India Perspectives - Green shoots cropping up

Highlights: The implementation of the UK-India trade deal, improved rainfall as well as robust inflows from the FCNR deposit scheme have helped buoy recent sentiment. However, continued uncertainty in the Middle East and increasingly hawkish US Federal Reserve need continuous monitoring. INR bonds should benefit from robust foreign flows and improved supply-demand dynamics, but risk of RBI rate hikes leads us to retain a neutral stance. We retain our tactical mild underweight stance on Indian equities despite the recent inflows and modest earnings uptick as elevated relative valuations continue to be key headwind.

• The Reserve Bank of India (RBI) kept interest rates unchanged in its Monetary Policy Committee (MPC) meeting on 5 August. Despite the dovish tilt in the MPC meeting, we project two 25bp rate hikes in 2026 – in October and December meetings, bringing the repo rate to 5.75 per cent by end-2026
• We retain our tactical mild underweight stance on Indian equities. While the improvement in foreign investor flows and a modest uptick in earnings expectations are positive, the overhang of relatively expensive valuations and oil price uncertainty lead us to retain a mild underweight stance. We favour more defensive large-cap stocks. We also prefer domestically oriented sectors and are overweight Financials and Industrials
• We are neutral on Indian local currency bonds. Strong foreign inflows and the potential reduction in domestic issuance by banks due to liquidity from FCNR deposits lead to favourable technicals. However, potential rate hikes could lead to upside pressure on yields leading us to have a neutral stance for INR bonds. Foreign inflows and FCNR deposits have helped stabilise the INR over the past month. However, oil price uncertainty, broad USD uptrend and RBI’s preference to bolster FX reserves are likely to keep the currency rangebound in the near-term