ETMarkets Smart Talk | India could attract $1.5 trillion FII inflows over the next decade: Swati Khemani

Q) Thanks for taking the time out. After a stable May, the market turned volatile in June. 1H2025 has been robust with Nifty closing in the red in just 2 out of the last 5 months; however, we still underperformed EM peers in 2025. How do you see markets in the medium-to-long term?

A) Short-term market fluctuations are normal and not directly tied to global peers. Over the medium to long term, Indian markets have consistently outperformed, driven by strong fundamentals like rising GDP, demographic advantages, and reforms.

India’s 5 structural macros are rock solid – Current Account deficit is < 1%, fiscal deficit is well within control, banking asset quality is robust with NPA being less than 0.5%, lesser leverage – debt to GDP is at 78% which is one of the lowest in the world & well managed inflation. We don’t see any structural challenges within our economy.

We have been saying and continue to say that India is the best wealth creation story around the globe and a short-term approach/mindset will only be detrimental to investor outcome.

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Q) What is your take on the outcome of the MPC meeting in June. What is the trajectory you foresee for rates in 2025?
A) RBI has done a fantastic job over the last 6 months of cutting interest rates and infusing liquidity through OMOs. The RBI’s June MPC meeting also continued its growth-oriented approach, cutting the repo rate and CRR to boost liquidity and lower borrowing costs.These measures support economic growth amid global uncertainty. For 2025, we expect gradual rate cuts, potentially by another 50-75 bps, contingent on inflation and global conditions, fostering a pro-growth environment.Q) Which themes look attractive to you for the next 6-12 months amid trade war ears, strong dollar and possible scenario of falling interest rates?
A) We continue to be bullish on BFSI due to falling rates and rising credit demand, Manufacturing (pickup in private capex), pharma (CDMO) for global supply chain shifts, and specialty chemicals amid trade realignments. These sectors are resilient to trade war risks, offering strong growth over the next few years.

Q) The IMD has predicted a normal monsoon in 2025 – do you see this supporting consumption stocks/auto stocks?
A) A good monsoon in general is good for the economy but benefits the rural economy even better. This supports auto and consumption stocks, particularly in rural-focused segments, enhancing their growth potential over the next 6-12 months.

Q) How do you see flows – FIIs have recently turned positive on Indian markets, while DIIs have supported the rally. Do you see a reversal of flows into Indian markets?
A) FII inflows depend on global interest rate clarity. As Fed uncertainty eases, India’s underweight status among global investors will attract significant capital, potentially USD 1.5 tn over 5-10 years; given our current USD 5tn market cap, this will be a significant amount.

Domestic flow will also remain strong, with household equity exposure likely rising from 5% to 15% over the next decade, ensuring sustained market support.

Q) Is there any theme or sector where one should avoid fresh investments in the current environment?
A) In any environment one must stay away from themes/sectors with excessive euphoria – currently one must avoid overvalued renewables, defence, railways, select capital goods etc., where valuations outpace fundamentals. Focus on sectors with sustainable growth and reasonable valuations.

Q) Have you seen the recent trend of block deals taking place? Is that largely promoter selling? If yes, is that a worrying sign for stocks or is it business as usual?
A) This is again a step in direction towards segregation of ownership and management.

Block deals, often involving promoter or PE sales, reflect India’s maturing market, with ownership and management increasingly separating, similar to developed markets.

High promoter holdings (60-70%) are normalizing, and sales often fund family offices, redeploying capital into markets.

This trend, ongoing since 2020, is not inherently negative but requires monitoring for company-specific issues. Investors should assess the rationale behind sales without assuming broader market concerns.

Q) What is your call on the small & midcap space? Are they still trading at expensive valuations, and are large caps still a better play?
A) In a transforming economy, small and midcaps (SMIDs) often trade at premium valuations given their high growth. One must understand individual stocks to determine the investment.

Our SMID portfolio remains attractive, with expected earnings growth of 20-25% over the next 2-3 years. Large caps offer stability but lower growth, making SMIDs a better play for risk-tolerant investors in bull markets.

Q) Many investors who stayed on the sidelines in the beginning of 2025 and are now experiencing FOMO as markets have seen a significant rally, but it is still down by about 5% from highs. Should they adopt staggered buying, keep cash or do a lump sum investment?
A) Investors experiencing FOMO after the 2025 rally should opt for staggered buying over 3-4 months, given potential volatility from geopolitical tensions, US policy shifts, and global slowdown. This approach mitigates risks while capturing opportunities in a consolidating market.

Q) COVID cases are rising. Can this fuel hospital stocks, or should investors keep an eye on that theme? What are your views?
A) Rising COVID cases are unlikely to significantly impact markets, as healthcare systems are better prepared. Hospital stocks, already priced for steady demand, offer limited upside from this trend. Investors should focus on broader healthcare themes like diagnostics instead.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)