Indian equities remain in a competitive race for foreign institutional investor capital, with global investors continuing to compare India's growth prospects, valuations and earnings outlook with other markets, according to Jignesh Desai.

Centrum Broking says lower crude oil prices, rupee stability and two consecutive quarters of earnings delivery could be critical for a sustained revival in foreign flows

Desai believes the current risk-reward equation for Indian equities is fair and does not warrant investors stepping away from the market. However, he recommends a selective approach, with greater emphasis on companies that have clear earnings visibility rather than relying solely on broad market momentum.

According to Desai, a sustained acceleration in foreign flows into Indian equities will require three important developments: crude oil prices remaining below levels that triggered the March market scare, greater stability in the rupee and two consecutive quarters of earnings delivery without downgrades.

Indian Equity Valuations Remain Reasonable

The Nifty 50 is currently trading around the 24,300 level, approximately 7% below its January 2026 peak and around 9% above the March low of 22,331 that followed the escalation in West Asia.

Desai believes the correction has improved the valuation comfort available to investors.

With the Nifty trading at below 20 times FY27 estimated earnings, he does not see an aggregate valuation problem in the Indian market.

However, he believes this does not mean investors should adopt a blanket bullish approach across all stocks.

Instead, the current environment could favour investors who rotate towards companies where earnings visibility is stronger and where valuations remain supported by fundamentals.

Stock Selection Becomes More Important

With the broader market no longer trading at extreme valuation levels, the next phase could increasingly become a stock-picker's market.

Companies delivering consistent revenue growth, margin improvement and positive earnings surprises could attract greater investor attention.

Conversely, businesses that require continuous earnings upgrades to justify their valuations could remain vulnerable if expectations are lowered.

The focus, therefore, is shifting from market-wide valuation calls towards earnings visibility, balance-sheet quality and sector-specific growth drivers.

Global Bond Yields More Important for Foreign Investors

Desai believes global bond yields matter more to India's equity risk-reward equation than domestic yields because they influence the cost of the marginal dollar entering Indian markets.

The domestic government bond market has remained relatively stable.

The 10-year government bond yield averaged around 6.76% in July, compared with approximately 7.03% in May.

However, a sustained increase in the 10-year yield towards 7.3–7.5% could materially change the risk-reward equation for equities.

At those levels, the earnings yield available from Indian equities may no longer provide sufficient compensation for the additional risk compared with fixed-income assets.

Private Banks Could Be Sensitive to Rising Yields

Private-sector banks could be particularly vulnerable if bond yields rise sharply.

Foreign ownership in private banks is estimated at around 41% of the sector, making the segment relatively sensitive to international portfolio allocation decisions.

However, the sector also presents an interesting fundamental opportunity.

Foreign ownership has fallen, valuations have moved towards the lower end of historical ranges, while credit costs remain contained and asset quality remains stable.

This creates a potential disconnect between market pricing and underlying fundamentals.

Private Capex Cycle Could Drive the Next Earnings Leg

One of the biggest potential upside catalysts for Indian equities is a sustained revival in the private capital expenditure cycle.

Industrial credit has started to improve across sectors, while new investments are increasingly directed towards value-added manufacturing.

If this trend continues for four to six quarters, the impact could extend well beyond financial companies.

A sustained private capex cycle could benefit capital goods, engineering, power, industrial automation, logistics, infrastructure and manufacturing-related businesses.

It could also create a broader earnings cycle across the economy.

Industrial Credit Growth Shows Early Signs of Improvement

The recovery in industrial credit is particularly important because it can provide an indication that businesses are becoming more willing to invest.

For several years, corporate investment was constrained by excess capacity, balance-sheet repair and subdued demand.

If companies now begin expanding capacity in response to stronger demand, the resulting investment cycle could generate additional economic activity.

Banks could benefit through higher corporate lending, while capital goods and industrial companies could see stronger order inflows.

Monsoon Emerges as an Underestimated Market Risk

While private investment remains a potential upside catalyst, Desai believes the monsoon represents an important downside risk that investors may be underestimating.

Cumulative rainfall was around 12% below normal in early August, while investors appeared increasingly comfortable with food inflation following headline CPI inflation of 4.45% in July.

A weak kharif season followed by weaker rabi output could put pressure on agricultural incomes.

Combined with soft rural incomes, this could disrupt the consumption recovery currently embedded in FY27 earnings expectations.

Rural Consumption Could Become a Key Market Variable

A sustained improvement in rural consumption would be important for India's broader economic recovery.

Higher farm incomes can support spending on consumer goods, automobiles, two-wheelers, agricultural equipment and other discretionary products.

However, uneven rainfall or weak agricultural output could limit this recovery.

If rural consumption disappoints, companies dependent on rural demand could face pressure on volume growth and earnings expectations.

This makes the monsoon an important variable for both the economy and equity-market earnings forecasts.

Mid- and Small-Caps Continue to Show Earnings Strength

Desai remains positive on mid- and small-cap companies, but emphasises that investors should distinguish between earnings strength and valuation.

According to him, earnings growth in the segment has been genuinely better, with topline growth in the teenage percentage range, compared with low-single-digit growth for large-cap companies.

