The Tide and the Anchor: Riding India's Growth Wave with Strategic Stability

Dear Investor,

As we emerge from a period of celebration in the markets, the journey ahead calls for both optimism and prudence. India's economic fundamentals remain robust, strong growth momentum, improving corporate health, and resilient domestic participation paint a promising picture that has rightfully captured global attention.

Yet, as we step back, market history offers us a valuable lesson: Sustained rallies, no matter how well-founded, eventually encounter periods of recalibration. This isn't pessimism; it's market wisdom born from decades of observing cycles that reward the prepared and penalise the complacent.

Valuations in certain segments have stretched beyond comfort zones, while underlying indicators, modest industrial production growth and softening urban consumption, hint at emerging headwinds. This is not a call to abandon conviction, but rather an invitation to refine our approach. The outlook remains constructive, but the path forward rewards those who combine optimism with prudence, celebration with caution, and conviction with strategic flexibility.

Macroeconomic Foundations: Strong but Nuanced

1. Fiscal Discipline & Capital Investment: The Engine Remains Strong

India's investment machinery continues to fire on multiple cylinders. Gross capital formation has stabilized above 30% of GDP—a critical threshold that historically correlates with sustained economic acceleration. This isn't happening by accident. Strong public capital expenditure has served as the anchor, particularly in infrastructure development, while private sector sentiment shows encouraging signs of revival after years of cautious positioning.

What makes this particularly significant is the positive correlation between export growth and fixed investment. When external demand strengthens, it doesn't just boost current revenues—it triggers capital spending decisions that create multiplier effects across the economy. Manufacturing capacity additions, logistics infrastructure, and technology investments all respond to this external pull, reinforcing domestic investment cycles and creating a virtuous feedback loop that drives economic expansion.

The Investment Implication: Sectors tied to capital goods, infrastructure, and export-oriented manufacturing stand to benefit from this sustained capex cycle. However, the key is selectivity—companies with strong balance sheets and proven execution capabilities will capture disproportionate value as this cycle matures.

2. Inflation Dynamics: A Tale of Two Trends

September 2025 delivered a headline number that stopped economists in their tracks: CPI inflation plummeted to 1.5%, the lowest reading since June 2017. Food deflation of -1.4% drove this dramatic decline, positioning India well below the RBI's 4% target and providing substantial relief to household budgets. For consumption-driven sectors, this should theoretically be a tailwind of considerable force.

But here's where it gets interesting—and complicated. While headline inflation retreated, core inflation (excluding food and fuel) rose to 4.6% in September from 4.2% in August. The culprit? Surging gold and silver prices rippling through the personal care and goods segment. This divergence matters because it suggests inflationary pressures haven't disappeared—they've merely shifted.

What This Means for Your Portfolio: The inflation picture is Janus-faced. Lower food inflation supports consumption stocks and consumer discretionary spending. However, elevated core inflation could limit the RBI's room to cut rates aggressively, which has implications for interest-rate-sensitive sectors like real estate and banking. The central bank will likely maintain a cautious stance, watching core inflation closely even as headline numbers provide superficial comfort.

Watch This Space: If core inflation continues its upward trajectory while headline remains benign, we could see a policy dilemma emerge. The RBI's response to this divergence will be a critical market driver in coming quarters.

3. Growth Trajectory & Mixed Signals: Reading Between the Lines

On the surface, India's growth story looks spectacular. Real GDP expanded at 7.8% in Q1 FY2025-26—the fastest pace in seven quarters. The services sector led the charge with a robust 9.0% contribution, marking an eight-quarter high. PMI indicators reinforced this narrative, with Manufacturing PMI at 57.7 and Services PMI at 60.9 in September 2025, both firmly in expansion territory.

But sophisticated investors know to look beneath the headline. Several underlying indicators tell a more complex story:

Industrial Production Disconnect: The Index of Industrial Production (IIP) expanded by a mere 2.0% during April-July 2025. This isn't just below the headline GDP growth—it's dramatically below it. This divergence raises questions about the sustainability and breadth of the growth momentum. Is the services-led growth masking underlying weakness in manufacturing and industrial activity?

Urban Consumption Stress: Passenger vehicle sales declined 9.0% in August 2025, a significant reversal after posting modest growth earlier. Vehicle sales are often considered a leading indicator of urban affluence and discretionary spending capacity. A 9% decline isn't statistical noise—it's a signal that bears serious attention.

