Agarwala suggests investing in domestic businesses that avoid crude oil and bond-yield volatility. He said, "We expect a time correction rather than a sharp further fall, and are deploying in tranches." While pharma remains a top pick, he expects the RBI to raise its FY27 inflation projection today as well.
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The next preferred investment ideas, as per Agarwala, are domestic-focused businesses that are insulated from crude oil and bond-yield volatility, including premium consumption companies, where demand is less exposed to fuel prices and rural stress.
However, the smallcase manager said he would avoid crude-intensive sectors for now.
Ahead of the RBI policy outcome due today, Agarwala expects the central bank to raise its FY27 inflation projection from 5.0 percent, while its 6.7 percent growth forecast is likely to be trimmed as higher energy costs and softer rural demand weigh on economic activity.
Do you think the worst-case scenario has been fully discounted by the market after the sharp fall over the past eight weeks?
Not entirely. The correction has done a lot of the work and a large part of the correction is priced in; the Nifty is roughly 15 percent below its January peak, and about half the Nifty 500 trades 30 percent or more below its highs. Valuations are far more reasonable than at the start of the year.
But a true worst case, with a prolonged Hormuz disruption keeping crude above $100 a barrel, a rate-hike cycle and an El Niño-hit rabi season all at once, may not be fully priced and can trigger extended bouts of volatility. We expect a time correction rather than a sharp further fall, and are deploying in tranches.
Do you expect the Q2 earnings season to deliver positive surprises despite the prevailing global headwinds?
We don't expect a large negative surprise. Earnings estimates have been cut through the year, so the bar is lower. Banks and IT should hold up, with IT helped by a softer rupee. Pressure will show in margins of crude-sensitive businesses such as paints, aviation, few chemical and parts of autos, and in rural-facing names.
The real signal will be management commentary on second-half demand and input costs, not the headline numbers.
Are you taking exposure to FMCG stocks, or do you still consider the sector to be largely ignored by investors?
Not staples yet. A monsoon that ended at around 90 percent of normal will weigh on rural volumes, and crude-linked inputs such as packaging and edible oils will squeeze gross margins for a couple of quarters. Valuations have cooled but don't yet fully reflect this. We'd rather wait for rabi sowing and input costs to stabilise; that is when the risk-reward turns favourable.
Where would you invest your hard-earned money in the current market environment?
Pharma tops our list, backed by steady export demand, a weaker rupee and low sensitivity to the domestic cycle. Next come domestic-focused businesses insulated from crude and bond-yield volatility, including premium consumption, where demand is less exposed to fuel prices and rural stress.
We also like select IT companies that are using AI to win business, and companies within the AI value chain. Select capital goods, power and defence names tied to multi-year domestic capex round out the list.
We would avoid crude-intensive sectors for now, and deploy in phases over six to nine months rather than all at once.
Do you expect the RBI to raise the repo rate at its October policy meeting, or maintain the status quo?
Yes, we believe the RBI will raise the repo rate, most likely by 25 bps from 5.25 percent. Headline inflation is back above the 4 percent target, crude has stayed above $100 for weeks, and the rupee is under pressure. A weak monsoon raises the risk of energy costs spilling into food and core inflation.
A measured hike now protects credibility and anchors expectations, and avoids a larger move later.
Do you expect the RBI to revise its inflation and growth forecasts for FY27?
We expect the FY27 inflation projection to move up from 5.0 percent, reflecting elevated crude and the weak monsoon. The growth forecast of 6.7 percent is likely to be trimmed as higher energy costs and softer rural demand weigh on activity.
The direction of the revisions matters more to markets than the exact numbers.
Do you believe stronger El Niño conditions could pose a challenge to economic growth?
Yes, especially alongside the ongoing geopolitical tensions and high crude. The monsoon closed at around 90 percent of normal, and El Niño is expected to strengthen through October–January, just as rabi crops are sown. That threatens wheat, pulses and oilseeds.
Combined with elevated crude, it is a double hit: higher food and fuel inflation, weaker rural incomes and less room for policy support. We see the growth impact as moderate but real.
Do you see bond yields having a significant impact on financial markets going forward?
Yes. With the 10-year G-Sec near 7 percent, the cost of capital has risen, compressing equity valuations, particularly for long-duration, high-PE stocks. More worrying, the gap between Indian and US 10-year yields has narrowed dangerously, to around 220 bps, roughly half its long-run average. That thin cushion leaves little compensation for currency risk, pushes foreign money out of both bonds and equities, and limits the RBI's room to ease.
Until yields stabilise, we prefer companies with strong cash flows and low leverage over pure growth stories.