SEBI's new closing auction session will stabilise with time; Indian market valuations 'fair, not cheap, not expensive': Nilesh Shah
New Delhi, August 13
Kotak Mutual Fund Managing Director Nilesh Shah has said that the newly implemented closing auction session under SEBI's revised trade mechanism could take some time to stabilize, but is likely to become an integral part of the Indian market as participants become more familiar with it.
Speaking exclusively with ANI, Shah said the system may initially face operational difficulties but SEBI is open to feedback and improvements.
"When you roll out a new system, will there be some hiccups? The answer is yes. Will SEBI take the market feedback and make any improvement if required? Answer is yes," Shah said.
He said the closing auction mechanism, which provides a single execution price and is particularly beneficial for passive funds, is not unique to India and is already used in several developed markets.
"The closing auction is not an innovation in India. It exists in many parts of the world. It was launched to provide passive funds a single price of execution," Shah said.
He said the initial difficulties should ease as market participants become more comfortable with the system.
"If people become more comfortable with the system, will the inefficiencies go away? The answer is yes," he said, adding that the mechanism had faced "some teething troubles" and this is being resolved through active engagement between market participants and SEBI.
Shah said the new system could help passive funds by reducing tracking errors, while active funds could potentially use price movements around the closing auction to their advantage.
"For a passive fund, this is very positive that tracking error will come down. For active funds, obviously they'll take advantage of the plus or minus 3 per cent price movement and try to participate," he said.
However, he flagged challenges for arbitrage funds, particularly because they may not know the final execution price of their cash-market transactions during the closing auction.
On Indian equity market valuations, Shah said valuations are currently reasonable and do not appear either excessively expensive or cheap. He said corporate earnings have remained supportive and that future market returns are likely to be driven more by earnings growth than valuation re-rating.
"Valuations are fair, not cheap, not expensive," Shah said.
He said first-quarter corporate earnings had been broadly in line with or ahead of expectations, with relatively few disappointments. Excluding oil marketing companies, he said, the broader economy delivered fairly good results.
"We believe that despite the strong set of numbers, market return will still be linked with earnings growth," Shah said.
According to Shah, earnings growth is expected to remain the larger contributor to portfolio returns, with growth appearing to be in the low double digits.
On the broader market outlook, Shah said three factors -- sentiments, flows and fundamentals -- would determine market movement.
"On a fundamental basis, the economy has done well in the face of the Middle East crisis and monsoon deficiency. Obviously, we need to be cautious," he said.
He added that corporate earnings for March 2026 and June 2026 had been good, while valuations were around historical levels.
Shah said foreign portfolio flows had also started turning positive, with FPI buying seen in July and continuing into August.
For long-term investors, he remained positive on the Indian market's ability to generate returns through sustained earnings growth.
"Overall, for a long-term investor, can the Indian market deliver a compounding story? The answer is undoubtedly yes," Shah said.
He also cautioned investors against reacting sharply to individual inflation readings, saying markets had already factored in several known risks such as higher oil prices and monsoon-related inflation.
"India is a long-term growth story. You invest with a longer horizon. It will compound earnings growth...equivalent return should come from our market over a period of time," Shah said.
— ANI
Reader Comments
The closing auction session is actually quite good for us retail investors. Earlier there used to be such volatility in the last 5 minutes with operators manipulating prices. Now single price execution makes it fair. But yes, initially it was confusing - even my broker didn't understand it properly. Time will fix it.
Good to hear Shah's balanced view. But I wish SEBI would also address the real issue - the need for more retail participation in the closing session. Right now it's mostly institutional players. The 3% limit sometimes creates artificial moves. Still, overall positive step for market integrity.
Interesting perspective from Shah. Having seen how closing auctions work in the US and UK markets, I think this is a step in the right direction for India. The teething issues will resolve. Also his point about passive funds is spot on - reduced tracking error is crucial for index investors.
As someone who invests through SIPs, this is reassuring. The market correction we saw in July was scary, but Shah's point about long-term compounding gives confidence. India's growth story is intact. Bas patience chahiye! 🙏
One concern though - arbitrage funds are important for many investors, especially in the short-term debt space. If they can't participate in closing auctions, their performance might suffer. SEBI needs to find a creative solution here. Otherwise, I agree with Shah's overall assessment.
We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.