Expert view: Indian stock market slightly above long-term valuations, says Vivek Rajaraman of Waterfield Advisors

Expert view on markets: Vivek Rajaraman, Executive Director, Head – Client Advisory, Waterfield Advisors, remains constructive on broader markets. He believes strong fund flows from DIIs and the revival of FPI flows can keep the Indian stock market buoyant. In an interview with Mint, Rajaraman shares his views on the potential impact of the US-China trade deal on India, the current narrative about defence, PSU and railway sectors and investment strategy for the next one to two years. Here are the edited excerpts of the interview:

Do you think the Indian stock market may scale a fresh high in the next few months?

The domestic market reacted to a good results season in the last quarter, with broad market earnings going up nearly 15 per cent YoY.

Going forward, earnings estimates seem stable, and macro fundamentals like GDP growth, steady inflation, and manageable deficits support growth.

We need to watch out for global factors such as geopolitical tensions, tariff-related disruption of supply chains, and inflation.

Considering all these, markets are currently slightly over long-term valuations, both on a price-to-earnings and price-to-book basis.

If there isn’t any disruption, strong fund flows from DIIs and the revival of FPI flows can keep the markets buoyant.

Do you think there will be an increased risk of foreign capital outflow from the Indian market in the case of a US-China trade deal?

While capital movement out of India and into China may be the immediate narrative, the issue is more complex.

From China’s point of view, their economic recovery post-stimulus and recent successes in AI have increased their appeal.

The tariff truce will also take away some of the advantage for manufacturing in India under the ‘China plus one’ strategy.

Hence, there may be a short-term increase in FPI flows to China. However, India’s structural growth trajectory remains intact.

Indian firms have also focused on sectors less affected by India-China trade dynamics (e.g. pharmaceuticals, IT services, etc.).

We have also seen FPIs come back to the Indian markets over the last few months and witness a strong rally and a stable currency.

India’s growth and inflation dynamics look favourable. What is your expectation of the RBI’s interest rate trajectory?

The RBI Governor, Sanjay Malhotra, in his speech post the Monetary Policy Committee decision on 6th June, decisively stated the change in stance from accommodative to neutral. 

This clearly signals that there will be no further rate cuts until data emerges to support them. 

The reduction in rate cuts impacted the yields of money market instruments and short-duration bonds more than long-term bonds, leading to a steepening of the yield curve. 

However, longer-term rates increased slightly, steepening the yield curve. 

While we can see some moderation in the 10-year rates, we expect this steepness of the curve to remain for the remainder of the year.

What is your take on the current narrative about the defence, PSU and railway sectors?

The longer-term vision for the defence industry in India is ambitious. The plan prioritises self-sufficiency and then leadership in key areas where we can build capabilities. 

Of course, the current manufacturing ecosystem is dominated by the public sector, which accounted for nearly 70 per cent of all defence production in FY25. 

However, the private sector’s share has steadily increased from 14 per cent in FY17 to 21 per cent in FY25. 

This has also corresponded with a 7-8 per cent growth in the defence budget since FY20. We see this sector getting a lot of focus.

PSUs, in general, catch the market’s attention from time to time and participate in a broad-based rally. 

We will be very selective about this segment, depending upon the attractiveness of the sector, the quality of the company, and the valuation.

What should be our investment strategy for the next one to two years?

We remain constructive on broader markets. Worries around reciprocal tariffs have receded to an extent, and we see the focus shifting to bilateral trade treaties. 

Signs of a recovery in discretionary consumption demand should start to become visible as the effects of monetary easing begin to take hold. 

For investors who are building equity positions, we advise a valuation-based deployment plan to reach the strategic weight in the portfolio in a reasonable timeframe. 

For fixed income, build a core portfolio around the three to five-year maturity bucket. 

We can take advantage of the new fund categories available to get better post-tax returns. Based on risk budgets, we can add to higher-yielding bonds directly or via funds.

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Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions, as market conditions can change rapidly, and circumstances may vary.