Indian equity markets had a difficult start to the year as stretched valuations, a weak rupee, and a tech rout dented risk appetite. However, analysts believe the worst is now over and recommend a gradual deployment of cash into quality banking, auto, defence, and pharma stocks.
"Despite limited near-term (upside) triggers, investors should gradually, not aggressively, begin deploying cash. While global risks have not fully eased, a large part of the negativity is already priced in," said Somil Mehta, head of retail research at Mirae Asset ShareKhan. Valuations have cooled in several pockets and make staggered investing a sensible strategy, he added.
Sharp drawdown
The BSE Sensex hit a low of 79,899.42 on February 1, dropping 7.3 per cent (6,259.58 points) from its record high of 86,159 on December 1 last year. The NSE Nifty 50 index tumbled 6.8 per cent from its lifetime high of 26,373 on January 5 this year, according to Bloomberg data.
The pain was even more severe in the broader market where the Nifty MidCap, and the Nifty SmallCap fell 8.8 per cent to 18.15 per cent from their peaks.
The BSE Sensex index has recovered 3.5 per cent from its recent lows, while the Nifty 50 was up 3.87 per cent until Wednesday. The Nifty MidCap is 7.5 per cent off lows, while the Nifty SmallCap is up 5.3 per cent.
"With the Indian currency having devalued by nearly 10 per cent in the last 18 months, the Indian markets have started looking attractive for foreign institutional investors," said Vinay Jaising, chief investment officer and head of equity advisory at ASK Private Wealth.
"The rupee may stay stable in the immediate future as depicted in the real effective exchange rate of 97.8, which implies the rupee is undervalued. A robust forex reserve of $717 billion (as of February 6, 2026), along with India-US trade deal, and decent third quarter earnings of India Inc suggest the worst is behind us," he said.
Sitting entirely on cash may not be the best strategy though and investors should keep adding funds incrementally and build positions in a staggered manner, said analysts.
"The progress in bilateral trade agreements between India-US and India-EU could be a significant re-rating catalyst for several segments of the market. Q3 results, too, have been fairly encouraging, with many companies delivering in-line or better-than-expected numbers. While global uncertainties remain, the risk-reward at current levels is becoming increasingly favourable for investors who are willing to take a 12- to 18-month view," said Prabhakar Kudva, director and principal officer, portfolio management service, Samvitti Capital.
Where to invest
Kudva said stocks below the top 250 market-cap have had the sharpest correction, making valuations more reasonable.
"Investors can look at sectors and themes that are direct beneficiaries of the trade deals, as improved trade terms can meaningfully boost revenue and margin profiles for related companies," he said.
Somil Mehta, of Mirae Asset ShareKhan, prefers largecaps and select midcaps and is wary of smallcaps. He is positive about defence, infrastructure, capital goods, state-owned banks, power, and pharma, saying these sectors are supported by strong policy visibility, long-term government spending, and improving balance sheets.
Kashyap Javeri, fund manager and head of research at Emkay Investment Manager, said auto and auto ancillaries, capital goods and certain pharma companies may emerge as winners.
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