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Taksali points out that FPIs invested around ₹20,000 crore in Indian equities in July, followed by another ₹12,921 crore in the first week of August. With the Nifty’s trailing P/E now around 20.8x—below its seven-year median and 10-year average—India’s valuation premium has also become more reasonable.
He believes India’s diversified, domestically driven growth profile could become increasingly attractive as the AI trade matures. At the same time, better-than-expected Q1 earnings, resilient margins and the potential revival in private capex could provide additional catalysts for Indian equities through FY27-FY29. Edited Excerpts –
Q) Market is showing signs of stablisation after posting over 1% back-to-back returns in the June & July. How are you reading markets?
A) The set up for Indian equities has improved meaningfully compared with what we saw through 2025 and the first part of 2026. Several of the key concerns that had weighed on global markets—trade tariffs, geopolitical tensions and the reverse AI trade—have either played out, or the concerns around them have receded. This improvement in sentiment is beginning to reflect in foreign flows. After several months of sustained selling, we have seen a meaningful reversal, with FIIs investing around ₹20,000 crore in Indian equities.
We have seen a prolonged time correction in the Indian equity markets over the last two years, since September 2024. During this period, large-cap valuations have also moderated, providing some comfort from valuation perspective. We believe the markets should show greater strength from here on.
Q) Most of the June quarter results are out. What do you make of Q1 numbers and management commentary?A) Barring OMCs, earnings season has been better than expectations. We have seen a broad-based beat across sales, EBITDA and PAT. The growth momentum has continued, with sales growth at 22% y-o-y and profit growth at 11% y-o-y. For most of the companies, margins have held up better than anticipated despite pressure from higher raw material and logistics costs.
While supply-chain disruptions and elevated input and freight costs did create headwinds, companies were able to offset a meaningful part of this through price increases, cost rationalisation, and operating efficiencies.
Management commentary suggests that business environment is expected to improve in H2 as cost pressure abates and festive season kicks in.
Q) Private sector capex announcements have remained subdued over the past 12–18 months. If this investment cycle continues to be delayed, could it push back the expected earnings growth for India Inc.? What are your views on the outlook for private capex and its impact on corporate earnings?
A) Private Capex has been slower than expected because companies have remained cautious amid geopolitical uncertainty and the wars, which have affected visibility on global demand, supply chains and input costs. We should see a gradual revival as visibility improves.
As geopolitical uncertainty eases and demand visibility improves, we expect more of the announced projects to move from the announcement stage to actual orders and construction.
Healthy corporate balance sheets, high-capacity utilisation, government infrastructure spending, PLI/manufacturing incentives and rising investment announcements provide the ingredients for a revival.
For equities, therefore, private capex is less a near-term earnings risk and more a critical upside catalyst—a broad-based capex cycle could materially improve earnings visibility over FY27–FY29.
Q) FIIs inflows have remained largely positive so far in August – can we say that the smart money is slowly moving back to India?
A) FPIs have turned buyers in July, investing around ₹20,000 crore in Indian equities. This momentum has continued into August, with another ₹12,921 crore coming in during the first week. There are three or four factors behind this.
First, valuations have corrected. The Nifty’s trailing P/E has also come down to 20.8x, about 9 per cent below its seven-year median and roughly 12 to 13 per cent below its ten-year average.
Second, the AI-driven reverse trade is beginning to abate. A significant amount of the earlier FII selling was essentially a rotation towards Korea and Taiwan, where investors had much greater exposure to the AI and semiconductor cycle.
India was relatively under-owned because it did not have the same direct AI leverage. As that trade matures, global investors are beginning to look for other markets.
Third, the macro environment is becoming more supportive. The rupee has stabilised, helped by strong foreign currency inflows. The FCNR-B deposit scheme has mobilised around US$41 billion so far, with inflows potentially reaching US$70–90 billion by the September 30 closure.
The government has also made interest income on Indian government bonds tax-free for foreign investors, contributing to around US$8.7 billion of net inflows into G-Secs. These measures have strengthened confidence in India’s ability to manage currency volatility and global capital-flow pressures.
More broadly, the external sector remains resilient, supported by services exports, remittances, merchandise exports and improving FDI flows. Overall, the stronger capital inflows and resilient external balances provide greater stability to the rupee and improve the macro backdrop for Indian equities.
And finally, India’s earnings outlook is improving. The Q1 results season has been better than expected, margins have been more resilient and management commentary suggests that demand could improve in the second half, supported by festive consumption, easing cost pressures and exports.
