Budget may not lure FPIs immediately: Somil Mehta, Mirae Asset Sharekhan

India's structural story (demographics, digitisation, manufacturing) is intact despite tactical noise, said Mehta

As the markets enter the budget week, Somil Mehta, head of retail research, Mirae Asset Sharekhan, tells Sirali Gupta in an email interview that Nifty's premium valuation of 22x FY26 earnings, uncertain trajectory of FPI flows, and rupee depreciation pressures could limit market's near-term upside. Edited excerpts:

Which sectors should be on investors' radar ahead of the Union Budget and why?

• Defence (HAL, BEL, Bharat Forge): Government capex is likely to rise in the range of 10-15 per cent over last year. Export targets and Make-in-India push intact despite global tensions.
• Auto (M&M, TVS Motors, Lumax Auto, Fiem Industries): Extension of schemes like PM E-drive and further incentives for EV adoption to drive the sector
• Consumption (Britannia, Nestle): Defensive play amid volatility. Rural recovery, urban premiumization to drive steady growth.
• Infrastructure and industrials (L&T, Hitachi energy, Vernova T&D): Overall higher capex allocation would boost the infrastructure and industrials sector.
• Insurance sector (Max Health Insurance, ICICI Lombard: Expected announcement of couple-based taxation would lead to pooling the deductions, which would be favourable for Health and Life insurance companies.

Will Budget 2026 give reasons to FIIs to come back to India?

Budget luring FIIs is unlikely in the immediate term, but investors are seeking several key measures such as a corporate tax cut to 22 per cent, infrastructure capex exceeding ₹12 trillion, and expanded PLI schemes covering electronics and renewables. The current environment presents significant headwinds. The overhang from US tariff threats (with potential 50 per cent duties) and uncertainty around Venezuela are capping enthusiasm among foreign investors. In the near-term, we expect DIIs to dominate market flows, while foreign portfolio investors (FPIs) are likely to remain on the sidelines, awaiting greater clarity with respect to earnings upgrades in FY27.

 

How long will can DIIs hold fort?

Foreign investors sold heavily, citing US tariffs (50 per cent on the Indian economy), Venezuela oil shock, and rich valuations. DIIs absorbed ₹46,000 crore year-to-date (Y-T-D), but retail panic is emerging. Mutual fund SIPs remain robust with ₹25,000 crore per month, yet cash levels at 5-year highs signal caution. DIIs' support may weaken if the correction deepens.

What is your portfolio strategy?

India's structural story (demographics, digitisation, manufacturing) is intact despite tactical noise. Budget 2026 may offer policy clarity, but global headwinds persist. Stay diversified and focus on quality.

• 50 per cent largecaps (Nifty 50 ETF, quality banks)
• 25 per cent gold/defensives (FMCG, utilities)
• 15 per cent cash for tactical dips
• 10 per cent mid/smallcaps, high-beta sectors

What's your reading of Q3 earnings so far? What is your view on FY26 and FY27 earnings?

December quarter (Q3FY26) earnings have been a mixed bag with Banks and IT delivering 5-8 per cent beats; however, consumption and industrials missed on weak demand. Consensus now sees FY26 earnings growth at 9-10 per cent, a downgrade from 13-14 per cent. FY27 hinges on capex revival, foreign institutional investors (FIIs) return, and rural recovery. Quality matters over quantity.

Where do you rank India versus other emerging markets?

India ranks second after Indonesia with H1 gross domestic product (GDP) growth of 8 per cent and a (Reserve Bank of India's) RBI's estimate of 7.3 per cent for FY26, significantly outpacing China (4.5 per cent) and Brazil (2.1 per cent). India's manufacturing push, bolstered by PLI scheme success and its positioning as a China+1 beneficiary, continues to attract investment.

 

Political stability and continuity further distinguish the country from emerging market peers facing heightened volatility. However, challenges persist: the Nifty trades at a premium valuation of 22x FY26 earnings, FPI flows remain uncertain, and rupee depreciation pressures persist, which could limit near-term upside despite strong fundamentals.

Markets have sharply come off their recent high. Is there more pain in store?

The Nifty has broken below its key 20-day (25850) and 40-day (25800) moving averages, confirming short-term weakness. Momentum indicators show a negative crossover, targeting 24,800 if 25150 support fails. PCR at 0.79 reflects bearish sentiment. Expect "sell on rise" until a decisive break above 26000 resistance.