UBS has identified several stocks, including Britannia, Hindustan Unilever (HUL), Mahindra & Mahindra (M&M), Eicher Motors, Cholamandalam Financial Holdings, and Shriram Finance, as preferred investments in the theme of Indian rural market recovery.
According to Tanvi Gupta Jain, Chief Economist at UBS, rural households are entering a period in the fiscal year 2026–2027 (FY27) following two relatively strong harvest seasons. This means their balances and savings are in better shape than in recent years.
Furthermore, UBS believes that various government support measures may continue to sustain rural incomes. Jain noted that large cash transfer schemes implemented by several states (around $20 billion), stable social security spending, and consistent government investment in rural infrastructure are likely to cushion demand. An additional source of support is the VB-GRAM-G rural employment scheme, which came into effect on July 1st and replaced MGNREGA, potentially providing extra support to rural income, although it has only been operational for a few weeks.
However, the stock performance of these companies on the exchanges in FY27 has been uneven. ACE Equity data shows that Britannia and HUL lagged behind the Nifty 50 index, showing growth of only up to 2 percent, while the benchmark grew by almost 10 percent. Meanwhile, Shriram Finance (growth of 28%), Eicher Motors (growth of 22%), Cholamandalam Financial Holdings (growth of 19%), and M&M (growth of 19%) outperformed the market.
Key factors
UBS believes that demand in rural India is driven by four main factors: farm income, wages, government transfers, and access to credit. The company noted that the current recovery in rural demand is broad-based and supported by commentary from sectors related to fast-moving consumer goods, discretionary consumption, and agriculture.
Jain reported that companies across various sectors have raised their volume growth forecasts for the fiscal year 2026–2027, citing sustained demand trends in rural markets. She added that improved farmer cash flows (thanks to two previous good monsoon seasons), government subsidies, GST-related benefits, and strong credit growth are likely to increase purchasing power and support consumption growth among rural households, despite concerns related to El Niño.
Word of caution
Despite the recent improvement in rural activity, UBS is less confident that the current growth rate can be maintained throughout FY27. Nevertheless, UBS expects rural demand to remain more resilient than during past periods of monsoon-related stress, even if growth rates slow compared to current levels.
Jain warned that weather-related risks remain high, as uneven monsoon activity could negatively affect agricultural production and farmers' incomes in the coming quarters. Additionally, while rising food prices have supported producer income, they are also likely to reduce the real purchasing power of rural households, though she does not anticipate a sharp slowdown in rural demand.
