Equity Market Insights:
Equity markets remain in a positive bias unless some disaster occurs that could break the upside momentum. Policymakers are quick to course correct when markets throw tantrums. As we recall, the BSE Sensex corrected by 8.3% between October 2024 and March 2025. We saw some important factors coming together to weigh on the market sentiment during this time. Ahead of elections, the government reduced spending, and the RBI tightened liquidity by Rs 3–4 lakh crore to support the rupee. This, combined with slowing consumption, weak corporate earnings and global tariff concerns, led to the correction.
The recent Apr–Jun 2025 quarter brought a welcome summer rally for investors. The Sensex gained around 10%, with most major sectors performing well- real estate and financial services leading the way. What drove this uptick? Expected increase in corporate profits, easing geopolitical tensions, a pause in global tariff decisions, surplus liquidity and FPIs turning net buyers for the entire quarter.
Equity markets in the US also hit record levels due to ease of geopolitical tensions, dovish fed and trade developments, but economic data released in early July for Q1 2025 (Jan-Mar) presents a mixed picture. In Q1’25 US Economy contracted at a rate of 0.5% annual rate, the first negative reading since Q1 2022. At the same time, inflation in the US remains above target (Core PCE at 2.7% in May), making interest rate decisions tricky. The region will remain sensitive to data around inflation, rates, and trade going forward.
What can we expect for Indian markets in the near term? India Inc’s corporate profit growth has been modest so far (Nifty companies are expected to grow June quarter net profits by 4.6% YoY). Monetary and fiscal policies decisions in the form of the recent rate cuts and budget tax breaks can lift household consumption, especially in the festive season ahead. Consumption already accounts for ~63% of India’s GDP, and this domestic strength is critical to cushion the impact of global uncertainties.
We remain cautiously optimistic as supply-side pressures in equity markets are rising again and pose a key risk for equity returns. Overall supply is up sharply. Bulk & Block deals (B&B), IPOs, Rights Issues, QIPs are up 103.5% q-o-q and 10.8% y-o-y.
Elevated valuations on the back of a rebound in investor sentiment also make the market more sensitive to negative surprises. Large caps are trading close to their historical averages while mid & small caps are at 22% and 44% premiums respectively. If we see the data, large caps have clearly been more resilient for YTD 2025: Large caps are up 5.2%, while mid-caps are nearly flat, and small-caps have declined. We remain focused on staying disciplined in our strategy- backing high-quality, large-cap value portfolios that helps managing risk and provide better upside potential with a long-term view.
Debt Market Insights:
Rate cuts are here, what does it mean for the bond markets?
The Reserve Bank of India (RBI) has officially moved into a rate-cutting cycle, delivering a total 1% reduction in the repo rate since February 2025. The cuts came in three rounds- 25 bps each in February and April, and a more aggressive 50 bps in June. This shift clearly signals that the inflation battle is, for now, under control. In fact, retail inflation in June hit a six-year low of 2.1%, driven largely by falling food prices. Strong agricultural sowing and good reservoir levels also point to a benign food inflation outlook in the coming months. However, we remain watchful of global risks, particularly any fresh volatility from trade developments or oil price shocks.
The RBI has made it clear: the priority now is to stimulate domestic consumption and private investment. Front-loading rate cuts are a strategic move to boost economic momentum and revive the credit cycle, which is a crucial transmission channel in India. Historically, when banks sense stronger economic momentum, they are more willing to lend. But if they perceive risks ahead, they tend to pull back, especially in lending to NBFCs or priority sectors like agriculture, as we saw in 2024. With interest rates easing and inflation subdued, monitoring domestic credit trends in the coming months will be important.
The bond market has responded quickly to the 1 percentage point repo rate cut. As expected, short-term yields have fallen faster than long-term ones, leading to a steepening yield curve. This is a classic sign that we’re likely approaching the end of the rate-cut cycle, especially with the RBI now shifting its stance from “accommodative” to “neutral”.
In this environment, short-duration debt funds are better positioned than long-duration ones, as they benefit more from near-term rate adjustments and system liquidity.
Arbitrage funds remain an attractive option for short-term cash management, offering tax-efficient returns. But given their sensitivity to equity market swings, we recommend pairing them with ultra-short-term debt funds to maintain portfolio stability and liquidity.
Other Asset Classes:
Gold as an asset class has delivered the highest returns month over month in 2025 so far, driven by global macro and monetary tailwinds. Gold Mini is up 24.3% YTD’25 and 32.11% in the last one year.
As we’ve consistently advocated, maintaining a strategic allocation of 10 – 20% to gold can enhance portfolio resilience, especially during periods of heightened global economic uncertainty. This quarter was another strong validation of that view.
Coming to real estate, India’s prime residential real estate markets saw a 14% year-on-year decline in sales during the June quarter, largely driven by pricing concerns. New project launches also slowed, as global geopolitical uncertainty weighed on demand. Affordability challenges are increasingly straining the broader housing market. Meanwhile, developers are shifting their focus toward the premium segment, which has remained more resilient.
However, real estate overall has become expensive. We are advising clients to avoid fresh property purchases at this stage. Given factors like illiquidity, cyclical trends, price volatility, and extended holding periods, we recommend capping real estate exposure at 20–25% of your total portfolio.
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