Summary
Global markets remain buoyant while India continues to underperform relative to peers. Persistent INR weakness, sustained FPI outflows, elevated primary market supply, and limited exposure to global AI-led growth themes have weighed on sentiment. However, improving earnings momentum, valuation correction in high-growth segments, potential currency stabilization, and possible trade agreements with the US and West could help reverse flows and restore confidence. The environment may increasingly favour alpha-oriented strategies as new growth leaders emerge
Global Economy
The US dollar index (DXY) has weakened below 100, benefiting markets with stronger currencies. However, the Indian rupee has remained relatively weak, limiting India’s participation in global inflows.
Emerging markets offering exposure to dominant AI-led growth themes have attracted capital, while India has relatively limited listed exposure to strong AI plays. Momentum reallocation within EM portfolios has also contributed to selling pressure in India.
Domestic Economy
Several domestic dynamics have contributed to market weakness:
- Continuous INR depreciation amid weak exports in high-value-added sectors due to US duties
- Elevated fundraising activity (QIPs, IPOs, promoter/PE exits) creating excess supply
- Retail and HNI participation moderating, partly due to weak returns, derivative losses, and strong gold/silver performance
- Narrow market breadth as new issuance absorbs available liquidity
While domestic mutual fund inflows remain positive, the pace has moderated relative to earlier peaks
Earnings Growth and Valuations
Q2 corporate results exceeded expectations, and Q3 may continue this trend, potentially restoring confidence.
Large-cap indices have broadly maintained valuations with earnings growth, while broader markets have seen valuation compression despite better earnings growth. High-growth segments have experienced sharper corrections, making them relatively better valued compared to the past.
This valuation comfort could support performance once macro and flow headwinds ease.
Flows and Liquidity
Sustained FPI outflows have been a key headwind. A favorable trade deal with the US and broader Western economies could help stabilize the INR and restart global capital flows.
Currency stability may trigger a virtuous cycle:
- FPI inflows strengthen forex reserves
- Improved sentiment encourages domestic investors
- Better demand-supply balance broadens market participation
Risks
- Absence of favorable US trade deal
- Persistent FPI outflows
- Elevated market supply
- Narrow breadth
Opportunities
Low inflation, relatively low interest rates, valuation correction in growth spaces, and improving earnings momentum provide a constructive backdrop.
Historically, the period post mid-March has delivered stronger returns relative to early calendar months, potentially offering tactical entry advantages.
Closing View
India’s underperformance has been driven more by flows and currency dynamics than by structural earnings weakness. With valuation resets in high-growth segments and macro stability improving, conditions may increasingly favor selective, alpha-driven strategies over passive index exposure.
Improvement could coincide with currency stabilization and trade clarity over the next year.
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