Daily Voice: Pranab Uniyal sees foreign inflows, India’s risk appetite rising next year on four key drivers

With a comfortable inflation trajectory in place, the RBI has space to cut rates further by 25 bp. In the upcoming policy meeting in December, even with another 25bps rate cut, the real policy rate (adjusted for inflation) would stand at 1.5-1.8% considering 3-4 quarters ahead inflation (i.e., Q1 and Q2 FY27). The real neutral policy rate has been guided between 1.4-1.9% by the RBI.

Are you confident that GST-triggered consumption will continue in Q4FY26, given that some experts believe the auto sector (as an example) is already slowing?

GST cuts helped reduce prices for high-ticket consumer discretionary items and certainly boosted demand. December and January typically tend to be strong months for discretionary expenditure driven by the holiday and the wedding season.

We would expect the boost from GST cuts to continue during the season. Beyond that, we would expect it to follow the normal seasonality/ cyclicality, albeit at a higher level.

Do you believe the constructive backdrop can push the market to new highs soon and trigger the next leg of the upmove?

Earnings of heavy-weight sectors like BFSI, IT, and consumption have almost bottomed out. NIM compression for lenders was lower than estimated during the quarter. NIM recovery is likely to begin in Q3FY26, and credit growth could rise to 13% by FY27.

Also, GST cuts, benign inflation, declining interest rates, and fiscal support in the form of income tax relief are expected to drive consumption revival. A trade deal with the US could reduce uncertainty. India’s premium to Emerging markets is now broadly in line with historical levels and could aid the next leg of the upmove.

What is your view on the new mutual fund rules? Will they impact new MF players?

SEBI’s new MF regulations are clearly pushing the industry towards transparency, lower cost,s and stronger governance. In the long run, these are healthy moves for the ecosystem. However, they do change the economics of running an MF, and the impact will be quite different for established AMCs vs new entrants.

The reduction in TER (Total Expense Ratio) and tighter control on brokerages is going to make the industry structurally more cost-efficient. For new AMCs, though, this means less room for error—you can’t rely on higher TERs or bundled costs to absorb the initial setup inefficiencies. The path to profitability becomes longer unless the business is built lean from day one.

But at the same time, it levels the playing field against legacy AMCs that historically benefited from scale and less transparent cost buckets. If a new player positions itself as low-cost, clean, transparent, and tech-driven, these regulations actually work in their favour.

With TER compression, scale is going to be more important. New AMCs must think digital-first, avoid large sales teams, and build strong direct-to-investor or platform-driven distribution models.

With brokerages tightly capped, there is less ability for legacy players to inflate brokerages to favoured brokers. This reduces historical inefficiencies. For new players, it means that all AMCs will now operate under an identical cost ceiling.

Governance and entry rules raise the entry bar. The 97% deployment requirement, stricter issuer limits, and tighter NFO deployment timelines raise expectations on operational readiness. New AMCs will have to get investment processes, dealing desks, risk systems, trustee engagement, and compliance frameworks right from day one. This may increase the initial costs, but it will also help build investor confidence, which will help new entrants.

Encouraging MFs to increase allocations to REITs/INVITs could open up space for new strategies. This could be a big plus for new AMCs as they do not have to enter crowded categories.

What factors could attract FIIs back to Indian equities?

India has, for much of the past year, been a funding market for global investors. This trend was fueled by a confluence of factors: a corporate earnings downcycle, relatively high valuations, and global tariff pressures. Since the market peak in September 2024, Foreign Institutional Investors (FIIs) have sold nearly $30 billion in Indian equities, including $16 billion year-to-date. This mass exodus marks the second-largest absolute outflow in India's history over the past two decades, pushing foreign ownership of listed equities to multi-year lows.

However, recent data is signaling the beginning of a flow reversal. We anticipate that foreign risk appetite and investment flows into India are poised to improve significantly over the next year, driven by four critical factors:

Growth-Supportive Policies: The Reserve Bank of India (RBI) has implemented critical easing measures, including rate cuts and improved liquidity. These steps, coupled with recent GST reductions and a slower pace of fiscal consolidation, are expected to significantly stimulate economic growth over the next two years. A decisive government push for growth forms a strong bedrock for equity investment.

Historic Underperformance Catch-up: India currently presents a compelling value proposition after a significant period of underperformance. The Indian market has underperformed Emerging Markets (EM) by nearly 25% over the past two decades. This large differential suggests that India is strategically positioned for a vigorous catch-up trade, attracting value-seeking foreign capital.

Corporate Earnings Recovery: The prolonged corporate earnings per share (EPS) downgrade cycle has finally stabilized over the last three months. The Q2 FY26 results have tracked better than expectations, leading to selective earnings upgrades. This fundamental recovery is crucial, as FIIs will return when they see a clear, upward trajectory in corporate profitability.

Normalizing Valuations: The India premium has undergone a massive correction. Our price-to-earnings (P/E) valuation premium relative to the Asian region has compressed sharply from a peak of 85-90% down to 45%. This level is now approaching the 20-year average of 35%, setting the stage for a potential market re-rating based on fairer, more attractive valuations.

Which sectors are the best to own in the new year?

Large banks, auto, insurance, real estate, capital goods, and chemicals are our preferred sectors. We remain underweight on mid-cap IT and upstream oil and gas. Overall, specific bottom-up ideas will drive alpha generation rather than sectoral allocation.

Are conditions looking strong for NBFCs? Are you a buyer in the space?

We have a positive view on large, diversified NBFCs with a proven track record of managing credit quality across cycles. We would expect these NBFCs to grow faster than overall credit growth. We remain wary of the microfinance sector. Within the lending sector, our preferred play has been PSU banks over the last couple of quarters.

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