Expert view: Elevated India’s debt-to-GDP ratio a key macro risk, says Niharika Tripathi of Wealthy

Expert view: Niharika Tripathi, Head of Products and Research for Wealthy.in, says India’s debt-to-GDP ratio is elevated at around 81%, which can put limits on how much fiscal space the government has for infrastructure spending. A weaker rupee, spike in crude oil prices, and lower tax collections are also among the risks that can affect the equity market. In an interview with Mint, Tripathi shared her views on the Indian stock market outlook, key risks to the market, and sectors she is positive about, among other topics. Here are edited excerpts of the interview:

What is your assessment of the emerging trends in the market?

We believe Indian equities are in a late-cycle but still constructive phase: headline indices are near highs with some consolidation, while the broader macro and earnings setup remains supportive but no longer cheap, so incremental triggers matter a lot now.

Large-caps are consolidating near highs while mid/small caps have seen sharper corrections followed by selective rebounds.

Globally, equities have been supported by AI/tech optimism and the expectation of easier monetary policy, which has driven broad-based gains and pushed up valuations across many markets.

For India, the growth outlook for FY26 remains solid with expectations in the mid-7% range, supported by domestic demand and investment, which underpins the earnings story for cyclicals and financials.

Inflation has been unusually benign and is projected to stay below target through FY26, which gave the RBI room to deliver a 25 basis-point cut. This is generally favourable for valuations and duration assets.

From here, the most important driver will be earnings. Markets are looking for a broader-based improvement in profitability beyond a handful of large financials and industrials.

Any meaningful upgrades to FY26 or FY27 estimates would be positively received. Policy and liquidity conditions will also be influential.

A final rate cut by the RBI, consistent domestic SIP flows, and any revival of FII buying into India (if global investors rotate back from cheaper markets) can extend the rally despite rich valuations.

A further leg of upside could come from strong consumption indicators, particularly in the automotive, durable, and discretionary categories, supported by low inflation and recent tax cuts.

A stable global backdrop where inflation gradually aligns with central bank targets and major central banks stay on a gradual or paused path would also support risk assets well into 2026.

How do you see the market's performance in 2025?

In the recent quarter, we witnessed decent earnings growth, strong macro-economic growth and the same is expected for the remaining half of the year.

The Nifty 50 has reached a new all-time high, post which it is now consolidating. However, multiple broader market stocks are down up to 40%-50% from highs.

2025 is already shaping up as the first losing or flat year for Indian equities since the Covid period, majorly due to FII outflows and global shocks, even as domestic SIP flows have kept the market from a deeper fall.

Valuations are comparatively closer to long-term averages, especially on the large-cap front, and hence a modest earnings growth can lead to a rally in the Nifty 50 index.

The year 2025 appears more like a stock-pickers and sector-rotation year than an index-performing year, as we witnessed significant divergences within the Nifty 500. Therefore, selecting reasonably valued and fundamentally strong businesses could generate alpha over broad index chasing.

While global factors remain key headwinds, do you see any major domestic risk for the market next year?

There are a few domestic risks that could come into play in 2026. India’s debt-to-GDP ratio is elevated at around 81%, and this puts limits on how much fiscal space the government has for continued infrastructure spending.

Tax collections could also fall short if nominal growth moderates, which would widen the fiscal deficit.

A weaker rupee or a spike in crude oil prices would raise input costs and compress corporate margins. This, in turn, could affect investor sentiment and increase the risk of further FII outflows.

What should be our equity investment strategy given the global factors like tariffs, currency fluctuations, and rising bond yields?

One can adopt a defensive equity strategy, emphasising diversification into domestic Indian large-cap stocks, quality sectors less exposed to global trade, and reduced international allocations amid US tariffs, currency volatility, and rising bond yields, which are pressuring valuations.

Major allocations can be directed to quality large-cap, flexi-cap, multi-cap, and multi-asset funds to keep overall portfolio volatility in check. Up to 10% may be allocated to specialised investment vehicles, including long–short strategies, which use derivatives to further stabilise returns during periods of heightened uncertainty.

Which sectors look attractive and which ones appear risky? Please explain your views.

For the next 12–24 months, domestic-demand-linked sectors like healthcare, banking and financial, insurance and digital/IT services look relatively attractive, while richly priced cyclicals like realty, export-sensitive sectors, and highly leveraged plays look riskier.

India’s FY25–26 real GDP growth is now projected around 7–7.2%, supported by strong Q2 data and recent tax cuts that are boosting consumption.

Healthcare-related sectors and financials remain medium-term structural winners from demographics, rising incomes, and under-penetration.

Well-capitalised private banks, diversified lenders, and niche NBFCs benefit from strong credit demand in a 7%-plus growth environment, even as some financials at the index level are seen as fully valued.

Realty has delivered outsized returns over the last decade and corrected sharply in the recent sell-off, suggesting positioning and valuations are stretched and vulnerable to any liquidity or demand disappointment.

Metals and other deep cyclicals have benefited from infrastructure and commodity upcycles but remain exposed to global growth and policy swings, making entry timing critical rather than buy-and-forget.

Sectors like aviation and some transport names are already showing stress from cost inflation (fuel) and operational issues.

Also, certain PSUs and defence stocks have an ask of a very high P/E multiple and thus carry valuation risk even if the businesses are solid.

What styles — value, quality, defensive, cyclical — suit the present market condition?

Defensive and quality styles are best suited to the current Indian market conditions, amid volatility from FII outflows, profit booking, and uncertainty surrounding US Fed decisions and trade deals.

Hence, a blend of defensive and quality stocks reduces the downside risk in this FII-driven volatility, while adding some value stocks supports long-term portfolios.

Sectors like metals, which are cyclical, face pressure from FII reductions, rising global tensions, and the trade war, and hence should be avoided in recent times.

Defensive and quality strategies, along with a blend of a few value picks, can be the style suited to present market conditions.

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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of the expert, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.