RBI Rate Cut: Monetary policy outcome to keep bolstering economic growth momentum, says Dhiraj Relli of HDFC Securities

Global equity markets took a hit in April after US President Donald Trump imposed reciprocal trade tariffs across countries. Back home, the benchmark equity index BSE Sensex, BSE MidCap and BSE SmallCap indices cracked nearly 4% each month-to-date till April 8. Meanwhile, RBI Governor Sanjay Malhotra on Wednesday said that the MPC has decided to cut the repo rate by 25 basis points to 6%. 

Where is the market headed in the new financial year? How should retail investors position themselves in the uncertain global trade environment? In an exclusive interaction with Business Today, Dhiraj Relli, MD and CEO, HDFC Securities, shared his insights on market outlook, trade tariffs and RBI’s interest rate decision. Edited excerpts:

BT: Sensex and Nifty have cracked 14% from their respective 52-week high levels scaled in September 2024. Considering the ongoing correction and present domestic and global market conditions, what are your expectations from Indian stock markets for FY26?

Relli: We believe it is time for long-term investors to seize this opportunity. Investors should gradually start building portfolios. Midcap indices have fallen around 20-22% from their highs, and individual stocks, by and large, have seen a fall between 25-40%. Valuation multiples of select stocks have become quite attractive.

Correction in markets has reduced India’s valuation premium to emerging markets to about 50% almost similar to its long-term average. Sectors with strong earnings visibility may see a significant rebound.

We are expecting a consolidation in indices for few months before moving to a higher orbit. Overall, the street expects Nifty earnings to grow between 12-15% each in FY26 and FY27. Selected stocks post recent correction have become attractive.

BT: RBI’s MPC cut repo rate by another 25 basis points on April 9. What is your advice to retail investors?

Relli: The central bank's monetary policy adjustments, including the quarter-point rate cut implemented in early February and further easing in April, will continue to provide substantive support for economic growth momentum. The second advance estimate for fiscal year 2025 saw a slight upward revision to 6.5% from 6.4% in January. We believe that one should gradually start building a portfolio.

Q4 FY25 earnings are expected to be strong, and that could also pull up the overall market. Post severe correction on broader markets, in the pockets where earnings trajectory is intact, we would see strong rebound as already visible in the past few days.

India will remain the fastest-growing economy among advanced and emerging G-20 countries for the foreseeable future. The significant size of its domestic market renders the nation less vulnerable to potential shocks from global economic disruptions.

BT: Is it time to shift towards large-cap stocks, or will mid- and small-caps continue to offer better opportunities?

Relli: Historically, mid and small-cap stocks deliver higher returns, but this potential comes with inherently increased risk and volatility. These segments tend to amplify both market upswings and downturns compared to their large-cap counterparts.

Investors must adhere to a clearly defined asset allocation strategy aligned with their personal risk tolerance and return objectives. This requires regular portfolio reviews, deepened understanding of equity market dynamics, continuous development of investing skills, and rational expectations about potential outcomes. When allocating capital to any particular asset class or market segment, thorough due diligence becomes essential for long-term success.

Even within identical sectors, individual stock performance can diverge dramatically over time. This phenomenon underscores why fundamental analysis and careful security selection often prove more valuable than broad sector-based allocation approaches. The ability to identify quality companies within sectors often separates successful investors from the crowd.

BT: Given global uncertainties, how much exposure should investors have in international equities? Or should one go completely with the domestic theme?

Relli: The new US administration under President Trump has rattled global stock markets, alarmed corporates and economists, and triggered heated rows with the US’s largest trading partners by imposing tariffs on imports.

These tariff proposals and implementations have significantly impacted global trade dynamics.  Overall, the cumulative effect of these tariffs could not only reduce export revenues but also lead to job losses and slower economic growth for the world.  The situation necessitates urgent attention between the US and its trade partners to mitigate these impacts before they take full effect.

Major economies worldwide are confronting a dual challenge: internal macroeconomic difficulties alongside external geopolitical tensions. The full ramifications of escalating global tariff wars remain unclear and unpredictable. This uncertainty is compounded by growing concerns about a potential US recession on one side, while China continues to struggle with fundamental structural weaknesses in its economic framework on the other.

