Fed Hike Refocuses Attention on RBI and Indian Markets
The US Federal Reserve’s decision to raise interest rates by 25 basis points on Wednesday, marking its first hike in three years, has shifted market attention back to the Reserve Bank of India (RBI). With inflation in India edging closer to the 5 percent mark, the global rate environment is once again a critical factor for domestic asset classes. However, Naveen Kulkarni, Chief Investment Officer for PMS and Listed Equity Alternates at Axis Asset Management Company (Axis AMC), argues that higher rates are unlikely to derail the ongoing earnings recovery in Indian equities.
Speaking at Moneycontrol’s Mutual Fund Summit in Delhi, Kulkarni noted that much of the anticipated rate adjustment has already been priced into Indian bond yields. He stated that even a potential 50-basis-point increase in rates would not pose a serious threat to current earnings estimates.
Earnings Estimates Remain Resilient
Current market consensus points to approximately 17 percent earnings growth for the Nifty index in FY27, with expectations of 14–15 percent growth in FY28. Kulkarni maintains that these targets remain achievable even if interest rates rise by 50 basis points. "Does that mean there is a serious downside to earnings estimate? The answer to that is no," he said.
While acknowledging that markets may experience a knee-jerk reaction to rate hikes, Kulkarni expects the impact to settle once the initial adjustment is absorbed. He highlighted that the impact of higher rates will vary by sector, with private banks potentially benefiting from improved net interest margins.
Mid- and Smallcap Sustainability Under Scrutiny
The sustainability of the earnings recovery is particularly crucial for mid- and smallcap stocks, which have continued to attract investor flows despite premium valuations. Kulkarni pointed out that the June quarter delivered a strong performance, with mid- and smallcaps recording earnings growth of around 23–30 percent.
"23% earnings growth for the first quarter was a very, very strong number, probably the best in the last three years. Question is that whether it will sustain or not," Kulkarni observed. He identified the September quarter as a critical test for this momentum. If Q2 earnings align with estimates, he believes there could be further headroom for these segments. While FY27 appears well-placed due to improving nominal growth, the FY28 outlook will depend on how the earnings recovery evolves in the coming quarters.
Crude Oil: A More Immediate Risk
Although Kulkarni does not view interest rates as a major earnings risk, he flagged crude oil prices as a more immediate challenge for Indian equities. Brent crude has surged approximately 20 percent in September amid escalating conflicts in West Asia, raising concerns over inflation and corporate margins.
Kulkarni noted that crude oil prices in the range of $105–110 per barrel would be a serious challenge for India, as most corporate earnings estimates assume oil prices in the $85–90 range. However, he does not expect this oil shock to become a long-term structural problem, believing that supply constraints are unlikely to persist over a longer horizon, which could allow prices to moderate.