You have been warning about valuation concerns in the market for a while. After a 15 per cent correction in large-caps, a 25 per cent decline in the broader markets, and a 30-50 per cent fall in some pockets over the past six months, do you think valuations are now more reasonable, at least in the large-cap space?

Yes, large-caps are now trading at more reasonable valuations. However, it’s important to remember that markets do not always trade at fair value—they can go above or below it. Historically, when markets are undervalued, they eventually become overvalued, and vice-versa.

With tax breaks in the recent Budget and the Pay Commission for government employees set to kick in next year, do you think the weak consumption demand will improve?

The government has taken a positive step by encouraging consumption in certain tax brackets. However, challenges remain, particularly in lower-income segments, as reflected in the performance of some consumer staples/FMCG companies. It’s difficult to predict whether all categories of consumption will see a boost. That said, the measures taken in the Budget, along with the monetary easing by the Reserve Bank of India, are steps in the right direction.

Despite attractive valuations in banking and financial services, especially PSUs, the market doesn’t seem to favour them. There is no major NPA problem apart from slow credit and deposit growth concerns. Some believe the best of the banking story is behind us. Do you agree?

Banking has been one of the best-performing sectors in the recent market correction, so it’s difficult to agree with the view that the best is behind us. However, given that banking is a cyclical sector, its performance depends on the overall economic environment. While valuations remain reasonable, banks typically struggle when markets decline.

Reciprocal tariffs imposed by the US have hurt many sectors. Do you think concerns over these tariffs are overdone?

It’s difficult to say. The US is one of the largest economies in the world, and apart from pharma, many sectors have been negatively impacted by reciprocal tariffs. We hope for some relaxation in these tariffs because if they persist, they could impact growth both in the US and exporting nations, potentially slowing global economic growth.

Markets across the globe are under pressure owing to tariff announcements by the US administration. Do you see the possibility for a downward revision given the scale of tariffs imposed?

It is quite possible that the current scale of tariffs imposed on various nations could be revisited. Currently, the duties appear rather steep and might see some downward adjustments over time. However, if history is any guide, predicting the direction and pace of such policy changes is quite challenging, and we have limited visibility into how the situation will ultimately unfold.

Is US recession a real possibility, and how do you view the sharp rise in US bond yields?

The US economy, which has served as the global growth engine since 2012, seems to be losing momentum. A slowdown appears imminent, but it is uncertain whether this will culminate in a full-blown recession. The prolonged and unresolved trade tensions between the US and China only add to this fragility.

Adding to these concerns is the sharp rise in US bond yields. Historically, US Treasuries have been viewed as the world’s safest asset, particularly during periods of market stress. But the recent behavior in bond markets—where yields are rising even amidst volatility—suggests a shift in sentiment. This signals that global investors may be losing confidence in US debt as a safe haven, which is alarming given the massive refinancing burden the US faces. If Treasuries stop being the global refuge, then that has profound implications.

The RBI has cut interest rates twice and has been infusing liquidity into the system since December via OMOs. However, some demand further cuts in CRR and SLR along with the repo rate to jumpstart bank lending and the economy. Do you think the RBI has done enough?

The RBI has done a commendable job of easing monetary conditions over the past few months, providing a strong push to economic growth. However, the bigger challenge has been the global environment, which has not been very supportive. The RBI’s steps have been positive, but global macroeconomic uncertainties remain a concern.

Are you satisfied with the domestic macroeconomic situation? The rupee has strengthened in recent weeks, GDP growth is estimated at 6.5 per cent, inflation is under control and GST collections are healthy.

We are broadly positive on India’s macroeconomic outlook. However, we are also mindful of the risks arising from global factors such as tariffs and a potential slowdown in global growth in 2025-26. How these factors will impact India’s domestic economy is still unclear, and we will be closely watching how things unfold.

Many Internet and e-commerce companies are entering the primary market at extraordinary valuations. Some are loss-making or have thin margins that don’t justify these valuations. Why are investors, including mutual funds, participating in these overpriced IPOs?

As fund managers, we face a tough challenge when evaluating such companies. Some of these businesses have strong models, even if they don’t generate significant profits under traditional accounting standards. Many of today’s biggest global tech companies also did not have high profits in their early years. We take a cautious approach to such investments, balancing risk and potential rewards. We acknowledge that we could sometimes get these calls wrong or be late in recognising emerging trends.

You previously warned that small- and mid-caps were too risky for retail investors. Your concerns have played out with these indices falling significantly. Do you still hold this view?

A sustained long-term commitment is essential for investors looking to invest in small- and mid-caps via SIPs. We are concerned that many investors, having seen a prolonged bull market, may not fully grasp the risks involved in short-term investments in small- and mid-caps. As managers of public money, it was important for us to highlight such risks. Given that India remains a long-term structural story, a very long-term outlook for investing in small- and mid-caps is likely to be good.

What investment styles—value, quality, or growth—do you think will outperform, going forward?

At this point, we favour quality and earnings revision-based momentum styles. We have always been strong believers in contrarian approach for long-term investing.

Which sectors or themes are you currently bullish on?

Instead of focusing on specific sectors, we emphasise asset allocation. A well-diversified portfolio across equities, debt, commercial real estate and other assets is essential. We also urge caution when investing in unlisted equity, micro-caps and small-cap stocks.

Six months ago, we were more positive on banking, financial services and insurance because they had underperformed, but since then, these sectors have outperformed most other sectors.

What is your view on gold?

Gold is at an all-time high, and historically, it tends to peak during periods of global economic turmoil. While it has performed well, we are not bullish on gold as we have been in the past.

What according to you are the positives for India as compared to other emerging markets?

India remains fundamentally strong, especially in terms of macro indicators like the current account, fiscal deficit and inflation. The main concern over the past 18 months has been elevated equity market valuation. Post the latest sell-off, large-cap valuations are now more reasonable, according to our internal metrics, while small- and mid-cap segments continue to look pricey. Additionally, India’s economic structure — being largely domestic in nature — insulates it from some of the global headwinds affecting more export-dependent economies.