Dollar strength, geopolitics & yields – the triple threat roiling Indian markets: Anirudh Garg

Time of India

3 days ago

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As Indian markets navigate a phase marked by heightened volatility, investors are grappling with a triple threat—dollar strength, geopolitical tensions, and rising U.S. bond yields.These global headwinds, combined with domestic uncertainties, are reshaping capital flows and risk appetite. In this edition of, we speak with Anirudh Garg, Partner & Head of Research at INVasset PMS, who breaks down the key macro triggers unsettling Dalal Street.From tactical shifts in portfolio strategy to his take on IPOs, SME exuberance, and sector-specific opportunities like defence and real estate, Garg offers a data-driven perspective on how investors can navigate the storm and uncover long-term value. Edited Excerpts –A) Volatility on D-Street today is driven by multiple overlapping factors rather than a single cause. While fears around the U.S.-China tariff war persist, their intensity has eased somewhat after a U.S. court struck down Trump's reciprocal tax policy, removing one source of uncertainty. However, the broader strategic competition remains, with ongoing tensions around trade, technology access, and Taiwan keeping investor sentiment fragile. Mixed signals from policymakers—balancing trade talks and tariff threats—fuel swings in risk appetite.Additionally, the recent India-Pakistan conflict, though not a full-scale war and swiftly contained by India's decisive response, added short-term volatility. Meanwhile, global monetary tightening, especially by the U.S. Federal Reserve, is tightening liquidity and raising borrowing costs, putting pressure on risk assets worldwide.The stronger U.S. dollar also plays a key role by increasing the cost of capital for emerging markets, prompting capital flows away from equities toward safer dollar-denominated assets, further amplifying market fluctuations. For India, these external shocks coincide with domestic challenges including inflation trends, RBI policy stance, and corporate earnings uncertainties, layering complexity onto market dynamics.At INVasset, our quant-driven, algorithmic approach continuously monitors sectoral and stock-level shifts to adjust portfolio exposure dynamically, capturing opportunities amid volatility while managing downside risks. Such fluctuations are a natural part of the evolving global risk framework investors must navigate today.A) The recent rise in U.S. bond yields, with the 10-year Treasury touching 4.43% and the 20-year nearing 4.94%, signals a shift in global capital flows and investor sentiment. Higher yields make U.S. debt more attractive, prompting potential capital outflows from emerging markets like India.This creates pressure on the Indian rupee, which tends to weaken against a stronger dollar, raising import costs—particularly crude oil—and fueling imported inflation. The RBI faces a delicate balancing act, as elevated global yields limit its flexibility to ease domestic interest rates without triggering capital flight.For Indian equities, this environment tends to increase volatility. Sectors reliant on imports or capital-intensive businesses may face margin pressures, while export-driven industries could benefit from a weaker rupee, gaining competitiveness internationally.At INVasset, we actively monitor these dynamics through a dynamic asset allocation framework, rotating into sectors likely to benefit from currency shifts and higher yields.A)Managing volatility is a core tenet of our strategy at INVasset, especially amid today's complex market environment. We rely on a data-driven, algorithmic approach that continuously scans over 1,500 stocks using 170+ parameters, enabling nimble portfolio adjustments grounded in real-time relative changes and sector rotations.Recently, we increased exposure to the textiles sector, anticipating benefits from the advancing India-UK Free Trade Agreement, which promises tariff reductions and export growth. This move diversifies risk and taps into a structural growth theme amid global trade shifts.Simultaneously, we've strengthened allocations in financial intermediaries and stock brokers, sectors benefiting from rising retail participation and digitization. These companies offer recurring revenues that help dampen volatility.Geopolitical tensions between India and Pakistan have also prompted a tactical increase in select defence stocks, aligning with national priorities and providing defensive portfolio ballast during uncertain times.Additionally, market-driven valuation dips have created entry points in quality financial firms with strong fundamentals, further balancing risk and reward.Our proprietary quant algorithm ensures these tactical shifts are unemotional and disciplined, capturing alpha while controlling downside. This systematic agility allows us to navigate volatility proactively, positioning portfolios to benefit from both macro trends and emerging opportunities.A) The March quarter results for India Inc. painted a nuanced picture, reflecting sector-specific trends and broader macroeconomic conditions.The Defence sector stood out with a strong performance, driven by heightened government focus on modernization and renewed geopolitical tensions, which bolstered order books and profitability.The Financial Services sector demonstrated robust resilience, buoyed by strong banking results, asset management growth, and increasing retail participation, contributing to healthy gains. Metals benefited from a global recovery in demand and sustained infrastructure spending, translating into volume growth and margin expansion.Meanwhile, Oil & Gas firms capitalized on favorable crude prices and domestic demand growth, which improved refining margins and petrochemical sales.On the flip side, sectors like Healthcare and Automobiles faced challenges. The healthcare industry grappled with rising input costs and regulatory pressures, impacting margins and earnings growth.The automobile sector experienced subdued demand both domestically and in export markets, leading to flat or declining sales and pressured profitability.These mixed results reinforce the importance of a diversified and selective investment strategy that emphasizes sectors benefiting from structural tailwinds—such as defence modernization, financialization, and global commodity cycles—while cautiously navigating those facing