Investing Through Market Inefficiencies: Staying Ahead of the Noise

In recent months, market sentiment has been clouded by short-term corrections, sectoral underperformance, and shifting investor flows. But this isn't unfamiliar territory. Markets often go through phases where price and value drift apart—driven more by emotion and speculation than by economic reality.

At such times, the ability to filter out noise and focus on underlying fundamentals becomes essential. This quarter, we take a closer look at what’s actually shaping the economy and markets beneath the surface—strong consumption, robust macro buffers, sectoral resets, and evolving policy priorities. Understanding these moving pieces is key to making informed, forward-looking investment decisions.

MACROECONOMY

Supply Chain Pressures Remain Benign and Supportive

A crucial, yet often overlooked, factor contributing to India's recent growth momentum has been the continued easing of supply chain pressures. The Supply Chain Pressure Index has not only remained below its long-term average but also signalled a much-needed return to logistical and input cost normalisation. While February saw a marginal uptick, it was far from disruptive. For businesses, this means better margins, improved efficiency, and more reliable inventory cycles—all of which quietly fuel GDP recovery without the need for aggressive intervention.

Exports Add Positively to GDP Despite Global Trade Headwinds

India’s external sector delivered an upside surprise, with exports growing by 10.4%, led predominantly by resilient service exports. Importantly, exports outpaced imports, resulting in net exports contributing +2.5 percentage points to Q3 GDP growth. This performance came against a backdrop of slowing global trade, making it all the more noteworthy. It also reflects India's growing strength in non-cyclical, service-led trade and its ability to capture demand in areas less impacted by global softness.

Domestic Consumption Rebounds on Broad-Based Strength

Private consumption continued its rebound, with PFCE growing at 6.9% in Q3. What’s encouraging is the dual revival in both rural and urban demand, driven by easing inflation, improved agricultural output, and continued formal sector stability. On the public side, Government Final Consumption Expenditure (GFCE) rose 8.3%, showing active fiscal support from both central and state governments. Together, this reflects a domestic economy where demand-side fundamentals are stabilising, laying the groundwork for more self-sustained growth ahead.

EQUITY MARKETS

A Market in Reset Mode: Ongoing Cyclical Consolidation

Equity markets experienced a broad-based correction in February 2025, with Capital Goods (-14%), Real Estate (-13%), and Smallcap 100 (-13%) facing the brunt of selling pressure. Even more defensive sectors like Technology, Media, and Utilities were not spared. While disheartening on the surface, this correction aligns with a natural phase of cyclical consolidation—where excessive valuations and overheated pockets of the market recalibrate. Historically, such phases often clear the way for more rational, sustainable growth trends.

FDI Confidence Intact Despite Drop in Net Inflows

Gross FDI inflows remained robust at US$ 67.7 billion, up 12.4% year-on-year, highlighting the continued long-term confidence global investors place in India’s macro and policy environment. Manufacturing, financial services, and energy received the lion’s share. However, net FDI fell to US$ 1.4 billion, impacted by increased repatriation and Indian outbound investments. This points to a maturing capital landscape, where flows are more dynamic and cyclical—but the underlying belief in India’s growth story remains firm.

Value Opportunities Emerging Beneath the Surface

Every market reset brings with it a shift in leadership and narrative. This one is no different. Quality multi-cap stocks with strong balance sheets and predictable cash flows are beginning to look attractive again. Sectors such as consumption and technology are well-positioned for the next leg of growth, thanks to India’s rising middle class, digitisation, and sustained formalisation of the economy. For long-term investors, this is a time to lean into conviction, not retreat from volatility.

FIXED INCOME

Policy Rate Cut Marks a Constructive Shift

In a significant move, the RBI cut the policy rate, signalling a clear pivot from inflation-fighting to growth-supportive policy. Liquidity injections and dovish undertones suggest a more accommodative stance in the quarters ahead. For fixed income investors, this improves the return outlook through potential capital gains on existing bond holdings and sets the stage for greater stability in the debt market after months of rate uncertainty.

Foreign Exchange Reserves Reinforce Macro Strength

India’s US$ 654 billion in forex reserves now cover over 11 months of imports and 91% of external debt. This robust reserve position isn’t just about numbers—it signals that India is well-prepared to weather global financial turbulence without compromising domestic monetary policy. For fixed income investors, this translates to reduced sovereign risk, currency stability, and more confidence in long-duration instruments.

Hybrid Allocations Prove Their Value

For investors with exposure to hybrid funds, the current environment underscores their value. As equities correct and rates stabilise, hybrids provide a built-in buffer—balancing volatility through debt allocation while still allowing equity-linked participation. Staying invested in these structures helps investors ride out short-term noise while remaining aligned with their long-term financial goals.

Closing Note: Patience in the Process

Market inefficiencies often create discomfort before they deliver opportunity. While the current environment may feel uncertain, the underlying direction of fundamentals points toward recovery and reacceleration. For those who remain focused, disciplined, and guided by data—not noise—this phase offers more than just resilience. It offers the chance to grow stronger, clearer, and better positioned for what’s next.