This suggests that the resilience of mid- and small-cap stocks is not purely the result of liquidity and investor flows.

However, selectivity remains important because valuation dispersion within the segment is high.

FII Selling Intensity Appears to Be Changing

Foreign investor activity has shown signs of improvement after a prolonged period of heavy selling.

Foreign investors sold approximately $3.45 billion of Indian cash equities in May and $5.16 billion in June.

The trend changed in July, when foreign investors recorded approximately $2.12 billion of net buying.

August has also remained positive so far.

Desai cautions that this does not necessarily mean the foreign selling cycle has permanently ended. However, the change in intensity itself is significant.

Market trends can often show a change in the intensity of flows before the direction of flows changes decisively.

Three Conditions Could Trigger Stronger FII Flows

According to Desai, foreign flows could accelerate if three key conditions are met.

Crude Oil Prices Need to Remain Under Control

Crude oil needs to remain below the levels that triggered the market scare earlier in the year.

India is a major importer of crude, making oil prices particularly important for inflation, the current account, corporate margins and the rupee.

A sustained decline or stability in crude could therefore improve investor confidence.

Rupee Stability Is Essential

The rupee has depreciated by approximately 20%, creating an additional consideration for foreign investors.

Even when Indian equities deliver positive local-currency returns, significant currency depreciation can reduce dollar-denominated returns.

A stable rupee would therefore make Indian equities more attractive to global investors.

Earnings Need to Deliver

The third requirement is sustained earnings delivery.

Desai believes two consecutive quarters of earnings performance without widespread downgrades could significantly improve foreign investor confidence.

The first quarter of FY27 has already provided an encouraging signal, but the market needs evidence that the improvement is sustainable.

India Still Competing for Global Capital

Despite improving sentiment, India continues to compete with other markets for a limited pool of international capital.

Over the last 12 months, the Nifty has declined around 2%, while several other major markets have delivered significantly stronger returns.

Korea has gained around 103%, Japan approximately 57%, and Singapore around 35% over the same period.

This relative performance matters because global investors allocate capital across countries based not only on individual market fundamentals but also on expected returns relative to alternatives.

India's Underperformance Could Eventually Become an Advantage

The fact that India has underperformed several markets could eventually create an opportunity.

Global investors may begin returning to Indian equities if valuations become more attractive and earnings expectations improve.

However, the current improvement in sentiment should not automatically be interpreted as a fresh structural re-rating of India.

According to Desai, constructive conversations around India are taking place partly because the market has already underperformed, rather than because investors have suddenly assigned a higher premium to the India story.

Private Banks Show a Fundamental Disconnect

The private banking sector provides one of the clearest examples of fundamentals potentially running ahead of stock prices.

Foreign ownership has fallen, valuations have moved towards the lower end of their historical range, while credit costs remain contained.

Asset quality also remains stable.

If credit growth continues to broaden and margins begin to recover, the sector could attract renewed investor attention.

This could become particularly relevant if foreign investors start looking for areas where valuations remain reasonable relative to earnings potential.

Three Conditions Needed for Broader Earnings Recovery

Desai identifies three factors that could support a stronger earnings cycle.

The first is a recovery in nominal GDP growth, which is important for topline growth across the economy.

The second is benign input costs, particularly crude oil and other commodities.

The third is broader credit growth, especially a shift beyond retail lending towards industrial and corporate credit.

The early improvement in industrial credit suggests that the third condition is beginning to develop.

Q1FY27 Earnings Offer Encouraging Signal

The first quarter of FY27 was an important earnings season for the Indian market.

Aggregate Nifty 50 profits were ahead of expectations, marking a positive surprise after a prolonged period of earnings estimate reductions.

However, Desai cautions that one quarter does not constitute a complete earnings cycle.

The more important development is the change in the direction of earnings revisions.

After roughly two years of cuts, a period of stable or rising earnings estimates could provide an important foundation for the next phase of the equity market.

Financials Remain a Preferred Sector

Desai favours financials as one of the key sectors for the current market environment.

Credit costs remain contained, while margins appear to be approaching a bottom.

If industrial credit growth accelerates, financial companies could benefit from a broader lending cycle.

The combination of stable asset quality, improving credit demand and potential margin recovery could support earnings growth.

Capital Goods and Power Could Benefit From Capex

Capital goods and power are also among the preferred sectors.

Both stand to benefit directly from an investment-led growth cycle.

A revival in private capex would create demand for machinery, engineering services, electrical equipment and industrial infrastructure.

Meanwhile, India's growing electricity demand and renewable-energy expansion are creating substantial requirements for generation, transmission and grid infrastructure.

IT Could Benefit From AI-Related Revenue Growth

Desai also remains positive on IT stocks, citing the potential revenue opportunity created by artificial intelligence-related services.

The AI transition is generating demand for cloud computing, data services, technology consulting and digital transformation.

Indian IT companies with strong capabilities in these areas could potentially benefit from increased technology spending.

The key question will be whether AI-related demand translates into incremental revenue growth quickly enough to offset pressure on traditional technology budgets.

