Are Indian markets fairly valued—or due for a correction? Religare’s Ajit Mishra explains

 

With Indian equities trading near record highs and global uncertainties clouding the outlook, where should investors turn next? Ajit Mishra, Senior Vice President—Research at Religare Broking, shares his views on market valuations, sector rotations, and smart asset allocation. In this insightful conversation with BT, he explains why large caps are the safer bet right now, which sectors are poised to outperform, and how investors can manage risk without compromising on long-term wealth creation

Q: How do you view the current market valuations in India—are we in an overvalued zone or is there still room for growth?

We believe current market valuations in India are largely fair, especially in the large-cap segment. After three strong years of earnings growth from FY22 to FY24—driven by robust demand and margin improvements through efficiency gains—FY25 saw a slowdown due to election-related uncertainties and tighter monetary stance due to inflation.

With government spending picking up again and the RBI signalling a more supportive stance through potential rate cuts and liquidity measures, demand is starting to recover. As a result, we expect earnings growth of around 11–12% in FY26. At roughly 20 times FY26 earnings, the Nifty is trading near its fair value. However, mid- and small-cap stocks continue to command a significant premium over large caps, making us cautious in those segments. In our view, the risk-reward appears more favourable in large caps at this stage.

Q: How do you see diversification and sectoral shifts helping investors navigate the current geopolitical uncertainties in the market?

Given the current geopolitical uncertainties—such as potential tariff policies and trade deals under a possible Trump administration—we’ve taken a more cautious view on export-oriented sectors like pharma, IT, and auto. Instead, we’ve shifted our focus towards more domestically driven sectors such as insurance, cement, infrastructure, and private banks.

This reallocation has worked well recently and is expected to continue performing in the near term, especially as global volatility remains elevated. In times like these, where international risks can quickly ripple across sectors, diversification—particularly with a tilt toward domestic-facing industries—offers a more stable and resilient strategy for navigating market uncertainty.

Q: Which sectors are currently outperforming, and what factors are driving their growth? Are these trends sustainable soon?

In the current market environment, investors are gravitating toward sectors and stocks that offer stable earnings potential, strong balance sheets, and reasonable valuations. Sectors like insurance, private banks, cement, and agrochemicals are currently outperforming, each driven by different factors. In the insurance space, regulatory concerns have largely eased, restoring investor confidence.

Cement companies are benefiting from a rebound in demand and reduced competitive intensity following a phase of consolidation. Meanwhile, the agrochemical sector is showing signs of recovery after a prolonged two-year downturn. These trends appear sustainable in the near term, though some caution is warranted—for instance, private banks, while seen as safe bets, may face short-term pressure on margins due to anticipated RBI rate cuts, which could limit their re-rating potential.

Q: In a volatile macro environment, what’s your preferred asset allocation strategy for a Rs 50 lakh portfolio today?

In the current volatile macro environment, a balanced and thoughtful asset allocation is the key. For a Rs 50 lakh portfolio, a smart approach would be to allocate 65–75% to equities to benefit from long-term growth potential. Around 15–20% in debt instruments like debt funds, FDs, or PPF can provide stability, while 10–15% in gold and silver (through Sovereign Gold Bonds or ETFs) acts as a hedge against inflation and uncertainty. Investing through SIPs can smooth out market volatility, and reviewing the portfolio annually helps keep it aligned with your evolving goals.

Q: In your view, how should investors interpret macroeconomic indicators like GDP, inflation, and IIP to gauge India’s economic path in 2025?

India’s economic indicators for early 2025 reflect a cautiously optimistic outlook for investors. The robust Q4 GDP growth and easing inflation create a conducive environment for investment. The economy posted a strong Q4 FY25 GDP growth of 7.4%, while retail inflation eased to 3.16% in April—at its multi-year low—indicating improved price stability.

Although full-year GDP growth moderated to 6.5%, but it remains healthy amid global uncertainties. Industrial activity showed moderate strength with 2.7% IIP growth in April, and a sharp 20.3% rise in capital goods output, signalling rising investment activity. With inflation under control and growth steady, the RBI may consider further rate cuts, supporting infra, consumption, and rate-sensitive sectors.

Q: What impact do interest rate cycles have on equity valuations and investor sentiment, and how should retail investors factor this into their strategies?

Generally, interest rate cycles significantly influence equity valuations and investor sentiment. When interest rates rise, companies face higher borrowing costs and future cash flows are discounted at a higher rate, reducing equity valuations while financials may benefit. On the flip side, falling rates make equities more attractive, boosting valuations and investor optimism. Higher rates also attract capital to safer debt instruments, reducing equity flows, while lower rates encourage risk-taking.

Retail investors should factor these cycles into their strategies by diversifying across sectors with different interest rate sensitivities. Monitoring central bank guidance is crucial, as markets often react ahead of actual rate changes. Additionally, retail investors may adjust asset allocation between equities and debt, maintain diversification, and avoid short-term reactions. Ultimately, a long-term perspective and a well-balanced portfolio help investors navigate the ups & downs of interest rate cycles effectively. 

Q: What’s your advice on managing downside risk while still aiming for wealth creation?

Managing downside risk while aiming for wealth creation involves blending risk control with strategic growth. Diversify across sectors and maintain a balanced asset allocation based on market cycles and personal goals. Focus on high-quality companies with strong financials and sustainable moats, avoiding speculative bets and high-beta stocks.

Adopt a long-term mind set as volatility is the price of returns. Avoid panic selling, stay disciplined, and rebalance when markets are frothy. Use corrections to accumulate quality assets at lower valuations. This approach helps protect capital while positioning your portfolio for steady, compounding growth over time.

Q: What is your outlook for Indian stock markets in next one year?

The Indian stock market outlook for the next one year appears constructively positive, supported by robust domestic macro fundamentals, stable corporate earnings, and strong retail participation. Government capex and PLI-linked investments are driving growth across infrastructure, manufacturing, and capital goods.

Consumption is expected to pick up, aided by rural recovery, personal income tax cuts and stable inflation. Private sector capex revival, led by real estate and select capital goods, should sustain earnings momentum. However, global headwinds like elevated US interest rates and geopolitical tensions may trigger intermittent corrections. Valuations across mid and small caps are rich, warranting selective bottom-up investing. Sectors with tailwinds such as financials, infra, healthcare, pharma etc. offer long-term potential.