Rate hikes unlikely to derail India’s earnings story: Axis AMC’s Naveen Kulkarni

The US Federal Reserve raised interest rates by 25 basis points on Wednesday, its first hike in three years, taking the federal funds rate to 3.75-4 percent. The move has brought the interest-rate outlook back into focus for markets, with the spotlight now shifting to the Reserve Bank of India as inflation edges closer to the 5 percent mark. However, higher rates are unlikely to derail India’s earnings recovery, said Naveen Kulkarni, CIO - PMS and Listed Equity Alternates at Axis AMC.

Speaking on the sidelines of Moneycontrol’s Mutual Fund Summit – Delhi edition, Kulkarni said much of the expected rate adjustment has already been reflected in Indian bond yields and even a 50-basis-point increase in rates would not pose a serious threat to earnings estimates.

Rate hikes may not hurt earnings momentum

Kulkarni said the impact of higher rates would vary across sectors, with some pockets potentially benefiting from the shift. Private banks, in particular, could see an improvement in net interest margins, he said.

Current consensus estimates point to around 17 percent earnings growth for the Nifty in FY27 and 14–15 percent in FY28. Even with a 50-basis-point increase in interest rates, he expects these earnings estimates to remain achievable. “Does that mean there is a serious downside to earnings estimate? The answer to that is no,” he said.

Kulkarni acknowledged that markets could see a knee-jerk reaction when rates rise, but expects the impact to settle once the initial adjustment is absorbed.

Q2 earnings key for mid and smallcaps

The sustainability of the earnings recovery will be particularly important for mid- and smallcap stocks, which have continued to attract investor flows despite their premium valuations.

Kulkarni said the June quarter delivered a particularly strong performance, with mid- and smallcaps recording around 23–30 percent earnings growth. The key question now, he said, is whether this momentum can be sustained through the rest of FY27.

“23% earnings growth for the first quarter was a very, very strong number, probably the best in the last three years. Question is that whether it will sustain or not,” he said. The September quarter, therefore, will be an important test. If Q2 earnings are broadly in line with estimates, Kulkarni believes there could be further headroom for mid- and smallcaps.

Kulkarni expects FY27 to remain relatively well placed, helped by improving nominal growth. The outlook for FY28, however, will depend on how the earnings recovery develops over the coming quarters.

Crude oil a bigger near-term risk

While Kulkarni does not see interest rates as a major earnings risk, he flagged crude oil as a more immediate challenge for Indian equities if prices remain elevated.

Brent crude has surged around 20 percent so far in September as the West Asia conflict has escalated, with oil prices moving sharply higher and raising concerns over inflation and corporate margins.

Kulkarni said crude at $105–110 a barrel would be a serious challenge for India because such prices are not reflected in most corporate estimates, which typically assume oil at around $85–90. However, he does not see the current oil shock necessarily becoming a long-term problem. In his view, crude supply is unlikely to remain a major constraint over a longer horizon, which could allow prices to moderate.