Markets have steadied after easing geopolitical tensions and lower crude prices. Has investor sentiment changed?

The index has held its level and currently only portends that there will be no further damage from hereon. The supply shocks have moderated but not have been fully resolved and hence there will be some moderation in margins, which the market is cognisant of. Hence, there is no runaway rally. Beyond the West Asia crisis, India has not given alternatives to the AI trade and there is no clear visibility on earnings. Flows will return once the trend is visible and markets will resume their uptrend thereon.

Foreign investors have started returning to Indian equities after months of selling. Could this become a sustained trend?

Earnings growth has been India's Achilles heel for some time. That feeds into the overvaluation, given the domestic liquidity glut in mutual funds. There are early signs of a good recovery in Q4 FY26, but Q1 FY27 will again have to factor in the disruption. So, the trend is yet to get established. We are sanguine on mid-teens earnings growth over the next two years. Two catalysts do exist for foreign institutional investors. India's weight in the MSCI index is at its lowest, at around 10 per cent, and the rupee has bottomed out. We are also expecting a moderation in the AI trade, and all this portends well for India.

Which sectors are attracting institutional money today?

Domestic investors have seen flows into mid-cap and small-cap funds, and the same is being deployed by them. The recent outperformance in the SMID segment also explains the direction of flows. Capital goods have seen a rebound with the power trade. These are cyclical stocks and capture a lot of the future. One should be discerning while chasing momentum.

Has the market become too comfortable with geopolitical risks?

The world has seen Covid, the Russia-Ukraine war and now the West Asia crisis in recent years. None of it has been debilitating to the world other than the parties involved. Maybe there is an understanding that the world finds its feet within three to four months and supply disruptions are resolved sooner rather than later. The reasons emerging markets have underperformed developed markets are, of course, the risks to growth that they inherently carry due to supply shocks and, of course, the technology and semiconductor trade. Developed markets are better insulated to energy shocks, so they get a premium.

The IPO market has picked up again with several large issues in the pipeline. Are more companies preparing to list?

Yes, the first quarter has been quiet and the second quarter looks better with big-ticket IPOs being announced. With moderation of geopolitical risks, companies will accelerate their growth and fund-raising plans.

There is a strong IPO pipeline for the second half. Will companies rush to list while market sentiment is favourable?

Valuation expectations have moderated and there is a pushback from investors. Companies will have to be reasonable in their expectations if they want to access public funds for their growth, and that is today's reality.

Domestic mutual funds have continued buying despite foreign institutional investor selling. Has that changed the way deals are priced?

They have to deploy cash, as it is their mandate. Foreign institutional investor selling has already created an opportunity to buy some good-quality stocks at reasonable valuations. A large portion of the allocation is domestic. It's a misnomer to think that foreign institutional investors are price makers. If at all, their position has weakened due to the outflows and they are price takers. Domestic investors are pushing back on high valuations, and we have seen a moderation in valuation expectations.

India remains a preferred long-term market, but capital has been flowing to other markets. What does India need to do to attract a larger share of global capital?

Growth! Growth! Growth! Emerging markets are preferred for the growth optionality. India has to grow beyond 6.5 per cent. That is the panacea. South Korea and Taiwan are currently in an overvalued zone, and our expectation is that India will be the recipient of foreign money as the rotation trade begins.