Markets await devil in the details in the India-EU FTA: Nilesh Shah, Kotak AMC

From a purely market standpoint, India-EU trade deal is a positive step and clearly in the right direction, Shah said

It is a busy week for the markets as they deal with the uncertainties surrounding the upcoming Union Budget proposals, India – European Union (EU) free trade agreement (FTA), developing geopolitical situation amid corporate earnings season back home. Nilesh Shah, managing director of Kotak Mahindra AMC, tel​ls Puneet Wadhwa in a telephonic interview that a meaningful valuation re-rating of the Indian market appears difficult from here. Edited excerpts:

 

How important is the India– European Union (EU) trade deal for the markets?

 

One needs to keep expectations realistic at this stage. Any India–EU trade agreement will require ratification by all 28 member states of the European Union, which is a long and complex process. This alone can take anywhere between six to twelve months. So, even if an agreement is announced, implementation will not be immediate. Execution will take time.

 

 

From a market perspective, the announcement itself is not as important as the underlying details. At present, there is a lot of signalling from both sides, largely to convey that alternative trade partnerships exist. The critical question, however, is whether the agreement eventually translates into a genuinely balanced and mutually beneficial deal. 

 

For instance, from the EU’s standpoint, sourcing garments from India or Bangladesh does not make a material difference. However, the EU has very limited export potential to Bangladesh, whereas India represents a large and growing consumer market. If the deal results in better access for Indian exports, such as garments, while also selectively opening the Indian market, it could create a far more meaningful economic relationship. That kind of give-and-take would put both sides in a much stronger position. Ultimately, the market’s response will depend entirely on the specifics—because, as always, the devil lies in the details.

 

From a purely market standpoint, this is a positive step and clearly in the right direction, but until clarity emerges on the finer points, it is unlikely to have a significant impact on market behaviour.

 

Does this development push market’s concerns around the India–US trade deal to the backburner?

 

Not really. The market has already factored in delays in the India–US trade agreement. Investors are no longer reacting to timelines alone. Once again, the key determinant will be the quality of the deal.

 

If an agreement is reached that is perceived to be unfavourable to India, markets are unlikely to respond positively, irrespective of how quickly it is concluded. On the other hand, even if the deal is delayed by another three months, but the final outcome is clearly beneficial for India, markets would view it very positively. In that sense, substance matters far more than optics or speed of execution. 

 

Are markets likely to remain range-bound in the months ahead?

 

At this point, most of the negative news is already discounted (by the market). That said, it is important to define what “range-bound” actually means. A meaningful valuation re-rating of the market appears difficult from here. Going forward, earnings growth will be the primary driver of market returns.

 

The current quarter’s earnings have been impacted by multiple factors. Rupee depreciation hurt companies that were unhedged, and there has also been an impact from the implementation of labour codes. As a result, earnings growth this quarter has been either muted or below expectations. This effectively means that outsized returns are unlikely in the near-term.

 

Market returns are therefore likely to mirror earnings growth, which points to high single-digit or low double-digit returns. Given this backdrop, markets are likely to remain range-bound, and expectations need to be calibrated accordingly.

 

What are your expectations from the Union Budget?

 

The Budget has to achieve what can best be described as a trinity of the impossible. First, the government needs to continue spending aggressively on infrastructure and investment. Over the last couple of years, capital expenditure has not exceeded net borrowing. This Budget should ideally reverse that trend, with investment levels surpassing borrowing.

 

Second, to enable higher capital expenditure without straining finances, the government needs to focus on non-tax revenue generation. This includes asset monetisation, divestment, and possibly even out-of-the-box measures such as gold disclosure schemes.

 

Third, there is a need for a structural push towards ease of doing business. One possible solution could be an ease-of-doing-business commission—where entrepreneurs affected by regulatory or procedural hurdles can seek swift resolution through a single-point mechanism. 

 

Will rationalising taxation on bullion ETFs encourage more retail participation?

 

While investors naturally prefer lower taxes, the more important issue is stability in tax policy (in the budget). Frequent changes create uncertainty and discourage long-term investment decisions. My recommendation would be to maintain consistency. Once a taxation framework is decided, it should remain unchanged for an extended period. Policy should not be altered every year to address individual demands. Investors and markets benefit far more from predictability than from marginal tax tweaks.

 

Have commodity prices—especially gold and silver—run ahead of fundamentals?

 

The current commodity cycle is being driven largely by the global de-dollarisation trend. Predicting political outcomes, particularly actions by President Trump, is extremely difficult, which adds to uncertainty. As long as central banks continue to diversify away from the US dollar, gold prices are likely to remain well supported. Gold’s direction will be determined almost entirely by central bank behaviour.

 

Silver, on the other hand, has a mixed demand profile—it is partly industrial and partly investment-driven. At present, silver appears to be more of a momentum trade, particularly as new supply is emerging from mines in Latin America. Overall, as long as countries seek alternatives to the dollar for reserve diversification, gold remains the primary beneficiary.