Indian stocks may have limited downside at current valuations, with corporate earnings set to return to double-digit growth in FY27, the fiscal year ending March 2027, after two years of slower expansion, according to Nikhil Ranka, chief investment officer of Equity Alternatives at Nuvama Asset Management, in an interview with CNBC-TV18.

Ranka expects the earnings recovery to continue into FY28. He said the market's valuation of roughly 17 times estimated FY28 earnings offers some support, unless a major economic shock occurs.

"At close to 17 times FY28 earnings, it is difficult to see much downside for the markets unless a major macroeconomic event unfolds," Ranka said. "We are constructive."

Banks Could See Around 20% Operating Profit Growth

Large private sector banks could see their net interest margins (NIMs) improve over the next two to three quarters as the interest rates earned on loans adjust upward, Ranka said. He pointed to banks raising foreign currency non-resident (FCNR) deposits with three- and five-year lock-in periods, which allows them to secure funding at lower rates.

If yields on loans rise by 70-75 basis points, large private banks could see their NIMs improve by 15-20 basis points, according to his estimates. Combined with loan growth of 15-16%, this could support operating profit growth of around 20%. The margin trajectory matters beyond the sector itself, since banks and financials carry the largest weight in Indian equity benchmarks.

Ranka said early indications from quarterly results did not suggest major cuts to earnings estimates, and the remaining quarterly prints will show whether that picture holds. He also expects telecom companies to have room to raise tariffs around the time of the Jio IPO, the planned public listing of Reliance Industries' telecom arm, potentially boosting earnings.

STT Cut Seen as More Likely Than Capital Gains Tax Relief

On equity taxation, Ranka said investors were hoping for relief on both short-term and long-term capital gains taxes. However, he expects any reduction to come with a grandfathering clause, which would limit the benefit to gains made after a specified date.

He sees a cut in the securities tax (STT), which investors pay when trading securities, as more likely. Nifty futures volumes have fallen to around 20 lakh contracts a day from 60-70 lakh when the STT rate was one paisa, he said. Ranka believes restoring the earlier rate could help revive trading activity without causing a significant loss of government revenue.

He also sees potential benefits for stock exchanges and brokers if the Securities and Exchange Board of India (SEBI) adopts the second of two options in its consultation paper on options-expiry settlement. That option would restore a settlement method based on the weighted average price between 2:45 pm and 3:15 pm, he said. SEBI's final decision on the paper will determine which settlement method applies.

Rupee May Trade Between 94 and 97 Against the Dollar

Ranka expects the rupee to trade between 94 and 97 against the US dollar in the near term, citing the narrowing gap between US and Indian bond yields. The difference between the US 10-year government bond yield and India's 10-year yield has narrowed to around 210 basis points, compared with a historical level of about 250 points. If the US yield remains near 5.2%, India's 10-year yield could move towards 7.75%, he said.

A smaller yield gap makes Indian debt less attractive to foreign investors once potential rupee depreciation is taken into account, Ranka said. He also pointed to the Reserve Bank of India's open market operations and direct dollar supplies to oil marketing companies as signs that currency stability remains a priority, making the central bank's currency operations a key variable to track as the yield gap evolves.

Consumer Staples Valuations Look Attractive; IT Upside May Be Limited

Ranka sees limited further downside for consumer staples stocks after years of single-digit earnings growth and a significant decline in valuations. Hindustan Unilever, one of India's largest listed consumer goods companies, for example, has fallen from around 50 times one-year forward earnings to about 36-37 times, based on FY28 consensus earnings per share of roughly ₹50-53. Its valuation multiple is now 20-25% below its historical range, he said. Expectations of a recovery in sales volumes could support the sector.

For large-cap information technology stocks, Ranka expects high single-digit earnings growth but sees little scope for valuation multiples to rise significantly from the current 15-16 times earnings. Indian IT firms earn the bulk of their revenue from overseas markets, leaving their earnings tied to global technology spending cycles. Following the recent rally, he believes the additional upside for many of these stocks may be limited to single digits.