Election results impact on stock market, focus stocks, rally leader- SMC's Ajay Garg decodes

India’s market outlook remains constructive despite global uncertainties, with policy continuity and macro stability supporting growth, says Ajay Garg, Director & CEO, SMC Global Securities. In an interaction with Business Today, he said that recent political developments could accelerate infrastructure spending and boost sectors like railways, PSUs, and logistics.

He believes that sticky inflation may delay rate cuts, banking and capex-led themes remain strong. Earnings are gradually shifting toward demand-driven growth, even as mid- and small-caps face valuation-led volatility, making selective, quality-focused investing crucial. Read the edited excerpts:
 

BT: How will recent state election outcomes shape policy direction, government spending priorities, and reform momentum—and which sectors (infra, PSU, defence, railways) stand to gain or lose in the stock market?

Garg: The recent election results, particularly the BJP’s breakthrough in West Bengal, indicate a mandate that could strengthen Centre–State development synergy. As the sixth-largest state economy, West Bengal is projected to reach a GSDP of ₹20.32 trillion in FY26, contributing meaningfully to India’s economic and market growth.Greater political alignment with the central government may accelerate project approvals, improve fund allocation, and enable smoother execution of large-scale initiatives, thereby driving momentum across infrastructure, tourism, and railway sectors. A leadership shift after a prolonged period could also unlock new investment potential, with key themes including stronger infrastructure coordination, a pickup in PSU-led lending, and the development of modern deep-sea ports at Tajpur and Kulpi.

Sectorally, the impact could be broad-based. With West Bengal being a major producer of rice, potatoes, fish, and tea, agriculture-linked industries, food processing, and logistics may benefit. Banking and financials may see improved credit growth, particularly in MSMEs and housing. However, fiscal constraints remain a concern, with the state’s fiscal deficit estimated at 3.6% of GSDP and outstanding debt of 38% of GSDP in FY26, making execution and fiscal discipline critical for sustained outcomes. While near-term market sentiment may remain buoyant, long-term performance will hinge on actual project execution and fiscal discipline.
 

BT: With inflation still showing stickiness, how likely is the RBI to delay rate cuts, and what could that mean for market liquidity, bond yields, and valuation multiples across sectors like banking, NBFCs, and real estate?

Garg: With inflation remaining somewhat sticky, the RBI is likely to stay cautious and delay further rate cuts in 2026. CPI inflation edged up by 19 basis points to 3.40% in March 2026, largely due to rising crude prices amid geopolitical tensions. Even if tensions ease, lingering supply constraints in crude oil and LPG may keep inflation risks elevated, though still within a manageable range.

Given this backdrop, the RBI may adopt a wait-and-watch approach, especially since the cumulative 125 basis points of rate cuts in 2025, bringing the repo rate to 5.25%, are still transmitting through the economy and providing adequate liquidity. Bond yields are likely to remain range-bound with a slight upward bias.The banking sector is poised to benefit from a powerful convergence of strong credit growth, a resurgent private capex cycle, and sustained government spending. While real estate may still face a lag effect of high borrowing costs, potentially squeezing margins. The banking core is exceptionally well-positioned to lead the next leg of market expansion as macro risks subside.
 

BT: What do Q4 results indicate about the health of India Inc.—are companies seeing genuine demand recovery, or are profits being supported mainly by cost controls and margin expansion?

Garg: The Q4 results indicate a pivotal transition from margin expansion-led growth to volume-led recovery. While previous quarters saw corporate India benefiting from a sharp cooling in input commodity prices, the current earnings season reveals a more fundamental recovery in top-line growth, particularly in urban discretionary and premium consumption segments.

However, the health of India Inc. remains bifurcated. While large-cap leaders are seeing genuine demand pull and are reinvesting in capacity, smaller players are still struggling with high interest costs and an uneven rural recovery. The fact that profits are now being supported by improved operating leverage rather than just cost-cutting is a healthy sign that the domestic economy is entering a more sustainable phase of the earnings cycle.
 

BT: Why are midcap and smallcap stocks witnessing higher volatility—are valuations stretched compared to historical averages, and could we see a time correction or a sharp price correction ahead?

Garg: The recent volatility in the midcap and smallcap segments is best characterized as a healthy “valuation indigestion” following a period of stellar outperformance. While some stocks are trading at premiums compared to historical averages, it is important to recognize that India’s superior earnings growth profile provides a fundamental floor to these valuations.

The market is likely entering a constructive time correction phase, where prices may remain range-bound as corporate earnings catch up to market levels. While frothy pockets driven purely by speculation may see some cooling, the broader mid-market remains resilient. High-growth companies with robust balance sheets continue to offer significant long-term upside, making this an ideal period for investors to shift from momentum-chasing to quality-focused stock picking.
 

BT: How strong is the Indian economy in the face of global slowdown risks—can domestic consumption, capex cycle, and government spending sustain earnings growth over the next few quarters?

Garg: The Indian economy remains relatively resilient despite near-term global slowdown risks, with real GDP growth projected at around 6.9% for FY27.Economic activity remains steady, supported by robust private consumption and stable investment demand. Rural consumption continues to be strong, aided by favourable agricultural conditions and a healthy labour market, while urban demand is expected to improve further, driven by GST rationalisation.

However, geopolitical tensions in West Asia pose a key risk to growth. Rising energy prices, along with higher input costs and potential supply chain disruptions, could weigh on overall growth in the short run. On the investment front, the government’s continued focus on infrastructure spending is reinforcing the capex cycle. This is complemented by a gradual revival in private sector investment, supported by strong credit growth and stable financial conditions. Key indicators remain strong, with private final consumption expenditure (PFCE) and gross fixed capital formation (GFCF) expanding by 7.7% and 7.1%, respectively, in FY26 compared to FY25. Overall, this “triple engine” of public capex, private investment, and urban demand is expected to sustain high single-digit earnings growth through FY27.
 

BT: Given the current macro environment, which sectors offer the best risk-reward—are traditional leaders like banking and IT still attractive, or is the market shifting toward themes like manufacturing, defence, and EV ecosystem plays?

Garg: In the current macro environment, the most compelling risk-reward proposition has shifted from traditional defensives to structural growth themes. While banking remains a fundamental anchor due to its relative valuation comfort and clean balance sheets, IT continues to face discretionary spending headwinds from the West. This means that the market’s alpha is clearly migrating toward the "New India" manufacturing ecosystem.

Power, Capital Goods, Pharma, Defence, and the EV supply chain are no longer just speculative plays, they are backed by multi-billion-dollar order books and clear policy visibility. For investors, the most attractive strategy is to balance the stability of large-cap financials with exposure to these high-momentum manufacturing and energy-transition themes, which are set to redefine India's economic landscape over the next decade.