Indian Equities: Volatility Outside, Strength Within

I ndian equities have entered a volatile phase, but the source of that turbulence matters. Much of the pressure has come from outside India: elevated crude oil prices, geopolitical uncertainty, swings in U.S. bond yields, a stronger dollar, and continued foreign institutional investor selling. These factors have unsettled sentiment.[EasyDNNnews:PaidContentStart]

In my experience, market prices often move faster than underlying fundamentals during such periods. The key question is whether the economic and earnings foundations have weakened. I do not believe they have. I remain constructive on Indian equities over the next 12 months, though I would not describe this as an effortless market to buy. Economic growth remains healthy, domestic liquidity is deep, and corporate balance sheets are stronger than in earlier cycles. More importantly, the latest Quarterly Results suggest that earnings are beginning to support the broader economic narrative. Even so, valuation discipline remains essential. A strong economy and improving profits do not automatically make every stock attractive. Markets reward investors who buy durable earnings at sensible prices, not those who pay excessive valuations.

India could grow closer to 7.5 per cent, ahead of more conservative official projections. High-frequency data such as automobile demand, credit growth, cement volumes, and commercial property leasing suggest that momentum remains intact.

The early Q1 FY27 results have strengthened this case. Nearly three out of every four companies in the sample reported year-on-year profit growth, and the improvement was not limited to one sector or a handful of index heavyweights. Across several industries, revenue growth has generally ranged between 15 and 30 per cent, while operating profit has grown faster than revenue in many cases. That points to margin expansion and improved operating leverage rather than a recovery driven only by volumes. I would still resist declaring that the earnings cycle has decisively turned after one quarter. Nevertheless, Q1 FY27 has strengthened the valuation floor and reduced the risk that India’s growth remains disconnected from corporate profitability.

Foreign institutional investor selling has been another concern. I have never viewed these outflows as a rejection of India’s long-term prospects. They are better understood as a response to relative valuations and competing opportunities in Korea, Taiwan, and China.

What has changed is the intensity of the selling. Net FII cash outflows stood at about `1,22,540 crore in March 2026. They moderated to `70,135 crore in April, `55,963 crore in May, and `49,029 crore in June. In July, the outflow stood at around `5,668 crore at the time of assesSMEnt. The direction is encouraging. Selling has not stopped, but it is losing momentum. Markets often stabilise before foreign investors become outright buyers. The first sign is usually a reduction in selling pressure, followed by earnings stabilisation and, later, meaningful inflows.

Q1 earnings and moderating FII outflows are reinforcing each other. Better results weaken the case for further earnings downgrades, while lower foreign selling allows domestic fundamentals to exert greater influence over market direction. Banks remain one of the preferred large sectors. Credit growth is healthy, provisions are manageable, and balance sheets are broadly sound. I also see a tactical opportunity in consumption and Real Estate. Salary and pension revisions could support spending on housing, automobiles, and consumer durables. Real estate should benefit from rising incomes and resilient commercial leasing, though investors must remain disciplined on leverage, cash flows, and valuations.

My conclusion is straightforward. Near-term volatility may continue while global conditions remain unsettled. However, India’s structural investment case remains intact, Q1 FY27 earnings have made it more credible. The next 12 months are likely to reward patience and careful stock selection, not indiscriminate buying.

RAJESH V PADODE
Managing Director

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