Daily Voice: FIIs won’t return till earnings catch valuations; budget capex jump unlikely, says Kotak Life CIO

Radhavi Deshpande is the Chief Investment Officer at Kotak Mahindra Life Insurance

• FII flows may remain subdued until earnings growth catches up with valuations
• Union Budget unlikely to show a significant increase in capital expenditure
• Job creation likely to remain a key priority in Budget

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In the short term, FIIs are likely to remain cautious, said Radhavi Deshpande, Chief Investment Officer at Kotak Mahindra Life Insurance, in an interview with Moneycontrol. “India continues to be a strong structural growth story, but foreign investors are highly valuation-sensitive.”

According to her, FII participation will improve meaningfully only when domestic earnings growth begins to catch up with elevated market valuations. Until that visibility strengthens, FII flows may remain subdued despite India’s long-term economic appeal.

Meanwhile, she believes the Union Budget is unlikely to show a significant increase in capital expenditure, with capex growth expected to broadly track nominal GDP growth.

In the Union Budget, do you expect the government to focus on measures that could attract more foreign investment into India?

Attracting foreign capital will remain a key priority, supported by policy continuity, capital market reforms and improvements in the ease of doing business. These steps help sustain investor confidence, but meaningful foreign inflows will return only when valuations are more reasonable and earnings growth strengthens.

While policy support provides an essential foundation, sustained foreign investment ultimately depends on consistent and stable earnings. In the current environment, steady reforms combined with clearer earnings visibility will be crucial for reviving foreign investor participation.

Do you think there will not be a major increase in government capital expenditure in the Budget?

The Budget is unlikely to show a major jump in capital expenditure, with capex growth expected to track nominal GDP growth broadly. Having already front- loaded infrastructure spending in recent years, the government now appears focused on sustaining momentum while maintaining fiscal credibility.

Some incremental capex increases are likely, but the key will be how effectively this translates into private sector investment. Markets will watch for clearer signs that government-led spending is supporting stronger corporate earnings and a broader investment cycle.

Do you expect the government to target a significant push toward job creation in the Budget?

Yes, job creation is likely to remain a key priority. Durable income growth is essential for sustained consumption, making the quality and stability of jobs crucial for any economy.

The government is expected to continue focusing on employment generation, particularly through infrastructure expansion, manufacturing initiatives, and targeted welfare schemes that enhance employability. These measures can support long term economic resilience while ensuring broader participation in growth.

Are you concerned about equity markets this year given the persistent global headwinds, even though domestic fundamentals remain strong and healthy?

There is certainly a case for caution in today’s markets. Domestic fundamentals remain resilient, but equity valuations are hovering around long term averages. With persistent global uncertainty, tight financial conditions, and an earnings recovery that is still uneven, the risk reward profile is gradually improving—but selectively.

Some segments of the market continue to trade ahead of fundamentals, so a balanced and disciplined approach remains essential in navigating the year ahead.

Have the earnings announced so far and management commentaries met your expectations and increased confidence regarding Q4 numbers?

Earnings so far have been stable but not as strong as markets would have preferred. Management commentary has generally been stable to cautious, indicating that while some sectors may be bottoming out, a broad based earnings acceleration is not yet evident.

Greater visibility on earnings momentum in the coming days will be important for strengthening confidence in Q4 performance. Until then, expectations should remain measured as the recovery is still uneven.

Do you think FIIs are unlikely to favour Indian equities in the short term, given their continued selling?

Yes, in the short term, FIIs are likely to remain cautious. India continues to be a strong structural growth story, but foreign investors are highly valuation sensitive and currently see better risk adjusted opportunities in other markets.

Their participation will meaningfully improve only when domestic earnings growth begins to catch up with elevated market valuations. Until that visibility strengthens, FII flows may stay subdued despite India’s long term economic appeal.

Do you believe Donald Trump poses a bigger concern for markets than other factors?

I wouldn’t say Donald Trump poses a greater concern than other key market factors. While geopolitical developments, including US political shifts, can influence sentiment and add short term volatility, markets tend to react more decisively to changes in global liquidity, interest rate expectations, earnings growth, and valuations. These macro and fundamental drivers ultimately shape sustained market direction, and they are likely to remain far more influential than any single political personality.