Nifty may hit 28,615 by Dec'26 if FII flows rise, oil cools: Rajesh Palavia

Rajesh Palviya of Axis Direct believes that following the January peak of 26,373, Nifty's valuation premium over emerging markets narrowed significantly, establishing a healthier starting point for H2

Nifty could reclaim its record high by the end of 2026, with an earnings recovery and renewed FII inflows likely to drive the next leg of the rally, Mumbai-based Rajesh Palviya, head of research, Axis Direct, told Abhinav Ranjan in an e-mail interview. "Under our bull-case scenario, a complete de-escalation of Strait of Hormuz risks could unleash ₹1.42–1.89 trillion in foreign inflows through H2CY26," he said. Edited excerpts:

 

FIIs have remained net buyers in the last 1.5 months (July and the first two weeks of Aug). How sustainable is this trend?

 

The recent shift in foreign institutional investor (FII) activity to net buying reflects a strategic realignment in relative valuations. After pulling out ₹2.25 trillion in H1CY26 due to the West Asia conflict and crude oil spikes, Indian equity valuations have reset to ~18.3x forward P/E, aligned with long-term historical averages. Concurrently, profit-booking in the artificial intelligence (AI) trade redirected capital back to India.

 

 

The sustainability of this buying trend hinges on macro stability: Brent crude consolidating between $70–$80/bbl, currency support from the RBI's FCNR swap window, and progress on bilateral trade deals. Furthermore, strong domestic liquidity anchored by monthly SIP run-rates exceeding ₹31,000 crore provides a robust floor. Under our bull-case scenario, a complete de-escalation of Strait of Hormuz risks could unleash ₹1.42–1.89 trillion in foreign inflows through H2CY26.

 

Can the markets reclaim record highs by the end of 2026?

 

Reclaiming record highs by late 2026 is achievable as market drivers transition from global macro overhangs to an earnings-led recovery. Following the January peak of 26,373, Nifty's valuation premium over emerging markets narrowed significantly, establishing a healthier starting point for H2.

 

Our Axis Market Playbook base-case projects Nifty reaching 27,200 by December 2026 (at 19.5x forward P/E), supported by a projected 12–14 per cent Nifty EPS growth for FY27.

 

In a bull-case scenario - driven by a complete geopolitical resolution, Brent crude settling at $70–$80/bbl, and a ₹1.42–1.89 trillion FII inflow surge - Nifty can scale up to 28,615. Conversely, our bear-case pegs downside at 23,030 if crude re-escalates above $100/bbl. Robust domestic institutional buying (₹2.08 trillion Y-T-D FY27) continues to absorb downside risks.

 

Does earnings growth justify current equity valuations? Which sectors look most attractive?

 

Current equity valuations are well-justified following the recent market reset. The Nifty 50 forward P/E has moderated from 21.3x to its historical long-term average of 18.3x, while Nifty 500 earnings grew 9 per cent Y-o-Y in Q4FY26 with FY27 EPS growth projected at 12–14 per cent. Sector strategy for H2CY26 favours a mix of cyclical recovery and structural growth:

 

- Financials (BFSI): Driven by 17–18 per cent system credit growth, robust asset quality, and expanding NIMs.

 

- Capital Goods & Defence: Multi-year visibility from indigenisation (defence production >₹2 trillion).

 

- Power & Energy: Benefiting from peak power demand hitting an all-time high of 270.8 GW.

 

- Auto & Healthcare/Pharma: Anchored by rural recovery, premiumisation, and IPM growth upgraded to 11.3 per cent.

 

We maintain a selective stance on IT due to cautious client spending, and remain cautious on FMCG/Paints owing to crude-linked input pressures.

 

Do you expect large-caps to outperform mid-and smallcaps in the next 12 to 18 months?

 

Large-caps are strategically positioned to outperform mid and small-caps over the next 12 to 18 months. During H1CY26, broader markets displayed remarkable resilience; the Midcap 100 reached 52-week highs near 62,907, and the Smallcap 250 rose 6.2 per cent, largely cushioned by domestic SIP flows. However, aggressive H1 FII selling of ₹2.25 trillion was heavily concentrated in liquid, index-heavy large-caps, squeezing foreign ownership in the Nifty 500 to multi-year lows and compressing valuation premiums. As foreign institutional flows turn constructive in H2CY26, capital re-entry will naturally flow into high-liquidity large-cap names with resilient balance sheets.

 

What could be the biggest trigger for a meaningful rally and a market correction?

 

The rally catalyst: A genuine de-escalation in West Asia. That alone would push oil down to $70-$80, take pressure off India's import bill and the rupee, and unleash ₹1.42-₹1.89 trillion in FII inflows. Add 12-14 per cent earnings growth and potential rate cuts, and you have a meaningful move higher.

 

The correction risk: A flare-up in West Asia tensions sending oil above $100-$120 per barrel. Rising oil feeds inflation, widens the current account deficit, forces the RBI to keep rates higher for longer, and triggers FII selling. That would drag the Nifty toward 23,030.   

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