Earnings are not the scarce resource. The price paid for them is.

The June-quarter earnings season has closed, and the aggregate numbers are strong. Profit growth for the broader listed market, excluding energy, crossed 20% year-on-year for the first time in eight quarters. Energy alone dragged the headline lower, with profits there down 63% year-on-year — a decline sharp enough to mask what was, elsewhere, a genuinely broad-based recovery rather than a narrow, sector-driven beat.

The more interesting story sits further down the market-cap curve, not at the aggregate level. Mid-sized companies delivered the strongest underlying growth by a distance — c.34% year-on-year, ex-energy, spread across most sectors rather than concentrated in one or two. Breadth, in other words, was a mid-cap story this quarter more than a large-cap one.

Smaller companies grew faster still on a headline basis, and it is tempting to read that as the stronger result. But consensus has now built in FY26-28 profit growth of c.35% a year for that segment, against c.20% for mid-caps and c.11% for large-caps. The bar being set is rising faster than the segment that just cleared it.

That gap between expectation and delivery is the more useful number to sit with. Over the last four quarters, only c.39% of small-cap stocks actually compounded profits above 20% a year, even as c.62% are now expected to repeat the feat. That is a wide gap between what has historically happened and what the market now assumes will happen again.

Mid-caps look far more balanced by the same measure — roughly as many stocks are expected to clear that bar as have historically done so, which is a meaningfully lower bar to clear than the one small-caps face. Large-caps, with the least demanding expectations of the three, arguably carry the most room for a positive surprise precisely because so little is being asked of them.

This is not an argument against small and mid-caps as a category, and it should not be read as one. The delivery this quarter has been real, and the upgrade cycle across the broader market has continued for several quarters running now.

It is, instead, an argument for discipline about where, on the market-cap curve, the price already assumes the good outcome has happened. The portfolio's tilt toward large and mid-caps, with the small-cap allocation kept selective rather than broad-based, reflects exactly this distinction.

Earlier in the year we flagged the RBI's decision to subsidise long-tenor NRI dollar deposits as the fastest available lever to shore up the balance of payments, at a time when the external account was the more pressing concern. That call has played out broadly as expected, and it is worth stating plainly when a policy call works rather than only when one does not.

Cumulative foreign-currency inflows through the scheme, alongside related external borrowing, have comfortably exceeded the original base case. The current account deficit for the June quarter came in at a modest 0.5% of GDP, and the full-year deficit is now tracking closer to c.1.2% of GDP, with the balance of payments surplus revised up to c.$80bn from what had looked, at the start of the year, like a considerably tighter picture. The rupee has, as a result, found something closer to a floor than it had for much of the past year. That is the intended and welcome outcome of a policy designed specifically to buy time on the external account while the underlying trade and services position adjusted.

What is less intuitive is what has happened to domestic liquidity in the meantime, and this is the part of the story that has drawn less attention than it deserves. System liquidity surplus has swelled past Rs5 trillion, yet financial conditions — bond yields, corporate spreads, the cost and availability of capital more broadly — remain tight rather than easy, which is not the combination a large liquidity surplus would normally produce. The RBI has begun actively absorbing this surplus through reverse repo operations and open-market sales, rather than letting it sit in the system, and durable liquidity is expected to keep rising into September, giving the central bank still more room to keep absorbing it.

The market had spent much of the year debating how much room the RBI had left to cut rates further. That debate has now flipped entirely. The more live conversation is whether a hike cycle, on the order of c.50 basis points, opens as early as December — a question that would have sounded out of place as recently as a few months ago.

A policy designed to solve last year's problem — the external account — may be creating this year's: a liquidity surplus that coexists uneasily with financial conditions that are, if anything, getting tighter rather than looser. For a portfolio positioned around domestic earnings resilience rather than around a lower cost of capital, that distinction is one worth tracking closely into year-end.

Banking earnings drew an odd market reaction this quarter, and the reaction is worth unpacking rather than taking at face value. Net interest margins compressed across most large lenders — the contraction was visible almost everywhere, not confined to one or two names — and the stocks sold off sharply on the print. Sector profits nonetheless grew 25% year-on-year on an aggregate basis.

Return on assets and risk-weighted returns, the more complete measures of profitability, actually improved at the same banks over the same period. The market appears, in other words, to have priced the headline rather than the substance sitting underneath it.

Part of the margin pressure is a direct, temporary consequence of the currency-support inflows discussed above, rather than a sign of deteriorating core profitability. Banks receiving large volumes of new foreign-currency deposits see an immediate drag on blended margins before that liability is deployed into higher-yielding assets. The same flows are expected to be modestly accretive to both net interest income and profit after tax once fully deployed — a detail the margin-only read of the quarter has largely missed.

The more durable driver underneath the margin noise is credit growth, which accelerated to c.19% year-on-year system-wide, its fastest pace in several quarters, helped by corporate borrowing shifting back toward banks from the bond market. Deposit growth, at c.15% year-on-year, continues to lag loan growth, a gap the currency-related inflows are only partly closing for now.

Asset quality remains benign for now, though a modest rise in credit costs is a reasonable base case to build into FY27-28 rather than a risk to be dismissed outright.

Private banks continue to compound profits meaningfully faster than public-sector peers — consensus now builds in an EPS CAGR of c.14% for private banks over FY26-28, against c.6% for PSU banks — and that gap looks set to widen rather than close. A quarter that read, on the surface, as disappointing for the sector was, in most of the ways that actually matter — loan growth, return on assets, the earnings trajectory — a continuation of the story rather than a break from it. That is broadly consistent with the portfolio's largest sector weight.

Foreign investors sold close to $14bn of Indian equities in the secondary market during the June quarter, continuing a pattern that has held for much of the year rather than marking a new turn. Domestic institutions absorbed more than that — roughly $23bn of net buying over the same three months — and did so comfortably.

The result is a further, incremental shift in who actually owns the market, continuing a trend that has been building for some time rather than a single quarter's event. Foreign ownership of the broader index has slipped to c.17%, its lowest level in some time, while domestic institutional ownership has risen to c.20% and now sits comfortably ahead of it.

What stands out within that shift is the sector-level detail, which tells a sharper story than the aggregate numbers alone. Foreign investors were net sellers of banks specifically, even as the sector's underlying earnings, discussed above, held up reasonably well on the measures that matter most. Domestic institutions, by contrast, were net buyers of the same sector over the same period.

Financials, in other words, saw fundamentals and flows point in opposite directions this quarter, which does not happen often enough to ignore when it does. That is a reasonably clean illustration of a point worth restating on its own terms: flows can dominate fundamentals for meaningful stretches, and the identity of the marginal buyer or seller can matter as much as the underlying numbers themselves.

A portfolio built around earnings visibility will occasionally look, for a quarter or two, out of step with where the foreign flow happens to be going. That is a cost worth bearing when the earnings case underneath is intact — which, on the evidence above, it currently is.