The Nifty is now trading at around 20.3x trailing earnings, placing it in the lower band of its historical valuation range. On the surface, this suggests markets have already priced in a fair amount of pessimism. Yet, foreign institutional investors (FIIs) continue to reduce exposure, reflecting a divergence between global and domestic views on India.
According to analysts, recent FII outflows are not necessarily a structural rejection of India, but a function of global portfolio rebalancing. Higher crude prices, a stronger dollar, and elevated geopolitical risks — particularly from West Asia — have pushed investors toward safer or cheaper markets.
Pranay Aggarwal, CEO of Stoxkart, argues that concerns of a prolonged low-return phase may be overstated. He points out that domestic demand for equities remains resilient, supported by steady SIP inflows and institutional participation. “Prolonged low returns would require a combination of sustained high crude prices, escalation of conflict, and margin compression across sectors. That is not the base case,” he said.
The Reserve Bank of India’s recent policy stance also reflects this balance. While acknowledging external risks, the central bank has maintained a neutral position, projecting FY27 GDP growth at 6.9%, indicating confidence in domestic fundamentals.
However, not all signals are equally reassuring. Foreign brokerages have increasingly flagged India’s valuation premium relative to other emerging markets. The MSCI India index continues to trade at 17-18x forward earnings, compared to around 12x for the broader emerging market basket, according to Thomas V Abraham of Mirae Asset Sharekhan.
This premium, historically justified by stronger growth and governance, is now under scrutiny. Slower earnings visibility, especially in export-oriented sectors, and margin pressures due to AI-led disruptions in IT and manufacturing are beginning to weigh on sentiment.Currency dynamics are adding to the complexity. The rupee, hovering near 92 against the dollar, has amplified import costs and pressured corporate margins. Combined with elevated crude prices, this has worsened macro conditions, with the current account deficit projected at 2.5-3% of GDP for FY27.
The RBI has intervened through forex sales and liquidity measures to stabilise the currency, but these steps also tighten financial conditions. Higher borrowing costs and uncertain liquidity are likely to keep FIIs cautious in the near term.
Yet, domestic investors are increasingly shaping market direction. Gaurav Bhandari, CEO of Monarch Networth Capital, notes that India’s dependence on foreign flows is structurally declining. “The more important shift is the growing dominance of domestic investors. Earnings growth and local liquidity are now the primary drivers,” he said.
This shift is critical in understanding why markets have not corrected more sharply despite persistent FII selling. Monthly SIP inflows continue to provide a steady cushion, absorbing external shocks and preventing sharp drawdowns.
The second question — whether India can remain undervalued for an extended period, as seen in markets like Japan or Korea — requires a different lens. Korea for most of 2000s till mid 2010s has seen its stocks consistently trade at lower P/E vs global peers even though they were undervalued. Japan too has seen a similar phase in the early 2000s.
Historically, prolonged undervaluation for countries has been associated with stagnant earnings, weak domestic capital formation, and lack of structural growth triggers.
India, analysts argue, does not fit that template. Economic growth remains among the fastest globally, corporate balance sheets are healthier, and policy-driven capex continues to support demand. Structural drivers such as manufacturing incentives, supply chain diversification under the China+1 strategy, and ongoing trade agreements continue to underpin the long-term narrative.
Aggarwal said that the current valuation is already about 20% below its historical average, suggesting that much of the near-term uncertainty is priced in. “This looks less like a value trap and more like a deferred re-rating,” he said, adding that a stabilisation in crude prices and easing geopolitical tensions could act as triggers.
Arpit Jain of Arihant Capital Markets echoes a similar view but cautions against expecting immediate upside. “There could be phases of muted returns, but these periods have historically acted as accumulation phases rather than structural slowdowns,” he said.
The market’s recent behaviour has some evidence to back the above views. Despite geopolitical shocks and earnings uncertainties, equities have shown resilience, with declines remaining contained relative to global peers.
FIIs still remain cautious, driven by global factors and relative valuation concerns. Domestic investors, however, continue to anchor the market, supported by structural growth expectations and consistent inflows. In the near term, analysts say returns may remain uneven. Earnings recovery, currency stability, and clarity on global risks will be key variables. But the broader trajectory appears intact.
India may not be cheap enough to trigger an immediate re-rating, but it is also not structurally weak enough to enter a prolonged phase of underperformance.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)