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Volatility likely to persist in Indian equities, large caps preferred over mid, small caps: SBI Funds

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New Delhi | March 14, 2026 1:51:44 PM IST
Rising geopolitical tensions and elevated crude oil prices are adding new risks to the macroeconomic environment and could create upward pressure on inflation, according to a report by SBI Funds Management.

The report noted that the recent geopolitical developments have added an additional layer of risk to the overall macro environment, particularly if crude oil prices remain elevated for a prolonged period. Higher crude prices could lead to upside inflation pressures and may also influence the policy response of the Reserve Bank of India across various market segments.

It stated "On asset allocation, we continue to be neutral equities expecting positive albeit moderate returns, with preference for large caps over mid and small caps on relative valuations".

In the near term, the report observed that the significant presence of the Reserve Bank of India in both the forex and rates markets has helped anchor market yields. However, it also cautioned that risks arising from external negative factors sustaining or worsening should be closely assessed.

The report said that apart from tactical positioning based largely on seasonality factors around the fiscal year-end, the strategy remains focused on maintaining duration positioning at a moderate level.

According to the report, spreads on high grade bonds as well as selective credits at the shorter-end currently remain attractive from a risk-reward perspective. It added that strategies on duration would remain nimble, with a preference to stay relatively lighter on a directional basis.

On the equity markets, the report highlighted that the defining feature of Indian equity markets in 2026 so far has been a significant surge in volatility.

According to the report, January witnessed aggressive selling by foreign portfolio investors amid a weakening rupee. In February, market sentiment was also affected by an increase in Securities and Transactions Tax (STT) on derivatives announced in the Union Budget.

However, trade deal announcements with the European Union and more importantly the United States provided some relief to the markets. Despite this, fears of potential disruption to Indian software services exports due to artificial intelligence again dampened investor sentiment.

While it remains uncertain how long the current shutdown and energy crisis will persist, the report stated that the base case scenario assumes that the situation may be resolved sooner rather than later due to the severe economic consequences for most parties involved.

In such a scenario, the report expects reflation of the economy and a recovery in corporate earnings to come back into focus.

However, it also cautioned that a longer disruption cannot be completely ruled out as a risk scenario.

In terms of asset allocation, the report maintained a neutral stance on equities, expecting positive though moderate returns, while expressing a preference for large-cap stocks over mid-cap and small-cap stocks due to relative valuations. (ANI)

 
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