Indian equity markets are seeking decisive direction as global uncertainties persist while domestic fundamentals show gradual improvement. Rahul Singh from Tata Asset Management has identified currency stability as the primary catalyst that could unlock market potential, even as corporate earnings continue to deliver steady performance.

Earnings Season Delivers on Expectations

The current earnings season has provided reassurance to investors, with companies largely meeting or exceeding market expectations. Singh highlighted that core earnings drivers remain robust across multiple sectors.

"The earnings season has started by and large quite fine actually because the numbers are either in line or better than expectations. The core drivers of earnings, whether it is credit growth, consumption and the likely impact of GST on the outlooks which the companies are painting for next year, all those things are going as per plan. Even IT is kind of, in pockets, managing to surprise," Singh explained.

Key sectors showing resilience include traditional growth drivers like credit and consumption, while information technology has delivered selective positive surprises, indicating underlying business momentum remains intact.

Currency Volatility Emerges as Primary Concern

Despite positive earnings trends, Singh emphasized that rupee stability has become the most critical factor for market direction. The currency's recent weakness has created investor anxiety, particularly given its impact on foreign investment flows.

"The bigger issue is obviously on the macro and how the USD-INR is behaving. I think that is creating a little bit of nervousness because a large part of flows obviously tracks that and therefore tends to have a knee-jerk reaction to how the rupee is behaving. So, the first trigger for the market is not going to be the budget, not going to be earnings; it is going to be stability in the rupee," Singh stated.

The rupee's depreciation occurring alongside relatively stable crude oil prices presents an unusual combination that requires careful monitoring, as this dynamic typically suggests other underlying pressures on the currency.

Valuation Metrics Show Improvement

Market valuations have undergone significant normalization over recent months, creating more attractive entry points for investors. The correction has been broad-based, affecting both sectoral themes and individual stocks.

"Nifty PE itself has come down from 22.5–23 times forward in the middle of 2024 to now close to 20 times, and earnings are likely to go up. So, all those things are falling in place and now the macro has to fall in place," Singh noted.

The valuation correction has been particularly pronounced in previously overheated sectors. Defense, manufacturing, and capital goods segments have experienced significant corrections from their peaks, making individual stocks within these themes more reasonably priced.

Sector-Specific Investment Approach

Singh's investment strategy reflects a selective approach across different market segments and sectors. His outlook varies significantly based on investment timeframes and specific sectoral dynamics.

For market capitalization preferences, the assessment depends heavily on investment horizon:

• Five-year outlook: Favors mid and small-cap stocks
• Two-year horizon: Neutral positioning
• One-year timeframe: Large-cap preference due to current underweight positioning

In information technology, the approach has evolved from broad sector underweights to stock-specific opportunities, recognizing uneven growth patterns within the sector. Real estate presents emerging opportunities following sharp derating, with some companies trading below net asset value of ongoing and pipeline projects.

Commodity Cycle and Market Outlook

Regarding industrial commodities, Singh believes the current cycle remains in its middle phase, supported by policy measures in China. This assessment suggests continued opportunities in commodity-related investments, though the early-stage explosive growth phase has passed.

The market appears positioned in a wait-and-watch mode, where steady earnings provide fundamental support, but meaningful upward movement awaits macro stability restoration, particularly regarding currency movements. Until rupee volatility subsides, discussions around valuations and earnings growth may not translate into sustained market momentum.

The Indian rupee has experienced a sharp decline to 91.7 against the US dollar, driven primarily by domestic pressures rather than broader emerging market weakness, according to Barclays' senior currency strategist. Mitul Kotecha, Head of Forex & EM Macro Strategy for Asia at Barclays, characterized the rupee's movement as "idiosyncratic" and attributed it to a surge in pent-up demand for the greenback that "really just forced Dollar-INR much sharply higher."

Key Drivers Behind Rupee Weakness

Several factors have contributed to the rupee's recent decline, with foreign portfolio investor outflows being a primary concern:

The currency has faced multiple headwinds including heavy and persistent equity outflows from foreign portfolio investors, continued dollar demand from importers, and the maturity of non-deliverable forwards. While bond inflows have provided some support, they have proven insufficient to offset the selling pressure from equity markets.

Market Dynamics and Momentum Effects

Kotecha highlighted the role of momentum-driven investors in amplifying the rupee's decline. He suggested that commodity trading advisors may have contributed to long Dollar-INR positions, creating additional downward pressure on the Indian currency. This momentum effect has been compounded by the breach of technical levels, which can trigger accelerated moves in currency markets.

Critical Levels and Market Psychology

While 91.80 against the dollar is being closely monitored by market participants, Kotecha emphasized that 92.00 represents a more significant psychological barrier. "The reality is psychologically 92 is a big level," he noted, explaining that breaches of such levels can trigger sharp and accelerated moves, similar to what occurred when the pair crossed 91.00.

RBI's Policy Arsenal

Despite the current pressures, Kotecha stressed that the situation does not constitute a crisis. India's balance of payments remains in "reasonable shape," and the pressures are "much more controllable" than in previous episodes. The Reserve Bank of India possesses a comprehensive toolkit to manage currency volatility:

• Moral suasion and regulatory actions
• Raising external commercial borrowing limits
• Direct intervention in spot markets
• Forward market operations
• NDF market intervention using substantial foreign exchange reserves

Outlook and Global Factors

The currency strategist noted that easing global market nervousness, particularly following news of no new US tariffs on Europe, could provide near-term support to Asian currencies including the rupee. However, he cautioned that the broader direction of the US dollar, which has begun to rebound, will remain the primary driver of the rupee's trajectory in the coming period.