Daily Voice: Quest's Rakesh Vyas sees FY27 earnings normalisation driving fresh capital inflows

Rakesh Vyas is the CIO and Portfolio Manager of Quest Investment Managers

• Any policy shift under new Fed Chair likely to be measured and data-dependent rather than front-loaded
• Expected earnings normalisation in FY27 may boost investor confidence, capital flows
• Indian exporters set to become significantly more competitive in large American market, particularly across cotton and apparel categories

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After two years of subdued performance, Rakesh Vyas of Quest Investment Managers believes FY27 is likely to witness a normalisation in corporate earnings, which should help restore investor confidence and improve capital flows.

FIIs have traditionally regarded India as a structural growth market, and the absence of robust earnings momentum over the past two years has weighed on capital inflows, he said in an interview with Moneycontrol.

Meanwhile, according to him, the government’s focus on stimulating domestic consumption is expected to improve capacity utilisation levels, which, in turn, could catalyse a meaningful pickup in private capital expenditure over the next 12–18 months.

Do you see a significant increase in FDI and technology transfer, especially after the India–US interim trade agreement?

The recent India–US interim trade agreement is expected to bring greater tariff stability and ease trade frictions, thereby helping revive both FII and FDI interest in India, particularly across sectors such as electronics manufacturing, IT services, and consumer goods.

In addition, the Union Budget’s announcement of a long-term tax holiday—extending up to 2047—for foreign companies leveraging India-based data centers to serve global clients should further catalyse investments in the data centre ecosystem and enable meaningful technology transfer. The agreement also contemplates higher Indian procurement of advanced electronics, ICT components, GPUs, and data-centre equipment, which would enhance domestic capabilities and strengthen the broader technology and manufacturing value chain.

Do you believe electronics and textiles will be high-growth areas going ahead?

With the US lowering reciprocal tariffs on Indian textiles and garments to around 18%, Indian exporters are set to become significantly more competitive in the large American market, particularly across cotton and apparel categories, which could translate into higher export volumes.

The tariff reduction also enhances the relative competitiveness of Indian electronics manufacturers compared with other Asian production hubs. This should support EMS providers in expanding capacity, increasing localisation, and strengthening integration into global value chains, thereby improving margins and boosting exports.

Overall, these developments position textiles, apparel, and electronics as key growth segments for Indian manufacturers to steadily gain market share in the US.

Do you think India’s relatively lower exposure to semiconductors and AI is a major concern for some foreign investors?

The strong rally in these segments over the past two years has underscored the limited availability of adequate investment opportunities in this space within India. However, recent policy measures — including the government’s announcement of long-term tax holidays for data centre–related investments and ongoing incentive schemes to promote domestic semiconductor manufacturing — are expected to create meaningful opportunities over the medium term.

Is a recovery in earnings and the ability to maintain healthy earnings growth a key factor in bringing FIIs back to the market?

FIIs have traditionally regarded India as a structural growth market, and the absence of robust earnings momentum over the past two years has weighed on capital inflows. Geopolitical uncertainties, along with delays in finalising a US–India trade agreement, have further compounded these concerns and kept flows subdued.

However, India has been proactively pursuing trade partnerships with major economies, which should improve market access and enhance the global competitiveness of domestic companies, creating long-term growth opportunities. With corporate earnings expected to normalise from FY27 onward, we believe FIIs are likely to regain confidence and view India once again as an attractive investment destination.

Do you expect interest rates in the US to be reduced gradually, especially after the new Fed Chair takes charge?

Given the continued strength in US macroeconomic indicators and a resilient labour market, the likelihood of the Federal Reserve undertaking sharp or aggressive rate cuts appears limited. However, in the near term, a modest and gradual easing—such as a 25 basis point reduction—cannot be ruled out, particularly if inflation trends remain contained.

Overall, any policy shift under the new Fed Chair is likely to be measured and data-dependent rather than front-loaded.

Which sectors would you like to increase exposure to, particularly in light of recent global and domestic developments?

Supported by India’s trade agreements with major global economies, export-oriented sectors such as electronics, textiles, pharmaceuticals, and chemicals are well positioned to benefit from improved market access and sustained long-term growth opportunities.

At the same time, the government’s focus on stimulating domestic consumption is expected to enhance capacity utilisation levels, which should, in turn, catalyse a meaningful pickup in private capital expenditure over the next 12–18 months.

Additionally, India’s inherent labour cost advantage makes it an attractive destination for labour-intensive industries worldwide, encouraging greater outsourcing and strengthening its role as a competitive global manufacturing and services hub.