The setup has changed — IPO supply is the new ceiling

FPIs sold through March to June and turned buyers in July, with FPI ownership of Indian equities now at a decadal low. On a Nifty-versus-global-indices basis, this kind of divergence is historically where Indian markets bottom out and start outperforming.

Corporate earnings have beaten across the board in the June quarter: 13 Nifty 50 companies beat versus 6 misses, 17 of the Nifty Next 50 beat versus 3, and 18 mid-caps beat versus 12. MSCI India Index earnings grew around 10% in FY26; FY27 and FY28 are both tracking double digits. Valuations are reasonable — large-caps around historical average, large-mids at a 10% premium, small caps at about 20% premium.

Government and RBI have moved hard on flows: ECB norms liberalised, roughly $37–40 billion mobilised under FCNR-B, tax exemption for debt FPIs, and roughly $100 billion expected between June and December 2026 — enough to cover the RBI’s forward position and restore some respectability to the rupee. Services exports at ~$400 billion with a $200 billion-plus surplus; GCCs offset the IT services drag; defence exports have climbed to ₹38,000 crore. RBI has revised core inflation down to about 4.3% and GDP growth up.

Monsoon is the live one. June came in at a 40% deficit, July was almost normal and pulled the season deficiency down to 13%, but a super El Niño is expected through August and September — a positive Indian Ocean Dipole is the only offset in sight. Agriculture is under 15% of GDP but employs a far larger share of the workforce, and once the monsoon deficit goes beyond 10%, the hit to agriculture GDP and the rural economy is substantial.

Fiscally: personal income tax collection growth has slowed to a decadal low, government spending is the lowest in a decade, and central government capex has stagnated from FY26 and is likely to stay flat in FY27 — with the Middle East situation and a potential 8th Pay Commission pushing the deficit above budget.

The rupee is near an all-time low, with the RBI over $100 billion short in the forward market and Chinese imports keeping the goods trade deficit high.

A shift in retail credit worth watching: consumption loans not taken for a vehicle or a home are now roughly half of all outstanding retail credit, up from 34% in March 2017. That is a leverage build in the household balance sheet, not a growth story.

US hyperscalers have turned free cash flow negative. Their borrowing is going from under $20 billion in 2023–24 to about $200 billion in 2026. Credit spreads have widened across the group. And roughly $1.65 trillion of AI-related debt sits off balance sheet as committed leases.

Kotak’s read: if the AI trade reverses, money looks for an anti-AI destination — and India sits at the top of that list. That is the case for hoping this time brings a decoupling between US and Indian markets.

Mid-cap overweight, large-cap equal weight, small-cap marginally underweight. Earnings have delivered across all buckets, but the valuation math tilts positioning toward mid-caps.

Small caps are already about 20% above historical average valuations and are up 15% from pre-crisis levels while large caps are still 4% below February. The value has moved unevenly — Kotak wants exposure to the segment where earnings and valuation align, and steps back from the segment that has already run.

Financials remain the anchor. Credit growth healthy, retail participation returning, margins holding despite cost pressure, credit costs better than expected. Prefer private banks over PSUs, and mid-size private banks over large ones where growth and returns are now comparable. NBFCs are the exception — growth is strong but valuations have run ahead of the banks.

Consumption — favour discretionary over staples. The direct tax and GST relief should show up as macro headwinds ease, and premiumisation is the durable part of the story. Liquor, QSR and consumption platforms over cigarettes and traditional staples.

IT — neutral to marginally underweight. The tell is that a strong currency tailwind has produced only flat margins, which means pricing pressure is real. Clients are now asking for AI productivity gains to be passed through. Growth and margin clarity are both still missing.

Infrastructure and power over oil and gas. Private capex is picking up and should offset the constraint on government spending. Base power demand is tracking about 7% and peak demand 8–9% year-to-date in FY27, with battery energy storage becoming genuinely lucrative and increasingly mandated alongside renewable tenders. Oil and gas is a tactical trade, not a structural one.

Defence — selective, not blanket. The growth runway is real, especially exports and the aerospace and nuclear adjacency, but the valuation re-rating has already happened. Be choosy about who is strategically placed.

Gold: stay positive, and use one rule — watch central bank activity every month. If they are buying, buy. China has bought through April, May and June, and likely July. The correction from $5,500 to around $4,200 was a rates story, and money supply has kept rising while the price fell.

Silver is a trading position, not a holding — it halved from $116 to $57 an ounce and will stay volatile.

The FCNR-B flows are the mechanism to watch, not the rate cycle. Reduced CD issuance by banks is compressing the short end. 3 to 5-year G-Secs and SDLs are already seeing demand. 5-year yields have eased more than 10-year.

Corporate bond spreads in the 2 to 5-year segment have not transmitted yet — that is the next leg. Bloomberg index inclusion has been deferred, not cancelled.