Amid this global turbulence, India stands as a beacon of economic resilience. Its favourable combination of prudent monetary policy and supportive fiscal measures positions the country advantageously compared to many global peers. This economic stability creates a particularly attractive environment for investment during uncertain times.

India’s long-term structural growth narrative remains compelling, and the recent sharp market correction has transformed previously stretched valuations into more reasonable territory. While diversification into international markets may offer some portfolio benefits, we anticipate that India will likely outperform other global markets in the coming quarters as its fundamental strengths become increasingly apparent against the backdrop of global uncertainty.

The ongoing trade war has introduced significant uncertainty into global financial markets, causing investors to reassess their portfolios amid unpredictable policy shifts and retaliatory measures between major economies.

In this challenging landscape, it is prudent to overweight domestically oriented sectors that derive the majority of their revenue from internal consumption, as these businesses face less direct exposure to international trade tensions and currency fluctuations that could erode profit margins.

Companies with strong local supply chains, established domestic distribution networks, and products that serve essential local needs will likely demonstrate greater resilience during this period of global economic recalibration, potentially offering both defensive characteristics and growth opportunities as domestic economic policies potentially shift toward stimulating internal consumption.

We maintain particular enthusiasm for the Banking, Financial Services, and Insurance (BFSI) space, which stands to benefit from India's ongoing financialisation trends, rising insurance penetration, and the digital transformation of financial services. The sector's valuation multiples remain reasonable relative to historical averages despite strong credit growth prospects, improving asset quality metrics across most institutions, and the increasing adoption of technology-driven solutions that promise to both expand market reach and improve operational efficiencies; furthermore, the regulatory environment has stabilised following earlier reforms, creating a more predictable framework for financial institutions to operate within.

BT: How do you think the fall in stocks market may impact government revenue in FY26? Can we see a fall in STT collection this year?

Relli: The Securities Transaction Tax (STT) has served as a consistent revenue stream for the Indian government since its implementation in 2004, particularly flourishing during bull market periods when trading volumes surge. Following the Covid-19 pandemic, STT collections have demonstrated remarkable growth, driven by exceptional buoyancy in equity markets.

In its most recent Union Budget, the government significantly revised its STT collection estimate for FY25, increasing the target from Rs 37,000 crore to Rs 55,000 crore—representing a substantial 63% year-over-year increase. This ambitious revision reflects the robust market performance observed this year.  However, current market conditions raise questions about the achievability of this revised target. Cash trading volumes have declined approximately 17% year-over-year in the calendar year 2025 thus far, suggesting the government may struggle to reach its collection goal under present circumstances.

The outlook appears even more challenging for the upcoming fiscal year. To achieve the projected Rs 78,000 crore in STT collections, the markets would need to demonstrate sustained vibrancy—a tall order given the prevailing uncertainties and geopolitical tensions. This projection assumes continued market growth at a time when multiple headwinds could potentially restrict trading activity and, consequently, STT revenue generation.

BT: What will be the key triggers for market recovery?

Relli: The market’s recovery hinges on two critical factors: uncertainty from the geopolitical environment and the trajectory of earnings recovery in upcoming quarters. Looking forward, three key drivers will influence earnings performance: the pace of monetary easing, stabilisation in commodity prices, and revival in urban consumption patterns. While market valuations have undergone correction, sustained earnings growth remains essential to justify any meaningful market appreciation from current levels.

BT: What should be the right strategy for equity investors to make money in FY26?

Relli: Investors can approach the current market environment with cautious optimism, as valuations across sectors have largely reset to more reasonable levels. Risk-averse investors may find greater security in large-cap stocks, which typically offer more substantial protection against market volatility compared to their mid-cap and small-cap counterparts.

The most prudent strategy involves identifying companies that maintain consistent earnings trajectories while offering a margin of safety due to recent price corrections. Although investors should remain vigilant regarding global geopolitical developments, the risk-reward profile appears increasingly favourable moving forward, barring any significant adverse international events.

This balanced approach—combining selective investment in fundamentally sound companies with ongoing awareness of external factors—creates a framework for potentially capitalising on current market conditions while managing downside risk.