The Interpretation: We may be witnessing a K-shaped recovery where services and certain sectors thrive while others struggle. The urban consumer, long the darling of equity markets, appears to be facing genuine stress. This could be attributable to high personal debt levels, job market uncertainties in certain sectors, or simply a normalization after years of pent-up demand.

Strategic Response: This calls for sector and stock-specific analysis rather than broad market optimism. Companies with pricing power, strong distribution networks, and exposure to resilient demand pockets will separate themselves from the pack. Avoid the temptation to paint the entire market with a single brush.

Equity Markets: Strength, Speculation, and Stability

1. SIP Inflows: The Retail Revolution Continues (With Caveats)

The democratization of Indian equity markets continues at a breathtaking pace. Average monthly SIP contributions reached ₹27,464 crore in H1 FY2025-26 (up to August)—up from ₹25,905 crore in H2 FY2024-25 and nearly triple the ₹9,409 crore recorded in H1 FY2021-22. This isn't just growth; it's a structural transformation in how Indian households approach wealth creation.

The DII Counterweight: Domestic Institutional Investors, particularly mutual funds, have emerged as the market's stabilizing force. With net purchases of ₹3.7 lakh crore during H1 FY2025-26 (up to September 26), DIIs effectively neutralized Foreign Portfolio Investor outflows that might have otherwise created significant volatility. This domestic cushion represents a fundamental shift in market dynamics—Indian markets are no longer at the mercy of foreign flows alone.

The Concentration Risk: However, let's acknowledge the elephant in the room. When retail participation surges at this pace, it often coincides with market peaks rather than troughs. History shows that retail enthusiasm tends to peak when professional investors are taking chips off the table. The key question: Are we seeing the final innings of this rally, or is this the beginning of a sustained, decades-long retail participation story?

My Take: It's likely both. India's retail participation has structural staying power driven by financialization of savings, digital infrastructure, and improving financial literacy. However, the pace of current inflows suggests some element of FOMO (fear of missing out). Disciplined SIPs will create wealth over decades, but investors who chase momentum in overvalued pockets may face disappointment in the near term.

2. Corporate Fundamentals & Sovereign Rating Upgrade: The Quality Argument

Here's where the bull case gains serious credibility. The interest coverage ratio of listed private manufacturing companies improved in Q1 FY2025-26, indicating enhanced debt servicing capacity and fundamentally stronger corporate balance sheets. After years of deleveraging, Indian corporates are entering this phase of the cycle with cleaner balance sheets than perhaps any time in the last decade.

The S&P Upgrade: More Than Symbolism: India's sovereign rating upgrade by S&P Global in August 2025—the first in 18 years—wasn't just a feel-good moment. It recognized continued fiscal consolidation and robust macroeconomic fundamentals. More importantly, it signals to global capital that India's investment grade is improving, potentially unlocking lower borrowing costs and deeper capital markets access.

What This Means: Companies with strong fundamentals, improving return ratios, and clear growth visibility deserve premium valuations. The upgrade reinforces India's position as a stable, growing market in an uncertain global environment. For long-term investors, this validates the structural India thesis.

The Caveat: Improved fundamentals justify higher valuations—but not infinite valuations. The question isn't whether Indian corporates deserve a premium; it's how much premium is sustainable. This is where stock-specific analysis becomes critical.

3. SME IPO Boom: Exuberance or Excess?

The SME IPO market has gone parabolic. Listings surged 187% in FY2024-25 compared to FY2022-23, with total issue amounts growing 52.7% to approximately ₹6,000 crore. On one hand, this reflects genuine entrepreneurial energy and capital formation at the grassroots level—a positive development for economic dynamism.

But let's be blunt: This explosive growth raises serious red flags about speculative excess and potential market manipulation. When obscure companies with limited track records command stunning valuations and generate listing gains that defy gravity, we're witnessing market behavior that rhymes with historical bubbles.

SEBI's Response: The regulator has rightly cautioned investors to exercise due diligence and launched probes revealing irregularities in the SME IPO space. This isn't regulatory overreach—it's necessary market hygiene. The SME platform was created to provide genuine small enterprises access to capital, not to serve as a casino for promoters and speculators.

Investment Discipline: For retail investors tempted by eye-popping listing gains, remember: What goes up dramatically on little substance comes down even more dramatically when sentiment shifts. The SME IPO space has elevated risks that aren't compensated by potential returns for most investors. Unless you have specialized knowledge and risk capital you can afford to lose entirely, this is a segment to approach with extreme caution—or avoid altogether.

