Group 1: Defence Sector - The defence sector remains a policy priority for the government, with sustained order inflows indicating strong demand [6] - Capacity bottlenecks have led to execution delays over the past one-and-a-half to two years, affecting companies like HAL and shipbuilders [6] - If the upcoming Union Budget addresses these capacity constraints and increases private sector participation, it could significantly improve delivery timelines for defence stocks [6] Group 2: Public Sector Banks (PSU) - Preference is currently given to public sector banks (PSU banks) over private sector peers, as PSU banks have shown strong performance while private banks have underperformed [6] - Improving balance sheets and stronger quarterly performance are noted, with expectations of meaningful consolidation in the PSU banking space over the next three to four quarters [2][6] - Key beneficiaries of potential consolidation include State Bank of India, Punjab National Bank, and Canara Bank [6] Group 3: Non-Banking Financial Companies (NBFCs) - Among NBFCs, gold loan companies have performed well, but their valuations may be stretched [2] - A focus on housing finance companies, particularly those targeting affordable housing, is recommended, with Aavas Financiers highlighted as a preferred pick due to its strong exposure to tier II, tier III, and rural markets [2][6] Group 4: US-India Trade Deal - Market expectations for a US-India trade deal have cooled significantly, with previous hopes for a deal by November or December now uncertain [5][6] - Despite the delay, it is not seen as a major negative, as India's trade deficit is low and the rupee has corrected sharply [6] - A trade deal could serve as a short-term trigger for markets, but equities are not overly dependent on it at this stage [6]

Core Insights - The Indian rupee has depreciated past 90 to the dollar, marking a record low and making it Asia's worst-performing currency with a 5% decline this year [1][8] - Economists predict that the rupee's depreciation will persist, particularly if a US-India trade deal is not secured, with expectations of further weakening beyond 90 per dollar [8][6] Currency Performance - The rupee closed at 89.98 per dollar on December 3, 2023, and is expected to trade in the range of 89-91 by March 2026 if no trade deal is reached [1][8] - HDFC Bank forecasts the current account deficit (CAD) to widen to 1.1% of GDP in FY26, while IDFC First Bank projects a deeper deficit of 1.6%, compared to 0.6% in FY25 [5][8] Trade Deal Implications - A potential US-India trade deal is anticipated by the end of December, which could provide temporary support to the rupee, but any gains may be limited due to the Reserve Bank of India's (RBI) actions [6][8] - The ongoing 50% US tariff, which includes a 25% penalty on Russian oil imports, is expected to add approximately 0.3% of GDP to the FY27 CAD [4][8] Economic Outlook - The RBI has cut its policy rate by 25 basis points, but this is expected to have only a temporary effect on the currency, with trade deal outcomes and capital flows being the main drivers of currency performance [6][8] - Seasonal trends may provide some relief for the rupee in Q4 FY26, as the trade deficit narrows and the balance of payments may turn surplus [5][8] Inflation Impact - Economists do not foresee significant inflationary pressure from the rupee's weakness, attributing inflation more to food price trends and recent GST rationalization [7][9] - Core inflation may see some impact from gold and jewelry prices, but this is expected to be offset by lower food prices [9]