As the country ushers in the festive season, beginning with Navratri and continuing through Diwali and beyond, there is a noticeable uplift in consumer sentiment. This positive outlook has been significantly enhanced by the introduction of GST 2.0. The revised GST structure has simplified the earlier system's complexities, resulting in price reductions of 5 to 10 percent across a range of consumer goods, including automobiles, consumer durables, and FMCG products. These price cuts are likely to encourage higher consumer spending during the festive period.

Monetary Policy and Economic Updates
In the most recent policy meeting held in September, the Monetary Policy Committee (MPC) unanimously decided to keep the repo rate unchanged at 5.5%, maintaining a 'neutral' stance. The Governor delivered a dovish pause, highlighting a notable moderation in inflation—attributable to subdued food inflation and controlled core inflation—which led to a downward revision of the inflation forecast to 2.6% for FY26. The MPC observed that the effects of the earlier 100 basis points rate cuts this year, along with recent tax measures announced in the budget, are still filtering through the economy. As such, the committee opted to allow these policy measures to take full effect before considering further rate reductions. However, it was noted that ongoing global uncertainties and tariffs could slow growth, potentially warranting additional rate cuts in the future. A rate cut is anticipated in December, with the possibility of another in the first half of 2026. The 10-year government security yield is expected to move towards 6.25%.

The Reserve Bank of India (RBI) has also taken steps to enhance credit flow within the economy. Banks are now permitted to fund acquisitions by Indian corporates, and risk weights have been reduced, particularly for MSMEs and the residential real estate sector. Additionally, the risk weights for NBFCs involved in infrastructure financing of completed PPP projects have been lowered. These monetary policy measures are viewed as positive for the banking sector, especially for large private banks owing to their higher exposure to residential real estate and MSME loans, as well as their stronger balance sheets.

Currency and International Developments
The Indian Rupee (INR) has experienced weakness, with the USD/INR exchange rate moving to 89. This depreciation is set against the backdrop of a 50% tariff on Indian goods, an increase in H1B visa fees, and a softer economic growth outlook. The rupee's underperformance relative to other global currencies has been amplified by a broader decline in the Dollar Index. It is expected that the rupee will continue to depreciate gradually until there is greater clarity regarding the US-India trade deal. This uncertainty is a key reason why the RBI has adopted a wait-and-watch approach, as further rate cuts could exacerbate pressure on the rupee.

Globally, there has been a significant development with the conclusion of the two-year-old Israel-Hamas conflict, as both parties have agreed to a ceasefire and a hostage release deal in Gaza. The resulting stability in the Arab region, along with progress towards resolving the Russia-Ukraine conflict, should create a less turbulent global environment. This reduction in geopolitical risk is expected to lower the risk premium attached to equities and other risk assets. Crude oil prices have declined, recently touching USD 62 per barrel, as the market shifts its focus to a potential oil surplus. This is a positive factor for India's current account deficit.

India–US Trade Relations and External Factors
India is actively renegotiating a trade deal with the United States, and a resolution is anticipated by the end of the year. While the initial 50% tariffs raised concerns, further US actions on the pharmaceutical and IT sectors are unlikely to have a significant impact on Indian exporters. Most Indian pharmaceutical exports are generics, so the 100% tariffs on branded and patented drugs should not affect the majority of companies. The $100,000 fee on new H1B visas is expected to have only a marginal impact, as Indian IT companies have already reduced their dependence on H1B visas and are likely to find alternative ways to increase offshoring. The introduction of an outsourcing tax appears unlikely, given that the US maintains a trade surplus with India in digital services and currently has no substitute for India's large IT workforce.

Foreign Institutional Investment and Market Positioning
Foreign Institutional Investors (FIIs) have withdrawn USD 17 billion from Indian equities in CY25 year-to-date, mainly due to slower-than-expected earnings growth and ongoing global trade and tariff uncertainties. As a result, FII ownership in Indian equities has dropped below 16%, and their underweight position on India relative to the MSCI Emerging Markets Index is at a historic high. The valuation premium of Indian equities has also normalised following over 20% underperformance compared to other emerging markets this year. Any improvement in corporate earnings or trade sentiment could potentially revive FII inflows. Notably, FII selling has moderated significantly in the current month.

Trends in Precious Metals
This year has witnessed a strong rally in precious metals, with gold and silver appreciating by 60% and 65%, respectively. Domestic gold prices have reached record highs of approximately ₹1,27,000 per 10 grams. India continues to be the world's second-largest consumer of gold, accounting for about 26% of global demand, just behind China's 28%. While household consumption remains the primary driver of this demand, there has also been a marked increase in central bank purchases. The RBI has added around 75 tonnes to its gold reserves since 2024, bringing total holdings to 880 tonnes—about 14% of the country's total foreign exchange reserves.

Gold serves as a buffer in household balance sheets, which collectively are valued at approximately USD 3.8 trillion (88% of GDP). This provides households with a positive wealth effect, further supported by cyclical factors such as lower interest rates and increased disposable income due to direct and indirect tax cuts. Recently, there has been a growing preference among households for financial assets, as evidenced by increased investments in gold ETFs, with flows amounting to USD 1.8 billion over the past 12 months.

Equity Market Outlook
Multiple catalysts are expected to drive the Indian equity markets in the coming months. Earnings growth is projected to accelerate in the second half of FY26, supported by GST rationalisation and festive season demand. Recent moderation in EPS downgrades suggests greater stability in overall earnings, particularly from domestically focused sectors such as Financial Services, Discretionary Consumption, and Automobile. A noticeable uptick in discretionary consumption is anticipated after the festive season, especially in the latter half of FY26. The Nifty 50 is expected to record EPS growth of 8–9% in FY26 and 12–13% in FY27.

The market has consolidated over the past year, and valuations for the Nifty are now considered reasonable. Most negative factors appear to be already priced in, and any improvement in market sentiment could spur the next upward movement. At the same time, a considerable number of new IPOs are entering the market, which should help absorb demand. Overall, a gradual rise in the markets is expected, with returns likely to be in double digits over the year, in line with earnings growth.

How should investors position themselves in this market?
In terms of asset allocation, it is recommended to marginally increase equity exposure to 55–60% (compared to 50–55% previously), maintain gold and silver holdings at 20%, and allocate the remaining portion to fixed income investments.

Within equities, it is advisable to continue investing in ABSL Large Cap Fund and ABSL Flexi Cap Fund. For thematic exposure, the ABSL Consumption Fund and ABSL Banking & Financial Services Fund are recommended choices.

On the fixed income side, investors with an investment horizon of more than one year should consider short-term funds such as ABSL Corporate Bond Fund or ABSL Banking & PSU Debt Fund. Those with a two-year or longer timeframe may look at the Income Plus Arbitrage Active Fund of Funds (FOF) for its tax efficiency. Additionally, a tactical allocation to the ABSL Government Securities Fund is recommended, as it stands to benefit from declining bond yields and a flattening yield curve.

Consistent with our longstanding perspective, asset allocation continues to be the most effective strategy for navigating market volatility. Asset allocation solutions such as the ABSL Multi Asset Allocation Fund and ABSL Balanced Advantage Fund are preferred vehicles for managing volatility and achieving long-term investment goals.

Wishing you all a very Happy Diwali and a Prosperous New Samvat Year!

Source: RBI, Bloomberg, Avendus Spark, ABSLAMC Internal Research

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.