Credit Markets: Transmission, Liquidity, & Opportunity

1. Credit Growth Acceleration: The Financing Engine Revs Up

Bank credit growth picked up to 11.4% year-on-year (as of October 3, 2025), reflecting improved lending momentum across sectors. More significantly, primary corporate bond issuances jumped to ₹4.0 lakh crore in H1 FY2025-26 from ₹3.3 lakh crore in the corresponding period last year—a 21% increase that signals both improved corporate confidence and favorable financing conditions.

What's Driving This: Companies are tapping debt markets to fund expansion, refinance expensive debt, and build war chests for strategic opportunities. The corporate bond market's depth and liquidity have improved substantially, offering companies an alternative to bank financing and investors an alternative to traditional fixed deposits.

The Investment Angle: Quality corporate bonds offer attractive risk-adjusted returns in an environment where deposit rates remain under pressure. For conservative investors seeking income with moderate credit risk, carefully selected corporate bonds and bond funds provide compelling options.

2. Strong Monetary Transmission: Policy Working as Intended

Monetary transmission has been remarkably effective. Three-month commercial paper and certificate of deposit rates declined by approximately 150 basis points—exceeding the 100 basis points policy rate cut implemented since February 2025. This isn't just academic; it means RBI policy is actually flowing through to borrowing costs in the real economy.

System Liquidity Surplus: System liquidity remained in comfortable surplus at ₹2.1 lakh crore (daily average), ensuring adequate funding availability across the financial system. This liquidity cushion prevents credit crunches and supports continued lending growth.

Why This Matters: Effective transmission means that rate cuts translate into lower EMIs, cheaper working capital, and improved business viability. It's the mechanism through which monetary policy influences economic activity. The fact that transmission is working smoothly is a testament to improved banking sector health and financial system efficiency.

3. G-Sec Market Resilience & Portfolio Strategy: The Stability Anchor

Government securities markets have shown impressive resilience. G-Sec yields at the short end declined meaningfully, with weighted average yields on traded maturities falling by 38 basis points in H1 FY2025-26. Trading volumes increased to ₹66,971 crore from ₹53,731 crore, reflecting improved market depth and liquidity.

The Strategic Implication: In an environment of elevated equity valuations and mixed growth signals, debt instruments provide essential portfolio ballast. Quality debt—whether government securities, AAA corporate bonds, or debt mutual funds—serves multiple purposes:

• Stability During Corrections: When equity markets correct, debt holdings preserve capital and provide dry powder for opportunistic equity buying

• Income Generation: Attractive yields provide steady income streams, particularly important for retirees and conservative investors

• Rebalancing Capability: Debt holdings allow systematic rebalancing from debt to equity during market dips, implementing a disciplined buy-low strategy

Portfolio Construction: Given current market dynamics, a balanced approach incorporating strategic debt allocations isn't defensive—it's intelligent portfolio construction. The goal isn't to avoid equity exposure; it's to ensure that equity exposure is sustainable through complete market cycles.

Synthesis: Navigating the Current Environment

So where does this leave us? The Indian economy exhibits genuine strength—robust investment activity, improving corporate fundamentals, strong services growth, and resilient domestic institutional support. These aren't ephemeral factors; they represent structural improvements that support higher long-term market valuations.

However, several amber lights are flashing:

• Stretched valuations in certain segments

• Divergence between headline GDP and industrial production

• Urban consumption stress

• Speculative excess in SME markets

• Core inflation persistence despite benign headline numbers

Conclusion: The Tide and the Anchor

The metaphor of the tide and the anchor captures our current moment perfectly. India's growth tide remains strong, supported by favorable demographics, improving infrastructure, policy reforms, and increasing global integration. This tide will lift well-chosen boats over the coming decade.

But tides have rhythms—they flow and ebb. The anchor represents the discipline, diversification, and quality focus that keeps your portfolio stable when inevitable storms arrive. It's not about fighting the tide or abandoning the ocean; it's about ensuring you stay aboard through the journey.

The opportunity set in Indian markets remains compelling for patient, disciplined investors who combine structural optimism with tactical prudence. Stay invested, stay diversified, stay disciplined—and stay focused on your long-term financial goals rather than short-term market noise.

The best time to plant a tree was twenty years ago. The second-best time is today. The same wisdom applies to building a thoughtful, diversified investment portfolio positioned for India's long-term growth.