Despite muted expectations, valuations in several areas of the mid and small cap segments remain expensive. However, the recent correction has brought valuations into a more comfortable zone, which supports a positive long-term return outlook, particularly as current Nifty valuations hover near their long-term average. Geopolitical tensions, tariff negotiations, and broader global economic conditions will continue to play a critical role in influencing market sentiment. The market appears to be underestimating the potential positive impact of tax cuts on the consumer sector, as well as the Reserve Bank of India's recent policy pivot. Corporate earnings, especially from sectors like financials and consumer goods, will be crucial in shaping market dynamics in the coming quarters.
In the medium term, select midcap and small cap companies with strong fundamentals could outperform. Prominent investment themes expected to do well include China+1 manufacturing, defence, power transmission and distribution, rural consumption, pharmaceuticals, and non-banking financial companies (NBFCs). Additionally, the stability of the Indian rupee could encourage foreign fund inflows, lending further support to the equity markets.
In the near term, markets may be impacted by developments in the India–Pakistan relationship and changes in U.S. trade tariff policy. Furthermore, both domestic and foreign portfolio investment (FPI) flows will be key variables to monitor in May. Given the current global geopolitical backdrop, Indian equity markets are well-positioned to outperform.
Debt Market Outlook
RBI lowered FY26 inflation forecast to 4% (from 4.2% earlier). According to its estimates, Q1 and Q2 FY26 inflation projections have been lowered to 3.6% and 3.9%, respectively.
Further, the RBI has trimmed GDP growth forecast to 6.5% (from 6.7% previously).
The RBI announced a Rs 1.25 lakh crore liquidity infusion, improving money supply and easing financial conditions. Stable inflation and strong macro fundamentals support bond yields.
Geopolitical tensions could lead to short-term volatility in debt markets.
Source: RBI, Bloomberg, CCIL, MOSPI (as on 30th April 2025)