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Broad macro indicators reinforce our optimism around a cyclical recovery starting H2FY26, led by discretionary consumption. Strong festive season sales in key categories like autos (eg, 2W sales +27% YoY over Sep to Oct-25) are reinforced by secondary data like an acceleration in credit growth to 11.5% and a 27% YoY growth in credit card spends in Sep-25. Financial markets also remain supportive, with the rupee and long bonds stabilizing after a rough 1-2 quarter spell – we think the worst is over. We remain constructive on the markets, with a Sep-26E Nifty target of 28,000 and discretionary consumption being our top OW.

Rupee – the worst is over

The worst is over for the currency depreciation, with a sharp reversal from the low of Rs88.8/USD. Aggressive RBI intervention triggered the reversal, and we think the worst is over. True, CAD pressures may increase, though the impact on exports from the tariffs seems to be a little muted. On the other hand, FPI flow into equities (-USD17.6bn during Jan to Sep-25) is reversing with USD1.7bn inflows in Oct-25, led by a rebound in growth. Moreover, the RBI is likely to defend the rupee from excessive depreciation and has the firepower to do so. The reversal is positive for domestic manufacturing margins, with IT negatively affected.

10-year bond to remain sticky

The 10-year bond has traded in the 6.4-6.5% range since October, and we expect it to remain sticky. The key challenge is that fiscal deficit is under pressure, with the GST cuts and low nominal GDP growth. The Centre has the flexibility to adjust some of its capital spends, although it will have to keep growth considerations in mind when taking those decisions. Any upward move from this range is unlikely, especially as the RBI has enough tools (swaps, OMOs, reorienting issuance tenors) to prevent a bond sell-off. Rangebound long bonds are an incremental negative for PSU banks, as treasury profits dwindle and put RoAs under pressure from H2FY26. The stress is likely to remain restricted to the long-end of the curve – consequently, the impact on private borrowing costs is likely to remain negligible as both corporate and retail borrowings are largely restricted to the <5-year bucket.

Robust festive season growth

Festive demand has been strong—IIP for consumer durables was up 10.2% YoY— reflecting pre-festive production ramp-ups. 2W sales surged 27% YoY in Sep–Oct. This was expected as GST cuts provide strong impetus to consumption; further, credit card spends rose 23% YoY, underscoring resilient demand. Other concurrent indicators are turning favorable too, as we see a few greenshoots in consumption/growth supported by automobile sales, cargo traffic, and the RBI’s Consumer Confidence Index. Coming off a weak H1FY26, we see a sustained recovery in consumption, driven by GST cuts and the RBI’s easing. This reinforces our bullish view on consumer discretionary, which remains our top OW.

FOMC meeting – further cuts in doubt

The Fed cut rates by 25bps but warned that further easing is not a given. If the Fed does remain on hold, the impact on Indian equities is neutral, at worst. At this stage, we think FPI flows into equities are more dependent on India’s growth momentum than Fed’s rate cuts. Moreover, the RBI is at the end of its easing cycle with an additional 25bp cut penciled in – this trajectory is unaffected by the Fed’s decisions. The IT sector is affected by (the lack of) Fed’s rate cuts, at least from sentiment, but the dependency is weak.

Credit growth recovery continues

Credit growth accelerated to 11.45% YoY on 17-Oct-25, from lows of 9% in May-25. MSME (20%) and retail credit (11.8%) remain the key drivers as of Sep-25. We see this momentum sustaining, driven by monetary easing, RBI’s deregulation, and a revival in consumer demand. We view SMID banks as the best play on this trend, given their low base and higher risk appetite.

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