Veteran SIP investors not deterred by stagnant market: Kotak Mahindra's's Harsha Upadhyaya
A change in the Reserve Bank of India (RBI) policy stance and rate hikes would impact companies with highly leveraged balance sheets or those overly dependent on short-term working capital. However, the leverage of Indian corporates, on average, is at decadal lows; hence, an all-round adverse impact on interest costs is unlikely, according to Harsha Upadhyaya, chief investment officer at Kotak Mahindra AMC. Upadhyaya also said that while short-term investors using the Systematic Investment Plan (SIP) route were facing a reality check, long-term investors were exceptionally resilient.
Q 1) RBI raised the policy rate on expected lines, but also changed the stance to calibrated tightening, which the Street had not priced in. What impact could this have on earnings?
The Reserve Bank of India's shift from a ‘neutral’ stance to ‘calibrated tightening’ serves as explicit forward guidance that near-term rate cuts are completely off the table. By signalling that future policy moves will strictly be either another rate hike or a data-dependent pause, RBI has reshaped expectations for the corporate sector and the markets.
The transition to a tightening cycle primarily alters borrowing costs and valuation frameworks for Indian corporates. However, the macro picture remains balanced by resilient domestic demand, as evidenced by RBI's upgrade of its FY27 GDP growth forecast to 7.1%. Elevated repo rates (now at 5.50%) will gradually translate into higher borrowing costs. Highly leveraged corporations and companies reliant on short-term working capital will face increased interest expense, directly weighing on net profit margins. However, the leverage of Indian corporates is, on average, at decadal lows; hence, an all-round adverse impact on interest costs is unlikely.
Q 2) Small and midcaps (Smids) have outperformed large caps this year. Will the rise in the cost of funds hurt them more?
The mid- and small-cap baskets outperformed the large-cap basket over the past year, mainly due to superior relative earnings growth. While we may have entered a rate-hike cycle, the extent of further rate hikes is expected to be quite moderate (possibly 1 or 2 more hikes in this cycle, as per current expectations), and, as mentioned earlier, average leverage levels are also quite low. Therefore, any meaningful impact on interest costs is likely to be limited to only highly leveraged companies in the Indian corporate sector.
Q 3) Have you, in the context of the repo hike, revised earnings expectations?
We have not made any significant changes to our earnings expectations following the repo rate increase. However, I must mention that the global macro situation is quite volatile, and hence earnings estimates may need to be monitored as we go along. Currently, we expect about 14-15% earnings growth for the Nifty basket in FY2026-27. The first-quarter earnings, despite the war in West Asia and the energy shock it triggered, were above expectations and showed positive 17% year-on-year growth.
Q 4) The Initial Public Offering pipeline has been exceptionally strong this year, because of big-ticket issuances. What is your outlook?
The outlook remains decisively robust but is transitioning from a retail-driven frenzy into a fundamentally driven, institutional playground. The September quarter alone saw a massive surge, raising over ₹90,000 crore. With the IPO pipeline at an unprecedented ₹3.86 trillion, with more than 200 companies awaiting listing, the primary market is experiencing structural deepening rather than a temporary bubble. Unlike the previous year, which was dominated by a high volume of mid- and small-sized listings, this phase is defined by systemic heavyweight IPOs. Also, there is a clear transition from pure-play tech startups to capital-heavy, traditional economic sectors. Engineering, infrastructure, power, and manufacturing companies have overtaken tech as the primary fund-raisers. Private equity (PE) firms are holding significant mature investments in India. The Offer-for-Sale (OFS) route via mainboard listings has become their preferred mechanism to secure profitable exits, providing a steady supply of large-scale issuances.
Q 5) The secondary Equity Capital Markets (ECM) have seen a bevy of bulk and block deals. What's your outlook here?
The secondary Equity Capital Markets segment in India has transformed into a high-octane institutional playground. Despite the Nifty 50 correcting this year, founders, early-stage promoters, and private equity (PE) firms are on track to surpass a staggering ₹4 trillion in secondary share sales through bulk and block deal windows. August alone registered a massive nearly ₹1 trillion wave, making it one of the single largest months for secondary blocks in market history. Many PE funds that invested in India 5–8 years ago are approaching their fund life expiry dates, triggering massive Accelerated Bookbuilds (practice of selling stakes to investors rapidly on the exchanges) in the mid- and small-cap spaces. Simultaneously, promoters are paring down their stakes to optimize capital allocation or deleverage corporate balance sheets at mature valuations. The ongoing pace of bulk and block deals signals that the market is undergoing a major ownership rotation in favour of domestic institutions, which are receiving inflows even in a volatile, downward market.
Q 6) After the latest round of correction, we have seen valuations across caps moderate compared to their long-period average (LPA). Do you feel this could reverse FPI outflows?
Valuation is an important factor for any investor. However, it may not be the only factor. Along with that, FPIs may also want superior earnings growth compared to other competing economies, stability in the external environment and currency movements, etc., before choosing to invest. Indian economic growth continues to be strong and resilient. So, when the dust settles, India should ideally once again become a preferred investment destination for FPIs.
Q 7) Do you think a reversal of the AI super cycle is possible? How can it benefit us?
Yes, a reversal in the AI supercycle is highly possible, and in fact, warning signs are increasingly visible. The primary catalyst for a reversal is capex fatigue and a massive mismatch between spending and revenue. Hyperscalers and tech giants have poured trillions into AI infrastructure (data centres, chips, and energy systems). However, actual monetisation and visible productivity gains across the broader economy have lagged. The disappointing AI investment returns could trigger a sharp global market correction as expectations outpace actual profits. Rising debt among massive AI spenders and higher-for-longer global interest rates have further squeezed free cash flows, increasing the likelihood of a narrative shift or a valuation bubble pop.
The Indian equity market may benefit from a possible global reallocation of capital away from AI-led markets or stocks, as well as from the Indian economy’s reliance on domestic drivers.
Q 8) Which sectors are hot and not-so-hot for you?
We are currently positive on three themes—banking and financial services, manufacturing, and pharma/healthcare services. We would look to avoid stocks trading at expensive valuations across multiple sectors in the smallcap segment.
Q 9) What are you gathering from distributors about the mood of SIP investors given that we haven't really moved meaningfully in the last two years?
The mood on the ground among Mutual Fund Distributors (MFDs) regarding the two-year market stagnation reveals a fascinating psychological divergence between two distinct sets of investors. Even though the broader market has remained relatively flat over the last 24 months, gross monthly SIP inflows have hit historic record levels. However, looking past the headline figures reveals a complex narrative forming behind the scenes.
One set of investors who entered the market during the post-pandemic boom—specifically between 2021 and 2024—are experiencing a heavy dose of reality. New retail cohorts entered equity mutual funds expecting the 20-25%+ annualized returns they saw on social media. Facing two years of flat or slightly negative XIRR (internal rates of return), they are feeling discouraged. This disappointment is causing measurable friction. While new SIP registrations remain high, the SIP stoppage ratio has repeatedly breached elevated levels. Investors who treated SIPs as short-term trading tools are either pausing their allocations or letting them mature without renewal.
Conversely, for investors with a horizon longer than 5 years, the mood is exceptionally resilient. Distributors note that their veteran clients view this period of stagnation not as a failure, but as a textbook ‘accumulation phase’.