GST 2.0, S&P upgrade may spur FII reweighting to India: Motilal Oswal AMC

Market outlook: We believe the market will reward companies that consistently deliver strong earnings growth, regardless of whether they are large-cap, mid-cap, or small-cap, says Ajay Khandelwal

Foreign investors could raise their India allocation in Indian equities as GST 2.0 reforms and S&P upgrading India’s credit rating bring fresh energy, says AJAY KHANDELWAL, fund manager, Motilal Oswal AMC, to Sirali Gupta in an email interview. Khandelwal also suggests sectors for long-term bets and explains how rising DII dominance is bolstering market stability. Edited excerpts:

With GST 2.0 reforms and S&P Global's rating upgrade, how do you view India's positioning among emerging markets?

In the last year, Indian markets rose only about 3 per cent, while other emerging markets were up nearly 19 per cent. Now, two big changes — GST 2.0 reforms and S&P upgrading India’s credit rating — have given fresh energy to our markets.

 

Foreign investors in emerging markets have been underweight in India for some time now, but with reforms and stronger credibility, we expect them to raise their India allocation. This shift can bring more foreign money into Indian equities, which is positive for our markets.

Which sectors or themes in India offer the most attractive long-term growth prospects?

India’s economy is changing fast, and this is creating new growth areas. Sectors like electronics manufacturing, defence, capital markets, healthcare, hotels, and travel are likely to grow strongly as domestic consumption rises.

Are any pockets (sectors) overvalued?

  Some parts of the market are trading at very high valuations, and those may be vulnerable if earnings don’t keep up. But sectors with earnings upgrades will continue to do well. We believe the price/earnings to growth ratio (PEG ratio) is a better way to judge valuation, because it tells you not just how expensive a stock is, but whether its earnings growth justifies that price.  ALSO READ | Tariff worries? Allocate 40-50% to Sensex or Nifty basket: G Chokkalingam

What could be the key catalysts for the next leg of the market rally? Will it be led by large, mid-cap or small-cap segment(s)?

GST 2.0 can make the system smoother, cut costs, and improve business efficiency. With earnings set to grow faster, inflation easing, and interest rates likely to come down, these factors together can give a strong push to Indian markets. After a phase of subdued, single-digit growth in FY25, consensus expects a return to double-digit earnings growth.

 

We believe the market will reward companies that consistently deliver strong earnings growth, regardless of whether they are large-cap, mid-cap, or small-cap.

 

What are your thoughts on the growing dominance of domestic institutional investors in Indian markets?

Domestic Institutional Investors (DIIs) have now overtaken Foreign Institutional Investors (FIIs) in terms of ownership of Indian equities, holding 19.8 per cent versus FIIs’ 18.4 per cent. This marks a structural shift in India’s market ownership dynamics.

 

Domestic investors are now a strong force in markets, thanks to steady systematic investment plan (SIP) inflows. With more savings moving into equities and rising awareness, DIIs will keep growing and provide stability against foreign flows.

How are you positioning your fund to outperform while mitigating downside risks for the markets?

Our funds are positioned using the QGLP framework — Quality, Growth, Longevity, and Price. By blending these four factors, we build a portfolio that can capture the upside during bull markets but also protect capital when cycles turn. In other words, QGLP helps us participate in growth opportunities without ignoring risks, which is key to delivering consistent outperformance.

What are Special Opportunities Funds (SOFs), and are they suitable for retail investors?

Special Opportunities Funds invest in companies going through big changes – like mergers, restructuring, promoter changes, or turnarounds. If these events play out well, the returns can be very strong. But if they take longer or don’t work out, performance may stay flat for some time. So, these funds are not for everyone – they suit investors who can take higher risk, stay patient, and are comfortable with lumpy returns rather than steady compounding.

Do you incorporate technology and AI in your investment process? If so, how?

Yes, we do use technology and AI in our investment process. It helps in improving our turnaround time. For example, AI helps us quickly analyse large volumes of financial data, track sectoral trends, and pick up early signals from earnings calls or management commentary.