FPI View: Relief rally aside, India equities need stronger catalysts for sustained turnaround

markets

• Indian stocks rebounded, but foreign investors remain cautious on the outlook.
• US-India trade deal uncertainty and rupee volatility weigh on investor sentiment
• Valuations have dropped but aren't attractive enough for aggressive buying.

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Even as Indian equities staged a smart rebound on Thursday, aided by positive global commentary, foreign portfolio investors Moneycontrol spoke to cautioned that it would take stronger triggers to decisively change India’s investment narrative. Yesterday, at Davos, US President Donald Trump backtracked on proposed EU tariffs, softened his stance on Greenland, and signalled a “good trade deal” with India as exclusively reported by Moneycontrol.

At 11:32 am on Thursday, the Nifty was trading 0.2 percent higher, snapping a three-day losing streak. Still, the broader trend remains weak. Till January 21, the benchmark has lost 4.5%, while the damage has been sharper in the broader market, with over 50% of stocks in the BSE Small-cap index correcting more than 10%.

Trade uncertainty and geopolitical risk

Rashi Talwar Bhatia, Partner & Portfolio Manager, Ashmore Investment Management India LLP said concerns around India-US trade deal have evolved beyond direct economic exposure. “The deal is not relevant anymore. The first derivative impact is minimal — about 2% of exports go to the US. But the worry is the second derivative impact,” she said, highlighting the risk of Chinese goods being diverted into European markets and disrupting global trade flows.

“Trade lines are all over the place. Even if a deal happens, this will not get resolved,” Bhatia added. Although the tensions around Trump’s stance on EU tariffs and Greenland have recended after his comments on Wednesday, she flagged rising geopolitical unpredictability as a continuing risk. “The Greenland issues, for example, came out of the blue. There is just too much unpredictability,” she said.

Hiren Dasani, Chief Investment Officer, Emerging Markets, WhiteOak Capital echoed concerns around trade-related sentiment, noting that fading confidence around a potential US-India agreement has weighed on foreign investor positioning. “With each passing day of delay in US India trade deal, market is trying to factor in long term implications of higher tariff.”

However, noting Trump’s comments on Wednesday suggesting a “good deal” he said, “any positive development on this front may change the sentiment around India.”

Currency volatility adds another layer of risk, although if a favourable trade deal is signed, it would lift some pressure off the rupee. As of now, currency movements remain a key overhang for global investors.

Bhatia said the rupee’s trajectory reflects both structural inflation differentials and short-term demand-supply dynamics. “The rupee should depreciate 3–4% every year against the dollar, based on the inflation differential we run against the dollar. What happens in reality is that this depreciation does not happen every year linearly, so at times of enhanced volatility we see sharper corrections,” she said.

“Right now, we are in oversold territory. It will retrace back,” she added. Dasani said currency stability is critical for foreign flows. “Rupee is a key factor that is worrisome for foreign investors because they care only about dollar returns. It raises the hurdle for investors to commit. Till the rupee stabilises, they will remain cautious,” he said.

Earnings momentum losing steam

On the earnings front, both fund managers flagged slowing momentum relative to global peers. Bhatia said domestic growth remains the most important driver for Indian markets. “Either geopolitics will settle or markets will become immune to it. Domestic growth has to be strong; that’s the main thing for our markets,” she said.

She pointed to selective resilience in corporate results. “In the case of tech stocks, expectations were running low, relatively companies have delivered better. For the other big cohort of the markets -- banks -- credit growth has been better. Results are slightly better, but stocks are still down, which makes valuations more palatable,” Bhatia said.

Dasani, however, noted that India’s earnings growth has lagged global pockets benefiting from structural tailwinds. “Other markets have been growing faster on the strength of AI, semiconductors, defence and so on,” he said.

Valuations correcting, but not compelling yet

While the recent selloff has eased valuation pressure, both managers suggested pricing alone may not be enough to drive a durable turnaround. Bhatia said markets had previously run ahead of fundamentals. “There was no reason why there was so much strength in the markets,” she said, adding that the ongoing correction is flushing out speculative participation. “Speculative hands are getting pushed out of the market, which is actually good.”

Dasani said valuations are now closer to historical norms, but not yet attractive enough to trigger aggressive buying. “Currently valuations are in line with long-term average multiples of the last 10 years. It’s a neutral zone,” he said. “Unless valuations become compelling, there is no urgency to buy India now,” he added, while cautioning that valuations alone will not revive sentiment.

What could change the narrative

Dasani said a shift in the market narrative would be required to sustain the rebound seen today. “Something has to change, possibly surprise announcements in the Budget or a truly favourable trade deal,” he said.

Fiscal policy will be closely watched, he added. “We have to see whether the finance minister bites the bullet on fiscal deficit. The government has been steadily reducing the deficit. High deficit is not good for the rupee and interest rates. One group of investors believe it is good for the near term, but personally I don’t believe so. And the government is unlikely to take that route.”

Instead, he expects the government to lean toward structural measures. “They may focus more on ease of doing business and expanding production-linked incentive schemes,” Dasani said.