Cutting Sensex, Nifty targets now is premature: Harendra Kumar, Elara Capital

Data has shown that on falling market days, retail investors were net buyers, and on rising days, they were net sellers. So, the idea that they are always disadvantaged is a misnomer, Kumar said.

There has been a steady pace of outflow of foreign capital from the Indian stock markets in the last few months. Harendra Kumar, managing director at Elara Capital, tells Puneet Wadhwa in an interview in Mumbai that while being less dependent on foreign capital sounds good, it also indicates underlying issues with the economy and policy framework to catalyse inflows. “After the recent INR depreciation – FIIs are even cagier. This should be a cause of worry to our policy makers,” he said. Edited excerpts:

 

Do you expect 2026 to be a volatile year for the Indian markets, or is the worst over?

 

 

Our take is that the worst is behind us. The US has lost some alignment with NATO and allies. It appears boxed in from all corners and the cost to the US and the world economy is very high. Inflation has crossed 4 per cent, and the outcomes at mid-terms is a key variable for Trump. The war has clearly disrupted global energy supply chains. Even if it ends, the inflation trajectory will remain higher than before the conflict. That’s a key shift markets need to keep in mind.

 

How are you dealing with this as a fund manager?

 

There are two parts to this. Before the war, we had a “Goldilocks” environment—low inflation, strong GDP growth, and capital flows returning to markets. The war changed that. It pushed inflation higher globally and in India, and reversed inflows into outflows. This has altered the operating environment.

 

So, it’s not about ‘whether’ markets will do well—but ‘what’ will do well.

 

Indian markets have recalibrated to higher energy costs and slightly lower margins. Earlier, low interest rate, consumption-driven stocks were leading. Now, in an inflationary environment, cost-push sectors like metals and energy tend to do better. Staples may also perform relatively well. While investing remains important, but how one invests has clearly changed.

 

How are retail investors holding up in this volatility?

 

Retail investors continue to surprise us. SIP (systematic investment plan) inflows are at all-time highs, and mutual fund inflows are very strong. In many ways, mutual funds have become the new fixed deposit for investors. There is an expectation of steady 9–10 per cent returns over time.

 

Also, retail investors are more intelligent than we assume. Data has shown that on falling market days, retail investors were net buyers, and on rising days, they were net sellers. So, the idea that they are always disadvantaged is a misnomer.

 

Many brokerages have cut their 2026-end Nifty targets post-war. Have you revised your estimates?

 

Not significantly. We expect some margin moderation in the first quarter of fiscal 2026-27 (Q1-FY27), but it’s too early to cut targets meaningfully. We don’t yet know the Indian government’s response—there could be stimulus, credit support, or trade measures. Markets often discount future earnings. If inflation falls sharply later, markets may price in earnings well ahead of time. So, cutting Sensex, Nifty targets at this stage is premature.

 

Where do you see opportunities right now?

 

Metals, energy, and power are key opportunities. India will see a major shift in its energy ecosystem. Investments in nuclear energy, coal gasification, compressed biogas (CBG), and LNG will accelerate.

 

There may also be increased domestic exploration by companies like ONGC and Oil India. Overall, the energy landscape is set to change significantly, and this will drive investment cycles and capital goods demand.

 

What about foreign capital flows?

 

Domestic savings are strong, but in isolation not sufficient enough. The real question is: why is foreign capital going to countries like Korea, Taiwan, or China instead of India? There are structural reasons—possibly better companies, stronger frameworks, or growth prospects. While being less dependent on foreign capital sounds good, it also indicates underlying issues with the economy and policy framework to catalyse inflows. Let me assure you that after the recent INR depreciation – FIIs are even cagier. This should be a cause of worry to our policy makers.

 

This worry to some extent could have been resolved had the government cut tax rates for FIIs. Have we missed the bus?

 

Foreign investors have often expressed their angst on India’s taxation regime and point to a globally accepted practice of not taxing foreign capital. Returns have been tough to come by with a depreciating INR and taxes. Additionally, India’s cost of capital stays elevated. It’s a double whammy and needs serious debate and introspection.

 

Can India achieve its growth ambitions without stronger foreign inflows?

 

At 6.5–7 per cent growth, India risks falling into the middle-income trap. To become a developed economy by 2047, we need 8 per cent+ growth. That requires three key levers - FPI (portfolio flows), FDI (direct investment) and export growth. Without exports and foreign capital, higher growth will be difficult.

 

What reforms are needed going forward?

 

India has taken an incremental approach to reforms, which has worked. But now, the time may have come for bold, big-bang reforms—especially opening more sectors to foreign investment. We need more capital to fund new industries and sustain growth.

 

Are markets prepared for higher inflation, especially if fuel prices rise after elections?

 

Inflation is already priced in. Markets corrected immediately after the energy shock. The rupee weakened—markets understand India’s vulnerability to energy shocks. Even if fuel prices rise post-elections, the reaction may not be as sharp as feared, because much of it is already factored in.

 

Could PSU energy companies take the lead over banks now?

 

Banks—both private and PSU—are doing well, with PSU banks improving due to better oversight and lower NPAs.

 

But your point is valid. Over the last few years, the government has allowed oil marketing companies (OMCs) to reinvest profits into new energy areas like ethanol, hydrogen, and gas. These companies could become key vehicles for future growth, with returns around 15 per cent ROE. Also, financing institutions like PFC and REC will benefit as energy investments increase.

 

How effective has the government been in handling the energy crisis?

 

The main issue is LPG. India has managed crude supplies well by diversifying sources, including Russia and others. LNG sources have also been diversified. Overall, India has handled the crisis better than many countries despite high import dependence. However, in the long term, more needs to be done—especially in nuclear energy, fertilizers, and domestic energy production.

 

Are equities the only option for retail investors in 2026?

 

Not entirely. Gold gave strong returns last year. But gold is essentially a dollar trade. If the war ends, the dollar may weaken, which could support gold marginally. At the same time, metals and commodities may also perform well. So, investors will have options. Overall, markets are likely to deliver positive returns for both the calendar and fiscal year from current levels.

 

What about India Inc’s earnings in this environment?

 

There are two aspects. India’s earnings are partly export-driven—sectors like pharma, information technology (IT), metals, and autos benefit from a weaker rupee. That’s why asset allocation becomes critical—markets may do reasonably well overall, but performance will vary significantly across sectors.

 

Overall, the markets will likely do reasonably well, but success will depend on asset allocation and navigating volatility. In volatile markets, skill matters more—just like in cricket, you recognize a good batsman on a difficult pitch.

 

How is Elara Capital positioned for the future?

 

We are aligned with India’s growing savings pool and are among the top institutional equity brokers. We plan to expand research coverage from 325 to 450 companies and use our prowess in quant and macro-research to add value to our clients. We are also strengthening capital markets capabilities, and will leverage our global reach to help companies raise both domestic and overseas capital.

 

Are rising costs and market volatility impacting your margins?

 

Regulatory changes is bringing in moderation in yields and market volumes. Like in any cycle – you have to be more productive and cost competitive. One needs to achieve scale and leverage technology. In a growing market fall in yields is natural but profitability can be protected and further consolidated with market share gains. 

 

How are you using artificial intelligence (AI) in your business?

 

AI is primarily an efficiency tool. It cannot replace analysts. It helps with data processing and reduces turnaround time—for example, extracting data from annual reports faster. But actual analysis, judgment, and investment decisions remain human-driven. AI is only as good as the prompt you give—and the quality of the prompt depends on your knowledge.