Q) After the recent correction seen in 1H2026. Has the premium corrected? If not, can India continue to command premium valuations compared to other emerging markets?
A) India’s valuation premium over emerging markets has compressed meaningfully, although India still trades at a premium. The important point is that the premium has become more reasonable after a period of relative underperformance.
Throughout 2024, India was trading at significant P/E premium to the MSCI EM index. Since then, Taiwan and South Korea have significantly re-rated on the back of the global AI and semiconductor cycle, while India has not had the same direct exposure to that theme.
At the same time, the global opportunity set has changed, with markets such as Brazil and other commodity- or value-oriented EMs becoming relatively more attractive at different points in the cycle. This has contributed to a broad re-rating and narrowing of India’s relative valuation advantage.
India’s weight in the MSCI EM index has also moderated from a peak of around 19.4% in late 2024 to its long-term average of around 11.8%. So, from a relative positioning perspective, some of the exceptional India premium has already been unwound.
Having said that, we don’t think India needs to trade at parity with other emerging markets. India’s premium is justified to an extent by the quality and diversity of its growth.
Unlike markets where the earnings cycle can be heavily driven by a single theme such as semiconductors or commodities, India offers relatively diversified exposure across financials, consumption, manufacturing, infrastructure and services.
More importantly, a large part of India’s growth is domestically driven, which makes the economy relatively less dependent on global trade cycles.
This becomes particularly relevant if the current geopolitical uncertainty starts to ease and oil prices remain contained. Lower crude prices are structurally positive for India because they improve the current account, reduce imported inflation and ease pressure on the currency.
It reinforces one of India’s key advantages—a large domestic economy with multiple internal growth drivers and relatively manageable external vulnerabilities.
The other factor is the AI trade. The extraordinary re-rating of semiconductor-linked markets has created a significant valuation and earnings gap versus India.
As the AI-led trade matures and the valuation differential between those markets and the rest of emerging markets becomes harder to justify, capital could increasingly look for diversified growth opportunities, where India remains well positioned.
So, we would not argue that India’s valuation premium disappears completely. A moderate premium is sustainable as long as India continues to deliver superior and more consistent earnings growth.
Q) Are there pockets of froth in the market that investors should avoid? Which sectors still offer reasonable valuations despite the market rally?
A) I think the key distinction at this point is between stocks where valuations are being supported by earnings and cash flows, and those where the valuation is being supported primarily by a narrative.
The recent correction in the headline indices has helped clean up valuations to some extent, but pockets of froth remain, particularly in stocks where expectations of very strong growth are already fully reflected in prices.
In some cases, investors are paying a significant premium for growth that may take several years to materialise. That leaves limited room for disappointment.
The valuations of SMIDs are trading above their long-term averages when compared to their own historical P/Es as well as when compared to PE of their large cap peers. But at the same time, SMID earnings have also grown at faster rate than the large caps.
Valuations are to be seen in conjunction with fundamentals. A company can be expensive and still deliver good returns if earnings consistently surprise on the upside, that’s where we see multiple re-ratings. So, we would avoid making a blanket call on any market-cap segment or sector.
The market will be increasingly driven by fundamentals. The better opportunities are likely to be businesses with strong cash-flow generation, sustainable competitive advantages, healthy balance sheets and earnings visibility, where valuations leave some margin of safety.
Q) How are you reading into new IPOs which have started to hit D-Street after few months of pause?
A) The IPO market has clearly picked up after a period of relative lull. As the macro headwinds abated, market stability has returned and so has liquidity.
There is a healthy pipeline of upcoming IPOs: 178 SEBI-approved companies looking to raise 2.96 lakh crore rupees, and another 71, awaiting approval for 1.84 lakh crore. Annual IPO issuance should reach roughly 2.5 lakh crore rupees.
The new issues are not just limited to a particular sector. We are seeing a much more diverse set of businesses coming to the market, spanning financial services, healthcare, consumer, manufacturing, technology and industrials.
The breadth of the current IPO pipeline is also a positive sign for the overall equity market. It indicates that companies are once again comfortable accessing public markets and that investor appetite for new businesses is returning.
We are seeing both established businesses looking to unlock value as well as newer-age and high-growth companies tapping the market. The diversity of sectors and businesses entering the market reflects the depth of India’s entrepreneurial and corporate ecosystem, and we expect the IPO pipeline to remain robust as market confidence improves.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
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