In Uncertain Times, Strength Lies in the Fundamentals

The intelligent investor learns to look past short-term noise and ask a deeper question: what is holding firm beneath the surface? 

This is a phase that rewards patience over prediction. Not because risks have vanished, they never do, but because a system anchored in fundamentals is better placed to absorb them. 

Strength, in such times, isn’t loud. It shows up quietly — in the form of resilience, in the discipline of investing, and in the confidence of those who stay the course when others rush to the exits.

As we look at the data across India’s external position and equity markets, we find quiet evidence of this resilience: in how the economy is earning, absorbing, and adjusting. Thus true stability is not the absence of volatility, but the ability to endure it without losing direction. That, more than anything else, defines where we stand — and how we move forward.

Indian Macroeconomy

1. Services Exports Bolster External Stability

India’s services exports continued to demonstrate remarkable resilience during January–February 2025, led by robust performance in software, business, and transportation services. This sustained strength in high-value service sectors reflects India’s structural competitiveness and the global demand for its IT and knowledge-based services. In a global environment marked by geopolitical tensions and slower trade flows, India’s services sector has emerged as a steady source of foreign exchange earnings. This not only strengthens the country’s external account but also insulates it from fluctuations in merchandise trade dynamics.

2. Surplus to Cushion Trade Deficit

Looking ahead, India’s net services receipts and inward remittances are projected to remain in healthy surplus. These inflows play a vital role in partially offsetting the merchandise trade deficit, thereby ensuring that the current account deficit (CAD) remains within manageable bounds. For both FY25 and FY26, the CAD is expected to stay comfortably below the 2% of GDP threshold—a level widely seen as sustainable by global investors. The presence of such buffers provides a layer of resilience to India’s macroeconomic framework, helping to anchor the Indian rupee and support broader financial stability amid external volatility.

3. Limited Systemic Risk from Tariff Tensions

While the recent reciprocal tariff announcements by the United States pose challenges to select Indian export categories, the broader macroeconomic implications are likely to remain contained. The reasons are twofold: First, the affected product segments constitute a relatively small share of India’s GDP. Second, India’s trade surplus with the US is modest when compared to countries like China. Moreover, India’s export base is more diversified, and its macroeconomic buffers—including ample forex reserves and healthy fiscal discipline—can absorb localized trade shocks. As a result, while specific industries may feel some pressure, the Indian economy is well-positioned to avoid systemic disruption.

Equity Markets

1. Domestic Support Cushions FII Selling

In March 2025, domestic institutional investors (DIIs) played a pivotal role in supporting the Indian equity markets amid a wave of foreign institutional investor (FII) outflows. With FIIs reallocating capital towards other emerging markets—particularly China—Indian equities faced intense selling pressure. However, strong DII participation, including mutual funds and insurance companies, helped absorb the bulk of these outflows. This domestic demand not only cushioned the immediate impact on valuations but also laid the foundation for a recovery in the latter part of the month, reaffirming the growing maturity and depth of India’s domestic investor base.

2. Sentiment-Driven Recovery Across Segments

The recovery in Indian equities during March was broad-based and sentiment-driven. After a challenging start to the month, improving domestic macro indicators, steady corporate earnings, and positive global cues led to a sharp reversal in investor sentiment. This was reflected in a rally across large-cap, mid-cap, and small-cap indices. The turnaround in sentiment was not merely technical but also supported by increased risk appetite among investors, driven by expectations of stable interest rates, a resilient economy, and earnings tailwinds. The combination of global relief and domestic confidence helped erase earlier losses and reignite momentum.

3. Valuation Landscape: Mixed Signals

The valuation picture across market segments remains mixed. The Nifty-50's 12-month forward price-to-earnings (P/E) ratio is currently 15% below its September 2024 peak, suggesting a healthy correction from previously stretched levels. In fact, the index is now trading at a modest 3% discount to its long-period average (LPA), improving its relative attractiveness for long-term investors. However, the broader market tells a different story—mid-cap and small-cap indices are still priced at significant premiums to their LPAs, at 26% and 32% respectively. This divergence indicates that while large-cap valuations are beginning to reflect reasonable expectations, smaller segments may be susceptible to near-term volatility or earnings disappointment.

Fixed Income Markets

1. Improved Systemic Liquidity Conditions

Systemic liquidity conditions have improved significantly over recent months, driven by proactive measures from the Reserve Bank of India (RBI). A cumulative liquidity injection of ₹6.91 lakh crore—through a mix of Term Repo Auctions, Open Market Operations (OMOs), and Foreign Exchange (FX) swaps—has shifted the banking system from a deep liquidity deficit of ₹3.33 lakh crore in January 2025 to a surplus of ₹1.72 lakh crore. This infusion of liquidity enhances the availability of funds across the financial system, easing borrowing costs for banks, non-banking financial companies (NBFCs), and corporates, while also improving credit flow to the real economy.

2. Stability in Short-Term Yields

The surplus liquidity has translated into greater stability in overnight and short-term money market rates. This reduction in volatility benefits short-duration instruments and makes the environment more predictable for fixed income investors. As a result, short-term debt funds—often used by investors seeking safety and liquidity—are now operating in a more favorable risk-reward setting. The visibility around returns improves as rate fluctuations decline, particularly in the call money, commercial paper, and treasury bill segments.

3. Potential for Capital Gains in Duration-Oriented Funds

If the liquidity surplus persists and the RBI remains accommodative, there is a strong likelihood of further softening in yields, especially at the shorter and medium ends of the curve. Under such conditions, bond prices could appreciate, creating capital gain opportunities for investors in duration-oriented debt funds. This environment favors tactical allocation into medium- to long-duration funds, especially for investors with a moderate risk appetite and a longer investment horizon. However, investors should remain vigilant about inflation risks or potential shifts in global rate expectations that could alter the yield curve dynamics.