already be behind us.

 

However, with the shifting rhetoric on the US economy and stiffer US bond yields, it is difficult to predict how long this trend will continue. That said, extreme narratives may not translate into aggressive policy actions, which could ease concerns and potentially reverse FPI outflows.

 

How will US tariff tensions affect markets?

 

Markets are likely to remain volatile in the near term due to uncertainty surrounding US policy shifts and trade tensions. These developments will keep investors on edge for a few months. However, such tensions may not last long or escalate sharply, as economic logic and pragmatism are expected to outweigh protectionist impulses.

 

Which sectors are you overweight and underweight on?

 

We are overweight on consumption, information technology, banking, financial services and insurance, industrials, healthcare, and real estate. We remain underweight on oil and gas, cement, automotive, and metals. We continue to prefer largecaps over mid and smallcaps.

 

What advice would you give to mutual fund (MF) investors who recently entered the market and are seeing their portfolios in the red?

 

New MF investors should avoid panic over short-term dips in their portfolios. Equities should be viewed as a long-term asset class, and investors must be prepared for periodic sharp corrections. Staying disciplined with investments — especially through systematic investment plans — can help in long-term wealth creation. Investors should also stick to their asset allocation strategy based on their risk tolerance.      THE FPI PARADOX: EXIT, UNCERTAINTY, AND A POSSIBLE RETURN 

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