Market Commentary

Equity

June 2026 saw an up move of 1.4%/2.3% in the Nifty 50 Index/Sensex as US and Iran announced a temporary pause to hostilities, which effectively opened the Strait of Hormuz. As commodity prices, particularly crude oil, declined, market sentiments improved with Small caps ending the month with a gain of 4% while the midcap ended flat. While Financials, Automobiles and Pharma/healthcare outperformed during the month, the underperforming sectors were Technology, Metals and Power. FIIs recorded outflows for the fourth consecutive month in Jun’26 at USD 3.1 bn. However, the selling eased materially, with flows turning net positive in the second half of Jun’26 at USD 1.3 bn. Notably, DII inflows were strong at USD 9.0 bn. FII outflows from Indian equities stand at USD 13.2 bn in 1QFY27 whereas DII inflows into equities continue to be strong at USD 23.1 bn in 1QFY27.

Contrary to expectations, growth in India held up remarkably well despite disruptions caused by West Asia crisis. High frequency indicators have steadily improved over the last few months with rural demand continuing to hold up well and urban demand too showing signs of uptick. Credit growth in high-teens also points to India’s deft management of the West Asia crisis by reducing the impact of higher crude prices and supply chain disruptions. Vehicle registrations and power demand recorded another month of strong growth, along with sharp pick-up in GST collections and e-way bill generation. Manufacturing and services PMI moderated in June compared to May but remain firmly in expansion zone.

After the moderation in valuations in the first three months of 2026, they are more balanced, albeit selectively so. Large-cap stocks and cyclical sectors appear more reasonably priced after the drawdown, offering improved entry points from a risk-reward perspective. In contrast, segments within mid and small caps have rebounded more sharply, with valuations in pockets again moving ahead of near-term fundamentals. Additionally, India's valuation premium compared to global peers has compressed to near historical lows. After nearly two years of consolidation and underperforming most global markets over the past year, Indian equities appear to have largely priced in the key downside risks.

Earnings outlook for Indian corporates has strengthened meaningfully, with corporate earnings expected to clock mid-teens CAGR over FY26–28, despite temporary pressure in 1QFY27. We remain optimistic on Indian equities considering key trade deals, attractive domestic growth outlook, healthy corporate profitability, and supportive pro-growth policies. However, near-term risks include risk of flare up in geo-political tensions.

Fixed Income

The fixed income market continues to be supported by favourable liquidity dynamics despite an increasingly uncertain global macro backdrop. We expect domestic liquidity conditions to remain structurally abundant over FY27, underpinned by policy initiatives aimed at attracting foreign capital. Measures such as ECB relaxations, FCNR deposit concessions and India's inclusion in the Bloomberg Global Aggregate Index are expected to facilitate incremental foreign inflows of USD 80–100 billion over the medium term. The attractive valuation of the Indian Rupee further enhances the outlook for sustained capital inflows. These flows should comfortably fund domestic credit growth while maintaining benign system liquidity and anchoring short-end interest rates.

On the monetary policy front, the threshold for further policy rate hikes appears significantly higher. The RBI is expected to rely primarily on liquidity management and foreign exchange interventions to address currency pressures before resorting to policy tightening. Underlying inflation remains well contained, with Super Core Inflation (headline inflation excluding food, fuel and precious metals) at 2.6% in May 2026, indicating limited demand-side inflationary pressures. While risks from a potentially weak monsoon and evolving global geopolitical developments warrant close monitoring, any policy tightening, if required, is likely to be deferred to the second half of FY27 and is expected to be gradual and shallow.

From an investment perspective, we continue to favour short-duration, high-quality corporate credit, where risk-adjusted carry remains attractive. PSU corporate bonds currently offer spreads of around 100 basis points over comparable Government Securities, providing compelling carry with limited duration risk. Conversely, valuations at the longer end of the curve have become less attractive, with 10-year, 15-year and 30-year Government Security yields largely retracing to pre-conflict levels. We expect more attractive entry opportunities to emerge during H2 FY27 as the bulk of Government Security and State Development Loan issuances are absorbed by the market, potentially leading to a more favourable risk-reward profile for extending portfolio duration.