After nearly 18 months of relentless foreign selling, signs are beginning to emerge that the tide could be turning for Indian equities. Foreign institutional investors (FIIs) have pulled out nearly USD 30 billion from Indian markets so far in 2026, following net outflows of about USD 19 billion in 2025, as elevated valuations, sluggish earnings growth, rising US bond yields, geopolitical tensions in West Asia and the absence of a compelling AI-led investment narrative weighed on sentiment.
However, with the US-Iran peace deal easing concerns around energy prices, crude oil trading below USD 80 per barrel and Indian valuations becoming more reasonable after a prolonged period of consolidation, investors are reassessing the outlook for the second half of the year.
In an exclusive interview with BW Businessworld, Pratish Krishnan, Senior Fund Manager – Equity at Abakkus Mutual Fund, shares his views on the prospects of a return in foreign flows, the evolving AI trade, market valuations, sectoral opportunities and the investment strategy investors should adopt as earnings growth and macroeconomic conditions begin to improve.
Edited Excerpts:
As the US-Iran peace deal materialises and crude remains below $80 a barrel, do you expect FIIs to return to Indian equities in the H2 of 2026?
Indian equity markets have largely consolidated over the last two years, with Nifty delivering low single digit returns. However, with earnings showing improvements over the last few quarters, valuations have now become more attractive.
The Nifty 50 Index is currently trading close to its 10-year average valuations level, while earnings growth is expected to improve further during FY27 & FY28. Recent developments in West Asia appear encouraging and crude oil prices are below at USD 80 now. This is clearly a relief for India, considering our high dependence on imports for crude oil and natural gas. Lower energy prices can help contain inflationary pressures and support macroeconomic stability.
The RBI has also taken measures to curb excessive volatility in the Indian rupee, and the currency could stabilise or even appreciate from current levels.
That said, some challenges remain, including the lack of a strong AI-related investment theme, relatively slower earnings growth compared with certain emerging market peers, and elevated US yields. However, with an improving earnings trajectory, more attractive valuations, and reduced foreign ownership levels, FPI flows could gradually turn positive over the next few quarters.
Additionally, several large IPOs are expected to be launched in the second half of the year, which could attract meaningful participation from foreign investors. Overall, while the timing and magnitude of flows remain uncertain, the environment appears increasingly conducive to a return of foreign investor interest in Indian equities.
FIIs have been chasing AI-linked opportunities in Taiwan and South Korea. Has that trade become overcrowded, and could capital start rotating back into India?
AI led capital expenditure (capex) continues to scale new highs. According to industry estimates, capex by Hyper scalers is expected to exceed USD 800 billion this year and could increase further even during CY27. Consequently, demand for memory and chips remain high led by demand supply mismatch, leading to significant rally in both Taiwan and South Korean equity markets.
Given high earnings growth outlook, valuation for many AI-linked companies still appear reasonable despite the sharp run-up in stock prices.
While AI-related investment opportunities remain attractive, recent FPI flow trends suggest that the trade may no longer be as one-sided as it was earlier. In fact, both Taiwan and South Korea have witnessed net foreign outflows on a year-to-date basis, indicating that investors may be reassessing allocations following the strong market performance.
Although flows into these markets could revive if earnings momentum remains strong, a meaningful and sustained rotation back into India will likely depend on the earnings trajectory of India Inc.
After the correction seen this year and persistent FII selling, are Indian equity valuations now fair, or do parts of the market still look expensive?
Frontline indices have largely consolidated over the past two years, with the Nifty 50 delivering a CAGR of approximately 2 per cent during this period. Earnings in the interim have increased in high single digits, driving valuations lower.
The earnings outlook has improved in recent quarters, and the trend is likely to continue, barring any near-term impact from higher inflation or other macroeconomic headwinds. Overall, corporate earnings could grow at a double-digit rate over the next two years.
The Nifty 50 is currently trading at around 18 times FY28 estimated earnings, which is below its 10-year average valuation multiple. In addition, some of the market’s larger sectors, including financials and IT services, appear reasonably valued and are favorably positioned from a risk-reward perspective.
That said, valuation dispersion within the market remains significant and valuations in certain pockets have become more attractive.
What should investors’ strategy be for the second half of 2026? Is this the time to be aggressive, selective or defensive?
We believe the broader India growth story remains intact, and investors should maintain a long-term perspective when investing in equities. In the near term, we would remain watchful of the potential impact of rising inflation on corporate earnings, as well as the effect of weaker monsoons on rural demand.
Indian equities have underperformed broader emerging markets over the past two years. However, with the earnings outlook improving and valuations becoming more reasonable, this period of relative underperformance could present an opportunity for investors to gradually increase their exposure to equities.
If geopolitical tensions continue to ease, what does that mean for gold and silver, which have outperformed most asset classes over the last year?
Gold prices have nearly doubled over the last two years. While gold has traditionally seen higher investor allocations during periods of geopolitical uncertainty, recent demand has also been driven by purchases from central banks. According to reports from the World Gold Council, central banks continue to buy gold and add to their reserves. As per an ECB report, gold has become the world’s largest reserve asset, surpassing US government bonds.
Besides central bank activity, US Federal Reserve policy will weigh on gold price movements over the next one year. While maintaining interest rates, the US Fed has indicated a relatively hawkish stance in its policy outlook. Higher interest rates generally weigh on sentiment towards precious metals and commodities in general.
Which pockets of the market currently offer the best risk-reward opportunity: large caps, mid-caps or small caps?
Large caps have remained relatively resilient to macroeconomic uncertainties and have delivered consistent earnings growth over the last couple of years. A key concern has been sustained FPI outflow, which has impacted the large cap segment the most.
Currently, Large cap valuations look favorable, trading lower than both midcap and small cap segments and at discount to their own historical averages. The Nifty 100 is currently trading at 19 times one- year forward earnings compared to 30 times for midcaps and 27 times for small caps earnings.
Valuations in the mid-cap and small-cap segments have also moderated and are now closer to their historical averages. At the same time, earnings growth has improved over the last two to three quarters. On an aggregate basis, mid-cap companies reported earnings growth of 36 per cent year-on-year (YoY) in 4QFY26, while small-cap companies reported earnings growth of around 14 per cent YoY.
Overall, while large caps appear more compelling from a valuation standpoint, improving earnings momentum in the mid-cap and small-cap segments continues to support their investment case.
Which sectors look most attractive today if geopolitical risks fade, oil prices remain contained and interest rates stabilise?
The financial sector appears attractive, supported by a meaningful improvement in credit growth and stabilizing net interest margins (NIMs). Recent regulatory measures relating to FCNR(B) deposits are expected to alleviate concerns around deposit growth and funding costs. Valuations in the sector have corrected, and with credit growth remaining healthy and NIMs stabilising, earnings are likely to stay robust in the near-term.
We are also constructive on the consumer discretionary space. Following the GST rate cuts, the automobile industry has witnessed a strong recovery in demand. More broadly, a series of policy measures declared by the Government and the RBI are expected to support domestic demand.