The coming interest rate surge: A two-year opportunity for banks
Government of India (GOI) bond yields are rising, signaling an imminent shift in the interest rate environment. Talking to ET Now, Srivastava predicts that India is about to enter a cycle where interest rates will increase significantly, creating a highly favorable environment for banks over the next two years.
“Banks make the best money when rates are going up”, Srivastava explained. “You can pass on the rate increase today, but your deposits are at the older rate and will continue for the next five to seven years”.
This dynamic is the reverse of what occurred last year, when banks faced net interest margin (NIM) compression as they had to reprice deposits faster than loans. The coming cycle promises “bountiful money” for banks as lending rates rise while deposit costs lag behind.
The driver? Massive government borrowing by both central and state governments makes it impossible for interest rates to remain at current levels. The 10-year treasury yield is already telegraphing this shift, and Srivastava emphasizes that equity investors must monitor bond markets closely for the best signals about equity market direction.
Strategic portfolio positioning: 50% in gold loan companies
Srivastava’s financial sector allocation reflects high conviction in specific niches rather than broad exposure. His portfolio breakdown reveals a concentrated approach:
| Segment | Portfolio Allocation |
| Gold Loan Companies | 50% |
| Private Banks (PE-backed) | 30% |
| Public Sector Banks | 20% |
| Large-Cap Banks | 0% |
Notably, the portfolio contains zero allocation to large-cap banks due to slow movement and expectations of relatively poor returns. The heavy weighting toward gold loan companies reflects confidence in their business models during rising rate environments.
Why India’s QSR story is dying: The retail cost problem
Quick Service Restaurant (QSR) chains face structural challenges that make them poor long-term investments in the Indian context, according to Srivastava. While promotional schemes like ‘buy two pizzas, get one free’ might drive temporary traffic, the fundamental economics don’t work.India’s QSR story is “dying not because people don’t want to buy, but the cost of servicing the customer through retail outlets is outrageously high”, he stated bluntly.
The core issue is India’s retail cost structure. Unlike the United States, where McDonalds and Dunkin Donuts thrive due to low retail costs, Indian QSR operators face crushing expenses:
- Mall rentals: Extraordinarily high, consuming most operational margins
- Maintenance costs: Significantly higher than Western markets
- Power costs: Add to already stressed unit economics
Adding to QSR challenges, cloud kitchens and virtual restaurants are capturing market share from branded chains. Consumer behavior has shifted dramatically toward ordering from unknown establishments discovered through delivery apps, eroding the moat that traditional QSR brands once enjoyed.
“QSR does not have a moat, at least in the Indian context, which gives you profitability in a longer-term framework,Srivastava concluded,” recommending investors stay away entirely from the sector.
The valuation trap: Why good EMS and manufacturing companies make bad investments
Electronics Manufacturing Services (EMS) and industrial companies represent strong long-term themes supported by government policy, but current valuations make them uninvestable, according to Srivastava.
“All companies are good. Sector is very good. We need the power companies. We need the infrastructure companies. But at these valuations, if you buy as an investor, how do you make a return?” he questioned.
The problem stems from mutual fund buying pressure that pushed price-to-earnings ratios to 50-70x for industrial companies. This occurred despite modest growth fundamentals:
- Government capex growth: 7% annually
- Private capex growth: Single digits
The valuation excess has already caused significant damage. Even large multinational companies in the manufacturing space have seen their stocks hammered over the past year as reality caught up with excessive valuations.
Good companies plus bad valuations make bad investment choices,Srivastava emphasized, drawing a clear distinction between company quality and investment attractiveness.
The bond market signal: Why fixed income could outperform
Perhaps the most contrarian call from Srivastava is his bullish outlook on bond market investments, particularly as interest rates rise. This may seem counter-intuitive since rising rates typically hurt existing bond values, but he’s focused on new issuance opportunities.
“The biggest thing for equity investors is keep looking at the bond market. Worldwide, it gives you the best signal what is going to happen to the equity markets,” he advised.
With the 10-year treasury yield already moving higher and government borrowing needs increasing, Srivastava believes bond market investments will offer phenomenal returns as rates rise sharply. This positions fixed income as both a tactical opportunity and a leading indicator for equity market direction.
Investment implications: Winners and losers in the new cycle
Sectors to favour:
- Banks and NBFCs: Net interest margin expansion as lending rates rise faster than deposit costs
- Gold loan companies: Defensive business models with pricing power in rising rate environments
- Private banks (select): Those with recent PE backing and strong capitalization
Sectors to avoid:
- QSR chains: Structural cost issues and eroding competitive moats from cloud kitchens
- EMS/Manufacturing: Good businesses at bad valuations (PE 50-70x vs. single-digit capex growth)
- Large-cap banks: Slow movement and relatively poor expected returns
The bottom line
The investment landscape is shifting dramatically as India enters a rising interest rate cycle driven by government borrowing needs. This macro shift creates clear winners and losers across sectors. Financial sector companies, particularly specialized lenders like gold loan companies and select private banks, stand to benefit massively from margin expansion. Meanwhile, previously hot themes like QSR and EMS face headwinds from either structural challenges or valuation excesses.
The key for investors is to separate company quality from investment opportunity. As Srivastava emphasizes, even excellent businesses become poor investments at the wrong price. With bond yields already signaling the direction of this cycle, positioning ahead of the curve could make the difference between strong returns and mediocre performance over the next two years.
For those willing to monitor bond market signals closely, the coming period may offer the clearest directional guidance for equity markets that investors have seen in years.
Disclaimer: This report is based on expert market commentary and is intended for informational purposes only. It does not constitute financial advice. Investors should conduct their own research and consult with financial advisors before making investment decisions. Past performance does not guarantee future results