Indian equities are not yet pricing in the possibility of a rate hike in 2026, while rising inflation remains the biggest near-term risk to markets, says Aditya Khemka, chief investment officer at InCred Asset Management. In an interview with Saloni Goel, Khemka says valuations offer limited comfort in large- and mid-caps, while selective opportunities remain in small-caps, healthcare and secured lending.
The RBI minutes came in hawkish, and there are expectations of at least one rate hike by the US Federal Reserve in the remainder of 2026. Are Indian equities pricing in these possibilities?
What are the key risks that the Indian markets are overlooking at this juncture? Is there valuation comfort? If so, where – large, mid, or smallcaps?
Nifty is trading at a minor 4 per cent discount to its historical price/book value multiple but with similar RoE vs history and slower earnings growth. Added to this dynamic is the potential risk to projected earnings from inflation. Hence, we do not find significant margin of safety in large-caps.
Mid-caps have done significantly better than large and small-caps in general in terms of earnings growth and hence are trading at a significant premium to their historical valuations. The mid-cap space offers a growth orientation but with low margin of safety in case earnings were to disappoint.
FPI buying trends have been encouraging. What has brought them back to India and what could keep them here?
We believe the three factors which were limiting FII participation in India were: a) Rupee depreciation; b) No play on AI/ML and c) Higher relative valuations compared to other EMs. While the recent measures from the finance ministry on FCNR deposits, taxation on Gsecs, etc have stemmed the Rupee’s fall against the USD, the AI/ML trade also seems to be maturing and not attracting incremental capital. Valuations of Indian indices have also corrected from the peak as earnings continue to grow while indices have been flat. Since all three concerns are partially or fully addressed, the FIIs returning to positive flows to the Indian equity market is not surprising to us.
What are some of the undervalued sectors in the market where you see scope for high returns?
Given our high inflation expectations, we are bullish on secured lending, healthcare, commodities and IT-enabled services. We do not see inflation impacting these pockets as much as it would other pockets of the market. Valuations are especially reasonable/cheap in healthcare and secured lending NBFC/MFIs.
Nifty Metals as a pack has seen seven years of consistent returns and remains the best-performing sector YTD as well. Is it still a buy or an avoid after such strong upmoves? What’s your view on banks?
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