Global Investors Are Concentrated in Large-Cap Themes

Global investors have significant exposure to India's structural themes, including manufacturing, defence, infrastructure, power and financialisation.

However, Desai believes many investors own these themes through only the largest two or three companies in each sector.

This creates a concentration at the top of the market.

The broader economic opportunity could extend much further down the supply chain, creating opportunities among companies that have received less attention from international investors.

Defence Remains a Structural Opportunity

The defence sector continues to offer a strong long-term investment theme.

India's defence budget has increased from approximately ₹2.53 trillion in FY2013-14 to ₹7.85 trillion in FY2026-27.

The opening of the Advanced Medium Combat Aircraft (AMCA) programme to private industry is also expected to increase opportunities for domestic private-sector participation.

Desai expects the defence sector to remain attractive over the next two to three years.

Opportunity Extends Beyond Defence Majors

While large defence companies have attracted substantial investor attention, the broader opportunity extends across the supply chain.

Components, electronics, specialised materials, engineering systems and manufacturing suppliers could benefit from increasing domestic defence procurement.

This creates an opportunity for investors to look beyond the largest listed defence names.

Transmission and Grid Equipment Could Be Underappreciated

One of the most underappreciated opportunities, according to Desai, lies in transmission, grid infrastructure and power equipment rather than only in electricity generation.

India's renewable-energy expansion requires massive investment in transmission infrastructure.

As more solar and wind capacity is connected to the grid, the need for substations, transformers, cables and grid-management equipment is expected to rise.

This could create a long-duration investment opportunity across the power-equipment ecosystem.

Electronics Components Could Outperform Assemblers

India's electronics manufacturing story has attracted significant attention, particularly around large assembly operations.

However, Desai believes the greater underappreciated opportunity may exist one layer deeper in the value chain.

Companies manufacturing electronic components, specialised materials and other inputs could capture a growing share of domestic value addition as India's manufacturing ecosystem matures.

This could become an important structural theme over the next several years.

Financialisation Offers a Recurring Flow Opportunity

Financialisation is another long-term theme that Desai remains positive on.

Systematic investment flows have exceeded $3 billion a month in seven of the last eight months, according to the assessment.

Unlike foreign portfolio flows, these domestic systematic flows can behave more like recurring capital rather than a highly cyclical source of liquidity.

This creates long-term opportunities in insurance, asset management and other financial-services businesses.

Desai sees the financialisation opportunity over a four- to five-year horizon.

Semiconductor and Data Centre Themes Have Long Runways

The semiconductor and data-centre ecosystems are also attractive from a long-term perspective.

Desai views these opportunities through an approximately 10-year horizon.

Artificial intelligence is increasing demand for computing power, storage, data centres and semiconductor infrastructure.

As India develops its domestic electronics and digital infrastructure ecosystem, companies operating across these supply chains could benefit from structural growth.

Passive Investing Raises the Bar for Research

The rise of passive investing and quantitative strategies is changing the role of traditional sell-side research.

However, Desai believes research remains highly valuable in areas where information is inefficient, particularly in mid- and small-cap companies.

These businesses often have thinner disclosures and lower analyst coverage.

As a result, differentiated primary research can provide institutional investors with an information advantage.

Primary Research Becomes Increasingly Important

The value of research is increasingly shifting towards work that cannot easily be replicated by screens or automated financial models.

This includes:

Company visits
Channel checks
Supply-chain analysis
Forensic accounting
Management interaction
Industry-level primary research
Competitive analysis

Such research can help identify changes in business conditions before they become visible in reported financial results.

Earnings Visibility Could Separate Winners From the Rest

As market-wide valuations become less extreme, earnings visibility could increasingly determine stock performance.

Companies that consistently deliver revenue growth, margin expansion and positive earnings surprises could attract institutional capital.

Conversely, companies dependent on aggressive future assumptions may face valuation pressure if earnings fail to catch up.

This makes the next few quarters particularly important for identifying the market's future leadership.

Market Outlook

The Indian equity market currently offers a fair risk-reward equation, but the next major leg of the market could depend on whether earnings recovery becomes sustainable and whether India can regain competitiveness for global capital.

For FIIs, three variables remain critical: crude oil prices, rupee stability and earnings delivery. If crude remains contained, the rupee stabilises after its significant depreciation and companies deliver two consecutive quarters without earnings downgrades, foreign flows could accelerate.

Domestically, a sustained private capex cycle could become the biggest upside catalyst, benefiting financials, capital goods, power, industrials and manufacturing. The first-quarter FY27 earnings season has provided an early positive signal, but the market needs confirmation over the next few quarters.

At the same time, investors will need to monitor monsoon conditions, rural consumption, global bond yields and relative performance against competing markets. These factors could determine whether the current improvement in sentiment develops into a sustained foreign-investor allocation shift.

Over the longer term, opportunities could extend beyond the crowded large-cap themes. Defence, transmission and grid equipment, electronics components, financialisation, semiconductors, data centres and AI-related technology services offer structural growth potential.

The key for investors will be identifying businesses where earnings growth, balance-sheet strength and long-term industry trends are still ahead of market expectations.