The Indian economy is experiencing an unprecedented Goldilocks scenario, with all macroeconomic indicators trending favorably. While the government has done a commendable job of keeping the fiscal deficit under control and within the agreed parameters outlined in the yearly budgets, the inflation scenario has also been benign. India has consistently been the best-performing country among the world’s large economies for many years now, and the trend is likely to continue in the near future.
Government capital expenditure has been significant and consistent over the last few years, helping accelerate GDP growth. The only area of concern is private capital expenditure, which, unfortunately, hasn’t picked up as expected. The forecast indicates that this may also improve soon, driven by rising demand for urban and rural consumption and the signing of multiple landmark trade deals with leading world economies.
Amidst all this cheer on the macroeconomic front, the Indian capital market has unfortunately been languishing in a range with a downward bias and sideways movement. Foreign investors have been relentlessly selling in the Indian capital market and have preferred other emerging markets over India over the last 12-18 months; with the exception of February 26, they have been net sellers throughout this period.
Financialisation of savings in India has been rapid over the last few years, leading to considerable domestic support for the capital market, and it is only domestic inflows that have prevented the Indian capital market from collapsing over the last year. This prima facie dichotomy, on the face of it, is counterintuitive, but a deeper understanding of the scenario can better explain the situation.
For the next fiscal i.e.2026-27, the earnings of Indian companies are expected to grow at the rate of 10-12 per cent. Indian currency, on average, depreciates around three per cent annually (barring 20-25 per cent, where it depreciated around six per cent), and the Capital gains and other tax incidence is around 1-2 per cent.
Thus, from the foreign investor’s point of view, very broadly the annualised return expectation works out to 12-3-2, i.e., around seven per cent on average. This isn’t attractive enough for them to take on exposure to an emerging market like India, which is probably why they have been staying away. The FIIs may buy selectively in the Indian market, but a top-down “buy India” will not happen until and unless there is a significant improvement in corporate earnings and the earnings growth expectation reaches somewhere between 15-20%.
So, the next fiscal will probably see an initial lukewarm response and participation from FIIs. This may change and improve as and when corporate earnings start to improve substantially.
It’s undoubtedly true that Indian stocks have corrected significantly from their peak in mid-2024. However, this “time correction” hasn’t yet made them attractive, valuation-wise, even when compared with our Asian peers. This is the reason why FIIs will be extremely selective in buying stocks. BFSI has shown secular growth in earnings, and the valuation gap between public-sector enterprises and private companies is slowly narrowing. Even now, public sector banks remain comparatively attractive from a valuation point of view compared with their private sector peers.
Another sector that does offer excellent opportunities at present is chemicals, agro-chemicals, and specialty chemicals. This sector was down in the dumps for almost two years, with pathetic results and gross underperformance. However, green shoots are visible now. The fundamental logic for this sector to rise, i.e., “China plus one,” remains strong. Also, the signing of trade deals with the EU and the USA will help this sector in a big way, as between 25 and 50 per cent of its production is exported to these markets. The valuation remains attractive from a medium- to long-term perspective, with significant scope for improvement.
Overall, we believe that Indian markets still offer opportunities for effective deployment and the generation of superior returns, provided the sector and stocks are carefully selected.
