From the structurally strong BFSI sector to the rapidly evolving healthcare and consumption segments, Kulkarni highlights where long-term investors can focus to capture compounding opportunities.
He also sheds light on current market challenges, including FPI outflows, tariff uncertainties, and the cautious outlook for IT companies, while pointing to triggers like GST cuts, private capex revival, and domestic consumption recovery that could spur the next leg of equity growth.
Edited Excerpts –
Thanks for taking the time. The Sensex has remained relatively unchanged over the past 12 months. What are the key reasons behind the Sensex delivering near-zero returns despite policy tailwinds?
The Indian economy has been one of the fastest-growing globally, clocking 7.8% YoY growth in Q1 FY26. Despite this, Indian equity markets have underperformed, with the Sensex and Nifty 50 delivering merely 2.9% and 4.3%, respectively.
The primary reasons for this underperformance include US tariff-led negative sentiment, a slow recovery in earnings growth, lower nominal growth, a drop in credit growth, and large supply in the primary equity markets.
The tariff overhang resulted in massive outflows from FPIs, with net outflows of INR 1.5 trillion over the past nine months. Tariff uncertainty, coupled with a slowdown in the US corporate sector, has particularly weighed on IT stock sentiment.
Earnings growth in Q1 FY25 came in at 9–10% (annualized) and is expected to pick up from Q3. Although real GDP growth has come in at 7.8% YoY, extremely low inflation has kept nominal growth for the current year at around 8.5–9.0%, a multi-year low (except for the Covid period). Normally, India Inc.’s earnings growth moves in tandem with nominal GDP growth.
Bank credit growth has halved from peak levels of around 20% in CY23 to about 10% currently, despite RBI rate cuts and ample liquidity.
This is mainly attributed to slow transmission of rate cuts into the banking system, sluggish recovery in private expenditure, cautious unsecured lending by banks, and alternative funding sources such as bond issuances.
The Indian IPO market has been extremely strong in CY25. In addition, regular supply from FPOs and private equity fund sales has exerted pressure on the secondary markets, putting brakes on further growth.
Could the rate cut trigger sustained FPI inflows into Indian equities, or is the impact expected to be short-lived?
The recent Fed rate cut, along with additional expected cuts, is likely to weaken the US dollar further, which has already been on a downslide. This may drive some reallocation of capital from the US to emerging markets, including India.
However, this alone is unlikely to trigger a structural shift in FPI sentiment toward Indian equities. Earnings growth is expected to revive from Q3 FY25, which should support sentiment. Still, lingering tariff uncertainties mean a sizeable FPI inflow is more likely once there are positive developments in Indo-US trade talks and a meaningful rollback of the steep tariffs imposed by the US on Indian exports.
How significant has FPI selling been in shaping market performance, and do you expect this trend to continue?
Persistent FPI selling has been a major speed-breaker for one of the fastest-growing economies. CY25 has been one of the worst years in terms of FPI outflows. The longer the US tariff uncertainty persists, the longer India remains vulnerable to FPI selling.
However, domestic mutual fund inflows have been a noticeable counterbalance. Even at the peak of FPI selling, retail and HNI investors have contributed record inflows into domestic mutual funds.
This trend is gradually reducing dependence on FPIs and broadening equity participation among domestic investors. FPI ownership of Indian equities has dropped to 17.4%, while domestic mutual fund ownership has risen to around 10%.
How much of the muted market performance can be attributed to corporate earnings versus macroeconomic or political factors?
Markets are influenced by both short-term and long-term forces. Short-term factors, such as geopolitical events and elections, create intermittent noise, while long-term macroeconomic variables—like inflation, interest rates, and GDP—determine the structural trajectory of markets.
From a medium- to long-term perspective, earnings growth is paramount, as equity prices ultimately reflect expected growth. In practice, both short-term and long-term forces play out simultaneously, influencing traders and long-term investors alike.
We have seen GST cuts and other measures to improve sentiment. What could be the next big trigger for D-Street?
The next push for Indian markets is likely to come from two fronts: revival of domestic consumption and recovery in private capex.
GST cuts, timed ahead of the festive season, are likely to boost consumer sentiment, while private sector investment can take the economy forward after government-led capex over the past few years. Coupled with low inflation and accommodative RBI policy, this sets the stage for higher earnings growth, which may revive FPI sentiment.
Are current valuations justified given earnings trends, or is a correction needed?
Indian equities have largely been range-bound this year, bringing valuations back to historical averages. The market has experienced a time correction rather than a price correction, allowing companies to grow earnings while investors can rebalance portfolios.
A risk remains: markets are pricing in 12–14% earnings growth. If this expectation falters, valuations could become expensive, triggering a price correction.
For long-term investors, what strategies can be employed during this consolidation phase?
Investors can accumulate companies with strong growth prospects at reasonable valuations, staggering allocations as earnings cycles improve.
Contra sectors — those facing near-term headwinds but no structural challenges—such as financials, pharma, and consumption, may also be considered. Exposure through index funds and ETFs can mitigate risk while ensuring market participation.
What are the big long-term themes for the next 3–5 years?
BFSI: Banking and financial services reflect structural economic growth and offer compounding opportunities, with healthier balance sheets enabling expansion.
Consumption: Rising income, aspirations, and improved distribution platforms support sustained growth in demand.
Healthcare services: Hospitals, diagnostics, and related services are expected to grow due to rising incomes, insurance penetration, and lifestyle-related diseases.
What are the potential consequences for Indian IT companies like TCS, Infosys, and Wipro amid H-1B visa changes?
We remain cautious on IT in the near term due to growth visibility challenges from AI adoption and US discretionary spending.
The H-1B visa fee hike to USD 100k per applicant introduces uncertainties, but the earnings impact is expected to be marginal (1–2%) since it applies prospectively to new applications only. Companies are mitigating risks via offshoring, nearshoring, or increased local hiring.
H-1B holders comprise just 3–5% of the active workforce, as IT firms have reduced reliance on these visas over recent years. While valuations are increasingly supportive, prevailing uncertainties may weigh on sentiment, so we maintain a neutral view, though the sector could be a potential contrarian investment.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of The Economic Times)
as a Reliable and Trusted News Source