Follow the shopper: 6 reasons why consumption stocks could be the star act of FY26

Written by Admin | Jul 18, 2025 1:00:00 PM

Brace yourselves, bulls and bears—India's consumption theme is teeing up for a blockbuster FY26. A rare cocktail of fiscal fireworks, monetary mellowing, and rural romance is brewing a heady mix for investors hungry for the next big trend. And if the soothsayers of Dalal Street are to be believed, the stars are finally aligning for consumption stocks.

The Rs 1 lakh crore income tax relief announced in Budget 2025 took effect from April and is expected to create a multiplier effect on consumption over the next one to two years, potentially boosting GDP growth by 30–40 basis points, says Akshay Badjate, fund manager at Merisis PMS.

“Consumption may emerge as one of the biggest themes considering the recent changes in the economic environment, such as the lowering of interest rates and the income tax rate cuts. Combined with other fiscal measures like higher capital expenditure, it could stimulate robust household consumption and economic growth this year,” he said.

Here’s why India’s consumer-facing stocks may be about to steal the spotlight—and why FY26 could be a turning point for the theme.

1. Budget Bonanza: Tax Cuts That Pack a Punch

The government’s Rs 1 lakh crore tax break has fired the starting gun on urban consumption. This sizable fiscal giveaway is expected to land directly in the wallets of middle-class earners, triggering a demand resurgence across sectors like FMCG, apparel, travel, and dining. Gandhi said the tax cuts offer an opportunity for a consumption revival after the recent slowdown, especially as middle-class consumers have more money to spend.

2. Monetary Mojo: RBI’s Liquidity Lifeline

The RBI has already slashed repo rates by 50 basis points in the last two months, and Morgan Stanley expects another 50 bps of easing through the rest of the year. Additional liquidity injections via CRR cuts, OMOs, and FX swaps are also working to stimulate demand. Cheaper loans and higher spending power are a potent combo for both discretionary and non-discretionary categories.

3. Pay Commission Payday

The implementation of the 8th Pay Commission in Q4FY26 is likely to unlock a fresh wave of consumption. With salary hikes expected for nearly 10 million government employees and pensioners, the demand momentum could spill into FY27 as well, Badjate said.

4. Rural Revival: Rain Gods to the Rescue

Rural India, which already contributes around one-third of FMCG revenues, has outperformed urban markets for five straight quarters. Skymet’s forecast of a “normal” monsoon in 2025—with rainfall expected to be 3% above the long-term average—should keep that trend going strong.

Akshay Badjate of Merisis PMS believes rural strength will be a key driver of the broader consumption theme this year, particularly in food, home essentials, and agri-linked consumer products.

5. State-Led Stimulus: Populism Pays

States are joining the fiscal party with their own income transfer schemes. Maharashtra’s ₹360 billion Ladki Bahin Yojana, Odisha’s ₹100 billion Subhadra Yojana, and Delhi’s ₹51 billion Mahila Samridhi Yojana are just a few of the schemes funneling cash directly into households, especially among women and lower-income segments.

6. Inflation Relief: Sticker Shock Subsides

With India’s retail inflation easing to five-year-low of 3.34% on an annual basis in March, consumers may finally get a break from price-driven demand destruction. This is especially relevant for staples, where consumers had been downtrading or cutting consumption altogether due to price hikes.

Caveats in the Cart

Urban consumption remains a sore spot, with the first half of FY26 expected to see sluggish volume and value growth for FMCG companies. Food companies may continue to face margin pressure from volatile agri-input prices like sugar, palm oil, and wheat. Moreover, the recent correction in stock markets may create a negative wealth effect—especially for retail investors—potentially dampening discretionary demand, according to brokerages.

Which stocks to buy?

Axis Securities likes Varun Beverages, Hero MotoCorp, Trent, and Indian Hotels. Motilal Oswal is bullish on Page Industries, Devyani International, Metro Brands, V-Mart, Lemon Tree Hotels, LT Foods, and Cello World. They argue that the sector is attractively positioned after underperforming over the last six months, with valuations now more reasonable—consumer index PE at 39x, down from the September 2024 peak of 54x. Motilal sees strong earnings traction in FY26—13% YoY for consumer plays and a hefty 37% YoY for retail names. With many large domestic funds underweight on the sector, a positioning reversal could amplify the gains.

Merisis Multicap Strategy has built a 35% exposure to the consumption theme, spanning housing finance, FMCG, insurance, beverages, and agri-linked companies. The strategy delivered 8.58% returns in March, beating the BSE 500 TRI’s 7.74%.

Badjate says their macro lens and stock picking approach both point toward one clear opportunity: India’s consumption renaissance.BNP Paribas is betting on large-cap consumption names including Britannia, Dabur India, HUL, ITC, and Titan.

FY26 may just be the year when India’s great consumption story gets its long-overdue sequel. The policy levers are pulled, the income taps are open, and the monsoon is expected to oblige. For investors, it may be time to load up the cart.

(Disclaimer: The article first appeared in The Economic Times, featuring Akshay Badjate, Fund Manager at Merisis)

View full post