Foreign investors should turn positive on India by early 2026: Sujan Hajra

The upward revision in RBI's FY26 growth forecast signals strong confidence in India's domestic economic momentum which has consistently beaten expectations

Given India's favourable growth dynamics, Sujan Hajra, chief economist and executive director, Anand Rathi Group, believes there isn't a strong case for a meaningful diversification away from equities for long-term investors. In this backdrop, he tells Sirali Gupta in an email interview that foreign investors could turn structurally positive by late 2025 or early 2026. Edited excerpts:

What does the Reserve Bank of India's (RBI) upward revision of the FY26 gross domestic product (GDP) estimate signal for equity markets?

The upward revision in FY26 growth forecast signals strong confidence in India's domestic economic momentum which has consistently beaten expectations. This confidence lifts domestic sentiment and attracts inflows. With inflation below target, potential future rate cuts could further amplify positive market sentiment.

 

How significant will the RBI’s measures be to boost primary markets?

Higher bank limits on loans against shares (LAS) let investors unlock liquidity without selling, funneling capital into equities and IPOs. Further, aligning banks' IPO financing and LAS norms with NBFCs levels the playing field. Since LAS is secured by marketable securities, it’s generally safer than unsecured retail lending, improving banks’ risk mix. Overall, these measures should lift liquidity, participation, and market depth across both primary and secondary markets.

How do you see Indian market valuations, especially compared to global peers?

Indian equities have long commanded a premium to global peers, anchored by superior return ratios, a stable macro backdrop, and strong long-term earnings visibility.

 

A key structural support is limited free float: over two-thirds of listed firms have promoter holdings above 50 per cent, constraining tradable supply. At the same time, institutional ownership of that free float has climbed from under 60 per cent to about 70 per cent.

 

Primary issuances and outbound Indian investments haven't eased this scarcity. Consequently, despite periodic corrections, Indian markets remain expensive versus peers and are likely to stay so.

With the Nifty and Sensex delivering negative returns over the past one year, how should investors think about portfolio diversification?

Despite negative year-on-year (Y-o-Y) returns, Indian equities are set to notch a tenth straight calendar year of gains since 2016 - an unmatched streak among major markets. Historically, they have delivered superior risk-adjusted returns versus fixed income, gold, or real estate over the medium to long term. Thus, we don't see a strong case for diversifying away from equities for long-term investors. Instead, diversify within equities -- across market caps, sectors, and styles -- to better manage near-term volatility.  ALSO READ | Can Sensex hit 90,000-mark by March 2026? Here's what chart suggests

How are developments in the US impacting Indian markets?

India's external sector is relatively small (exports and imports each 20 per cent of GDP), and domestic investors now own more Indian equities than foreign investors, tempering sensitivity to international flows. So, while US developments, including government shutdowns, or immigration reforms, can jolt Indian markets via sentiment and short-term capital channels, the medium- to long-term path is anchored by domestic growth, policy, and investor dynamics.

How do you currently position India among emerging markets (EMs) when it comes to attracting FII flows?

India’s valuation premiums remain high versus most EMs and are unlikely to de-rate meaningfully near term. Even so, India stands out as the fastest-growing major economy with political stability, and solid earnings prospects aided by fiscal and tax reforms. As global liquidity eases, foreign interest should turn structurally positive by late 2025 or early 2026. However, inflows are likely to be steady rather than outsized, constrained by a crowded domestic investor base and persistent valuation gaps versus peers such as Korea, Taiwan, and ASEAN.

What is your earnings growth outlook for India over the next 12 months?

We expect large caps to deliver 12–13 per cent annualised earnings growth through March 2027, supported by operating leverage, selective margin expansion, and healthy credit growth. Mid-and small-caps should grow faster at 14–16 per cent, aided by stronger linkage to domestic demand, premiumisation, and niche opportunities. Earnings visibility is strongest in financials, consumer discretionary, select capital goods, and services.

Which sectors or themes do you believe remain underrated or overlooked in the current market?

Investors should focus on select companies with pricing power, strong balance sheets, and leverage to secular domestic themes.

Key themes:

• Domestic demand: Urban consumption and premium discretionary categories offer multi-year growth.
• Services over manufacturing (near term): Financials, IT-enabled services, tourism, and healthcare delivery look better positioned.
• Premiumisation: A durable shift across autos, FMCG, apparel, and financial products.
• Underappreciated exports in services: Engineering design and professional services benefit from structural tailwinds.

As we approach Samvat 2082, what is your overall outlook for the Indian markets?

Since 2000, the Nifty 50 has delivered the best USD returns, among major global indices, about 70 per cent of the time. With core drivers - demographics, digital and physical infrastructure, financialisation of savings, and productivity gains - still intact, we expect Indian equities to outperform over the medium to long term.