Insights

The Nifty fell 2.9% in July after 3–4 months of a continuous uptrend. Mid-cap and small-cap indices underperformed large-cap and were down 4% and 6%, respectively. Overall sentiment remained cautious amidst uncertainty around India–US trade negotiations and a soft Q1FY26 results season. Almost all sectors ended in the red, except healthcare (+3%) and FMCG (+2%). IT, real estate, and capital goods indices were down 9%, 7%, and 6%, respectively. India was among the worst-performing markets, along with Brazil (-4%), the Philippines (-2%), and Malaysia (-1%), while Thailand (+14%), Indonesia (+8%), and Taiwan (+6%) were among the top gainers.

On the flows front, FPIs turned negative after three months of continued inflows; they sold US$5.5 bn of Indian equities in the secondary market, whereas DIIs bought US$7 bn. Retail flows into equity mutual funds remain strong.

High-frequency data for July continues to remain mixed, similar to previous months. GST collections improved by 7.5% YoY in July from 6.2% in June. Manufacturing PMI rose to a 16-month high of 59.1 as output and sales expanded at a quicker pace, while services PMI ticked up to 60.5 in July from 60.4 last month. Central government capital spending softened to INR 528 bn in June (vs. INR 616 bn in May), with cumulative capital spending at 24.5% of the budgeted target. Credit growth slightly improved to 9.8% YoY in July (vs. 9.5% in June). Power demand recovered to 2.1% YoY in July from -1.5% YoY in June. Vehicle registrations declined for both two-wheelers and passenger vehicles in YoY terms. MHCV retails were flat YoY in July 2025. Wholesale growth was ahead of retail growth as re-stocking before the festive season began. The Naukri Job Index moderated on a YoY basis but improved sequentially. On a CYTD25 basis, the aggregate index is up 4.7%, led primarily by an uptick in hiring in the non-IT sector. Air passenger traffic fell both on a MoM and YoY basis.

Of the 60% of NSE500 index companies that have reported their results (as of Aug 3, 2025), revenue growth has been around 7%, and PBT growth approximately 9% YoY. Within these, mid-cap companies as a basket continue to deliver relatively stronger earnings (+15% PBT growth YoY), while large-cap and small-cap companies have seen PBT growth of around 7% YoY. While this season has been marginally better than the previous few quarters, the extent of recovery is still muted, and much will now depend on the typically busy second half of the year.

As highlighted in our previous communication, market direction was expected to be a function of the outcome of trade negotiations and tariff conclusions. In this regard, India’s tariff discussions have stalled, leading to the imposition of an interim duty of 25% on Indian exports to the US—well above market expectations—and putting India at a relative disadvantage compared to other emerging market economies. We expect this outcome to cast a shadow on India’s overall growth outlook at least until final negotiations are concluded, likely over the next three months. This could potentially impact earnings growth, particularly in sectors such as textiles, gems and jewellery, and pharma, and in companies with significant manufactured exports to the US. Our earlier expectations of earnings growth accelerating to double digits during 2HFY26 may now be at some risk.

In view of the above, we expect overall market weakness to persist until the direction of trade negotiations becomes clear, even as some domestic levers—such as favourable interest rates, inflation, and government spending—continue to support the domestic economy.

Yet, we remain convinced that India’s overall economic cycle is in an expansionary phase, though it may have to contend with some global challenges in the near term. Our portfolio positioning, therefore, remains pro-cyclical, with a preference for domestic over global sectors and for high-quality companies demonstrating strong business execution.

US’s Treasury yields remained volatile during the month and inched up by 15-20 bps across the curve as the market factored in fiscal concerns from the new Tax bill and as the jobs market data remained robust thereby pushing back the rate cut expectations. Post the hawkish rate cut by RBI in June policy, domestic G-Sec yields also remained in a bearish trend with a steepening bias. Even as the June headline inflation came much lower than expected, market remained cautions as INR came under pressure owing to US’s tariff related worries & FPI’s huge equity outflow. Corporate bonds upto 5 year tenor performed better on account of healthy demand at elevated yields

Outlook

Global backdrop remains volatile & fast evolving as US’s tariff policies are getting unfolded. Few countries have got a better deal than the earlier Liberation Day tariffs and few others are still to conclude the deal. US’s recent non-farm payroll data came much lower than expected which has re-ignited the hopes of Federal Open Market Committee’s (FOMC’s) policy rate cut in upcoming September meeting. Notwithstanding,market yields continue to swing widely amidst inflation worries led by higher tariffs, timing of the next rate cut and fiscal concerns.

US has imposed higher-than-expected tariff on India at 25% and an additional 25% penalty for importing Russian crude which has led to INR coming more under pressure relative to the Emerging Country peers. Foreign Portfolio Investors (FPI’s) equity outflows have also picked up, adding to the INR pressure

RBI’s MPC has delivered a hawkish pause in its August policy after cutting it by a cumulative 100 bps over the previous three meetings & continued with a neutral stance. While RBI lowered the inflation projections for FY26 by a sharp 60 bps to 3.1%, inflation for 1QFY27 is projected to be high at 4.9%, largely on account of un-favorable base effect. Growth projection for FY26 is maintained at 6.5%, dispelling the global uncertainty led growth concerns. With the forward-looking growth-inflation dynamics, MPC has substantially raised the bar for any future rate cuts.

On domestic rate cycle, we believe that a small window may open up in October’25 or at the latest in December’25 policy meeting for a possible final rate cut, but for that domestic economic growth has to come under pressure meaningfully. RBI has retained its GDP projections for FY26 and across quarters for FY27, signaling confidence in the domestic economy’s resilience. However, the recent imposition of a 50% tariff by the US (including penalty) has raised concerns about potential headwinds to growth. While the Governor reaffirmed India’s ability to withstand external pressures, any material deterioration in the growth outlook could prompt the MPC to consider one final rate cut during this calendar year.

As we come to the last leg of the rate cut cycle, it is important to realign the return expectations from fixed income strategies as capital gain opportunities may be limited. Having said that, risk-reward continues to remain favorable for the debt funds. Market yields have further gone up by 6-8 bps post policy announcement from an already elevated level. Since the June policy rate cut of 50 bps, 5 year as well as 10 year G-Sec yields have gone up by approximately 18-20 bps. At the same time, headline inflation has dropped sharply to close to 2% and is also expected to remain moderate this year. The corporate bond spreads in the 1 to 5 years segment are elevated, offering an attractive investment opportunity from an accrual perspective. Additionally, the steepness in 5 to 10 years segment of the G-sec yield curve presents a value buy opportunity on the back of favorable demand–supply dynamics