Markets need time to recalibrate to new STT regime: Pankaj Pandey

ICICI Securities' Pankaj Pandey says markets may need time to adjust to the new STT regime but sees strong FY27 earnings and midcap outperformance

With a conducive global environment, particularly around India-specific trade deals with the US and the European Union (EU), Pankaj Pandey, head of research at ICICI Securities, tells Puneet Wadhwa in an email interview that investors can deploy cash at current levels. Edited excerpts: 

What’s your outlook for the markets for the remaining part of 2026?

 

We are positive on domestic equity markets, as India offers a compelling trifecta of lower inflation, lower bond yields, and improving growth, which supports a constructive equity outlook. The key driver at this stage is strengthening domestic macro conditions, particularly consumption-led gross domestic product growth, along with easing tariff tensions, with India-US and India-EU trade deals on the anvil. Another supportive factor is healthy corporate earnings in the third quarter (October–December) of 2025-26. 

With global sentiment turning in India’s favour, we expect mid and smallcap stocks to outperform larger peers. An analysis of data over the past two decades shows a low probability (14 per cent) of smallcaps correcting in two consecutive years. With the smallcap index down around 6 per cent in 2025 and nearly 13 per cent from its all-time high, the odds (an 86 per cent probability) favour a resumption of the uptrend, with healthy double-digit returns in 2026.

 

Is this the right time to deploy cash, or should investors sit out? Which sectors should be overweight or underweight?

 

Given the conducive global environment, particularly around India-specific trade deals with the US and EU, investors can deploy cash at current levels. 

·         Overweight: Capital goods, banking, financial services and insurance (BFSI), information technology (IT), real estate 

·         Underweight: Automotive (auto), metal

 

How badly has the Budget crimped investor confidence amid the hike in the securities transaction tax (STT)?

 

The STT increase was limited to the futures and options (F&O) segment, with the intent of curbing speculation. Since there were no changes to the equity segment, we do not anticipate any meaningful impact on investor confidence.

 

High-frequency traders and scalpers are likely to be the hardest hit due to the higher breakeven levels.

 

Markets will take some time to recalibrate to the new STT pricing structure and adjust accordingly. Volumes may dip in the near term following the implementation of the new tax rules. The impact on stock futures is expected to be higher than on other F&O segments due to relatively thinner liquidity.

 

Precious metals, often seen as safe-haven bets, have corrected sharply after a strong run. With equity markets volatile and unpredictable, where should investors deploy money?

 

On a standalone basis, debt looks attractive given higher yields and a more benign interest-rate environment. Investors should maintain their fixed-income allocation. While we remain positive on equities, a neutral allocation at current levels, combined with staggered investments on small market declines, could be a more balanced strategy.

 

Allocation to precious metals, especially after a strong run, should be at the lower end of one’s target asset allocation.

 

Do economic conditions and policy support lend hope for a revival in corporate earnings growth in 2026-27 (FY27)?

 

We expect corporate earnings to deliver double-digit growth in FY27, with Nifty 50 earnings projected to grow 16 per cent year-on-year.

 

In FY27E, the BFSI segment is expected to post strong double-digit earnings growth, driven by sustained credit momentum, stable asset quality, and improved return on assets.

 

Capital goods remain a growth compounder, supported by better execution and a revival in the capital expenditure cycle.

 

The auto sector is expected to benefit from sustained demand momentum following the goods and services tax rate cut.

 

Are there any sectors that could emerge as dark horses in terms of earnings growth?

 

We expect BFSI, IT, capital goods, and real estate to outperform in 2026. 

·         BFSI: Revival in credit growth, strong asset quality, and valuations near historical averages offer an attractive risk/reward, particularly in public-sector banks 

·         IT: Valuations appear to have bottomed out after sharp corrections, with growth expected to rebound in 2026E

  ·         Capital goods: Momentum in new projects and tenders points to strong ordering activity in 2026E 

·         Real estate: A long growth runway, with the sector potentially trebling in size over the next five years 

How do you see the US Federal Reserve (Fed) and the Reserve Bank of India (RBI) responding over the next six to 12 months?

 

The Fed is unlikely to cut interest rates in the near term. It will closely track incoming economic data before taking further decisions. A rate cut is more likely during the second half of the tenure of Fed Chair Jerome Powell’s successor.

 

In India, the RBI is expected to maintain the status quo on the benchmark repo rate over the next six to 12 months. Interest rates are likely to remain predictable, lower, and stable through 2026.