The report from DSP Mutual Fund said also pointed at relative attractiveness of large cap stocks especially IT and bank stocks.
With central government gross market borrowing having stabilised as a share of gross domestic product, net government‑security supply is rising slower than the economy, limiting bond supply and easing upward pressure on rates
"The spread between nominal GDP growth and the 10-year G-Sec yield has narrowed to about 2.5 per cent to 3 per cent, signalling room for lower policy and term rates if growth remains uneven," the report said.
Yet the spread between the repo rate and the 10-year yield is still comfortably wide at roughly 1 percentage point, offering attractive carry plus potential capital gains for investors willing to extend duration now. India Gsec 10 yr yield at 6.55 per cent to 6.65 per cent is an attractive entry zone, the DSP Mutual Fund said.
CPI inflation is at a multi‑decade low and well below the Reserve Bank of India’s 4 per cent target, further supporting the case for lower policy rates if growth remains uneven.
The fund house said that the Nifty MidSmallCap 400 relative to the Nifty 100 has fallen below its 200‑day moving average.
"As a result, the Flexicap SMID vs Large Cap signal now points to the relative attractiveness of the large caps," the report said.
The defensive bucket of IT, banks and a few other largecap stocks can be used to tide over the market volatility, it added.
However, the report noted that a 10 per cent nominal GDP growth with 4 per cent core inflation implies roughly 6 per cent real growth, insufficient to fully harness India’s demographic dividend.
It reflects weak consumption growth, a slowdown in services exports, a failure of goods exports to accelerate meaningfully, which needs a course correction, it said.
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