cyclical or regulatory headwinds.For long-term investors, focusing on themes backed by strong government support, evolving consumer trends, and global demand recovery offers the best risk-adjusted opportunities in the current environment.A) The Reserve Bank of India (RBI) has adopted a cautiously accommodative stance as it balances its twin mandate of controlling inflation and supporting growth. In April 2025, retail inflation has moderated to 3.16%—its lowest since mid-2019—thanks to easing food prices and subdued demand pressures.Simultaneously, the Indian economy is on a robust footing, with FY25 Q4 growth expected near 6.9%, driven by agriculture and strong consumer demand. The current account deficit remains manageable at 1.1% of GDP for 3Q FY25, underpinned by stable services exports and remittances.Reflecting these conditions, the RBI cut the repo rate by 25 basis points to 6.25% on 7th February, marking the first easing move in five years. Market expectations, supported by Reuters polls, point to a likely further 25 basis points cut in June, with potential additional easing later in the year, all data-dependent.The key variables guiding future rate decisions will be inflation trajectory, sustained economic growth, and external sector stability. If inflation remains benign and growth steady, RBI's room to ease rates further is significant.However, global uncertainties and potential external shocks will warrant cautious monitoring. Overall, India's monetary policy outlook is poised to support growth while maintaining vigilance on inflation and macro stability.A) India's IPO market has seen a notable resurgence recently, driven by renewed investor interest and companies seeking growth capital. While many IPOs have posted spectacular listing-day gains, often fueled by retail enthusiasm and market momentum, we at INVasset maintain a cautious stance.IPOs represent a distinct asset class, and initial exuberance frequently leads to price volatility and corrections as companies take time to prove their operational and financial credentials.Our approach emphasizes patience, allowing these firms to 'get cooked' over several quarters before considering investment, thereby aligning valuations with sustainable fundamentals.Examples like Ather Energy and select SME IPOs demonstrate the typical pattern of sharp listing gains followed by periods of earnings digestion and volatility. Given that many IPO valuations already price in strong growth expectations, premature entry risks capital erosion if execution falters.By waiting for consistent revenue growth, profitability, and cash flow visibility, we reduce downside risks and identify quality companies at reasonable valuations.In essence, while IPOs offer exciting opportunities, disciplined, fundamentals-driven investing remains paramount, reflecting our broader philosophy of measured, data-driven portfolio construction geared toward long-term value creation.A) The SME IPO segment has gained traction in 2025, but at INVasset, we remain cautious due to liquidity constraints and valuation concerns. Many SME stocks suffer from thin trading volumes post-listing, limiting exit options and increasing volatility risks.Additionally, valuations often reflect speculative exuberance rather than fundamental strength, leading to inflated listing gains that are unsustainable. While some SMEs have solid business models, the market's hype obscures true financials.Regulatory efforts aim to improve transparency, but structural challenges persist. Hence, we prefer mainboard stocks with robust liquidity and earnings visibility for disciplined, long-term investing.A) Beyond high-growth sectors, the old economy industries—such as manufacturing, railways, power, and defense—are now presenting compelling value opportunities following recent market corrections. These sectors stand to benefit from sustained government capital expenditure focused on infrastructure modernization, strategic self-reliance, and enhanced connectivity.The correction has improved valuation comfort, making these fundamentally strong areas attractive for long-term investors seeking quality at reasonable prices.Interest rate–sensitive sectors like real estate also offer promising entry points amid easing monetary policy and improving demand dynamics.Supported by urbanization and affordable housing initiatives, real estate remains a vital component of India's growth story. Together, these sectors blend secular growth with cyclical recovery, providing a balanced portfolio approach.Investors who focus on financially sound companies within these old economy themes can capture the upside potential of India's ongoing investment wave, while effectively managing economic and policy risks.A) The recent geopolitical tensions between India and Pakistan have once again highlighted the strategic importance of India's defence sector. At INVasset, we remain bullish on defence as a core portfolio theme, driven by robust government spending and a clear focus on self-reliance under the Atmanirbhar Bharat initiative.The government is aggressively expanding the Indian Navy and modernizing missile systems, which bodes well for domestic defence manufacturers. This renewed urgency ensures strong order pipelines and revenue visibility for companies in this space.Garden Reach Shipbuilders & Engineers (GRSE) stands out as a prime example. Despite a market cap of around ₹30,000 crore, GRSE currently holds an order book of ₹25,000 crore and recently secured an additional ₹25,000 crore in new contracts.The company is also eyeing another ₹40,000 crore in prospective orders. This large and growing backlog reflects India's focus on building a strong indigenous naval fleet and makes GRSE a key beneficiary of the defence modernization drive, with stable long-term cash flows.On the missile front, Bharat Dynamics Limited (BDL) has delivered critical capability with its Akash surface-to-air missile system, successfully countering drones and missiles during recent skirmishes. This proven technology has also attracted interest from Southeast Asian countries facing regional security challenges, opening promising export opportunities.As India emerges as a reliable defence exporter, companies like BDL are well positioned to benefit from both domestic demand and growing international markets. Defence is not just a sector; it is a strategic growth story with strong fundamentals.(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)