 "Jignesh Desai")
With markets now back near all-time highs, foreign institutional investors (FIIs) remain cautious about valuations — particularly in the mid and smallcap segments — and about regulatory uncertainty, especially in the wake of the Jane Street matter, says Jignesh Desai, chief executive officer for institutional equities at Centrum Broking, in an email interview with Puneet Wadhwa. Edited excerpts:
What are the three biggest risks to the Indian equity markets over the next six months?
While Indian markets have entered the second half of the year with cautious optimism, I believe there’s room for a fresh high over the next six months. That said, the first risk stems from global macroeconomic developments.
We expect the US Federal Reserve (Fed) to begin cutting interest rates by September 2025. However, any spike in inflation could delay this, strengthening the US dollar and triggering capital outflows from emerging markets (EMs). Trade policy uncertainty — particularly around US-India tariffs — is also a concern; any hike beyond 15 per cent could be poorly received.
The second risk is around earnings growth. Mid and smallcap stocks are currently pricing in nearly 25 per cent year-on-year earnings growth. Markets remain highly reactive to any earnings miss. Despite this, the recent correction has been modest, suggesting that investors are still optimistic about the quarters ahead.
Lastly, the regulatory overhang following the Jane Street episode has unsettled some institutional investors. That said, the Securities and Exchange Board of India’s (Sebi’s) quick response and recent clarification on escrow deposits have helped ease some of those nerves.
What are the other worrying points for FIIs?
We do expect FII inflows to strengthen over the next 12 months, especially once the Fed’s direction becomes clearer. India continues to stand out among EMs, offering solid growth prospects and a stable governance environment.
That said, FIIs remain wary of stretched valuations — especially in the mid and smallcap segments — and regulatory unpredictability, particularly in the wake of the Jane Street case. There’s also a renewed focus on earnings performance across the broader market.
As global investors rotate capital back into EMs, and with India remaining a top overweight in most Asia strategies, we expect foreign inflows to rise meaningfully over the next three to four quarters.
What could help ease FII concerns around regulatory uncertainty?
The Jane Street episode did spark concerns. The sharp fall in futures and options (derivatives) volumes and the resulting decline in exchange market capitalisation were hard to miss. However, it’s important to note that Sebi’s actions were targeted and not intended to disrupt the broader market.
The recent resolution — where Jane Street deposited ₹4,844 crore in an escrow account — demonstrates that the regulatory framework is working and equitable.
FIIs are looking for consistency and predictability in regulatory actions, especially around high-frequency and algorithmic trading. As long as Sebi maintains transparency and market stability, this episode is unlikely to deter long-term foreign capital.
Where is leadership likely to come from if the markets move higher from here?
Leadership is likely to come from sectors offering earnings visibility, steady cash flows, and relative valuation comfort. Largecap information technology, defence, public sector undertakings, select private banks, and non-banking financial companies look well placed. Many of these segments have already seen earnings bottom out, and any upside surprise could trigger a rerating.
Capital goods and infrastructure are also in a structural upcycle, supported by both government and private sector investments. On the flip side, sectors such as automotive (auto) ancillary, chemical, and specialty industrials may face margin stress due to elevated input costs and need close monitoring.
Manufacturing versus services — if you had to choose one investment theme for the next 12–18 months, which would it be and why?
Manufacturing, without a doubt. While services continue to perform well and remain central to the economy, manufacturing offers greater upside from an investment lens. The combination of production-linked incentives, global supply chain shifts, and rising domestic capital expenditure is creating a multiplier effect across sectors such as defence, capital goods, electronics, and auto components.
The Purchasing Managers’ Index has consistently stayed above 55, and corporate commentary from the fourth quarter of 2024–25 and the first quarter of 2025–26 points to healthy order books. Services will still play a role, but when it comes to earnings, valuation rerating, and global competitiveness, manufacturing is where we see the most alpha over the next 12–18 months.
