Insights

After a volatile start, Nifty gained 3.1% in June, marking the fourth consecutive monthly rise. Both mid-cap and small-cap indices outperformed large-cap indices and were up 4% and 6.7%, respectively. Almost all sectors ended up in positive territory, except FMCG. IT, healthcare and Realty were up 4.7%, 3.9% and 3.8%, respectively. Global markets were mixed with South Korea (+13.9%), Japan (+6.6%) and US SPX (+4.6%) amongst the top gainers, whereas Thailand (-5.2%), Indonesia (-3.5%) and France (-1.1%) were the top losers. The market’s sentiment was boosted by the Reserve Bank of India's surprise 50 basis points rate cut, easing inflation, falling crude and ceasefire between Iran and Israel. June saw sharp volatility in crude, jumping by 22% to $79/bbl in the month before cooling off $67/bbl as some ceasefire between Israel-Iran was reached.

Other key developments: (1) the US decided to hike tariffs on steel and aluminium imports from 25% to 50%, (2) the RBI reduced the repo rate by a larger-than-expected 50 bps, CRR by 100 bps, in four tranches of 25 bps each between September and November and shifted the stance to neutral. (3) the US Fed FOMC kept the policy rate unchanged at 4.25-4.5%, (4) the RBI relaxed project finance norms, primarily by reducing provisioning requirements for banks and NBFCs lending to infrastructure and real estate projects. (5) Defense Acquisition Council approved defense purchases worth Rs1050bn. Meanwhile, FPIs bought US$1.7 bn of Indian equities in the secondary market, whereas DIIs bought US$8.5 bn.  

High-frequency data for June remains mixed, echoing the trend of previous months. GST collections growth rate moderated sharply to 6.2%YoY in June from 16.4% in May. Manufacturing PMI improved to a 14-month high of 58.4, while services PMI rose to a 10-month high of 60.4, on the back of rising new business & output. Central govt capital spending softened to INR 616bn in May, and its growth rate stood at 38.7%YoY (partly impacted by base effect). The cumulative rainfall for the country as a whole is +12% above the LPA as of 3 July, while sowing activity is up 11.3%YoY as of 27 June. Credit growth though subdued, picked up to 9.6%YoY in June (vs 9% in May). Vehicle registrations (Retails) moderate both for two-wheelers and passenger vehicles in YoY terms. Air passenger traffic continues to be resilient. 

As anticipated, global equity markets have fared well since mid-April, as the rhetoric on tariffs and its economic impact had abated even as geopolitics around South Asia and Middle East took centre stage. Quick global interventions averted extended conflicts in both cases which stabilised commodity prices and restored market confidence. In the interim, while India markets too did well, it underperformed global and emerging markets due to higher direct and indirect impact of oil prices.

We expect the near-term market direction to be guided by the outcome of the tariff negotiations as they approach the July 9 deadline and the progress of the 1QFY26 earnings season. While on the former, our expectations are still of a relatively moderate impact on India’s current account and overall economic growth, the latter will likely be more decisive. On this count, 1QFY26 may be early double-digit growth quarter for the broader universe and mid-single digit for the narrower universe of the Nifty. More importantly, this may well mark the end of low single-digit growth as we enter a period of favourable base effect which could lift earnings growth to a healthier double digit in the subsequent quarters of FY26. We think the market will likely be more focused on this outcome and the longer-term positivity around the India economic cycle over the short-term debate around tariffs and geopolitics. Domestic outlook on interest rates, liquidity, govt spending, fiscal deficit, inflation and a good monsoon all remain supportive of a possible acceleration in earnings momentum for corporate India in the coming quarters. With the overall economic cycle in an expansionary space, we remain excited about the medium-term opportunity for sustainable alpha generation in the small and midcap space especially post recent corrections. Our portfolio positioning remains procyclical and preference continues for high quality companies with strong business execution.

US Treasury yields remained volatile during the month amidst FOMC’s policy announcement, US’s “Big Beautiful Tax Bill” and middle east geo-political tensions. FOMC delivered a hawkish policy while maintaining status quo on policy rate and retained its data dependent approach. The policy decision was taken in the backdrop of elevated US’s fiscal concerns as president Trump signed the tax bill. . In the domestic market, RBI delivered an outsized rate cut of 50 bps in June policy, however the domestic yields, both G-Sec as well as Corporate bonds, went up by 15 to 25 bps post policy as market reacted negatively to RBI’s change of stance to neutral and fears of tightening of banking liquidity. Only the money market yields rallied during the month.

Outlook

US yields may remain turbulent as the market’s rate cut expectation in US swing rapidly with incoming data print reflecting healthy jobs market & steady inflation, while the impending tariff related uncertainty remains an overhang on growth & inflation trajectory. Fiscal concerns remain elevated amidst the passage of the new tax bill. Notwithstanding the global uncertainty, currency markets have remained relatively stable giving flexibility to Central banks to remain focused on domestic factors for monetary policy actions.

Against the global uncertainty, Indian fixed income market continues to stay resilient on the back of favorable fiscal as well as monetary policies. On monetary policy front, MPC in its June policy delivered an outsized 50 bps repo rate cut and also a Cash Reserve Ratio (CRR) cut of 1% in a phased manner. However, in a balancing move, MPC also changed the policy stance back to “Neutral” from “Accommodative” after changing it in the previous April policy only, which spooked the market and resulted in hardening of yields (above 2 yr segment) by 15-25 bps. We believe it is an overreaction by market and gives an opportunity to investors. While MPC’s neutral stance may result in a pause over next couple of monetary policies, the current policy rate cut along with the liquidity surplus with CRR cut will still gradually drive the yields lower with a curve steepening bias. We expect RBI to maintain surplus banking liquidity for effective rate cut transmission and a measured Variable Rate Reverse Repo (VRRR) of Rs 1 lac cr for 7 days reflects that. Further, as inflation is expected to remain benign with healthy monsoon & may even undershoot RBI’s projection of 3.7% in FY26, any growth slowdown due to global overhang may open up a window for RBI to deliver one more policy rate cut.

Depending on the risk appetite, investors can look to participate across the debt fund categories. While the steep policy rate cut is favorable for the steepening of yield curve, longer end of the curve provides tactical opportunities as the term spread has widened sharply and is expected to compress in second half of FY26 when demand picks up from long investors. Overall, risk-reward remains favorable at current juncture with well-balanced demand-supply dynamics for G-Sec and benign liquidity. However, considering the shape of yield curve, it will be critical to position appropriately on G-Sec & Corporate bonds as we find G-Sec yield curve above 5 yr tenor and Corporate bond yield curve upto 5 yr tenor more attractive.