Indian Equity Markets Enter FY27 Amidst Global Uncertainties
As India steps into the financial year 2027, its equity markets are navigating a complex landscape where robust domestic fundamentals are counterbalanced by an unpredictable global environment. While policy support, improving economic growth, and resilient domestic capital flows establish a solid foundation, geopolitical risks—particularly the ongoing tensions between Iran, Israel, and the US—continue to exert pressure on near-term market sentiment.
Domestic Macro Environment: A Supportive Backdrop
The domestic macroeconomic scenario remains favorable, with India benefiting from a positive base effect, aided by fiscal and monetary easing measures, advancements in trade agreements, and GDP outcomes that have surpassed expectations. Demand conditions are showing gradual improvement, and retail participation in equities is deepening steadily. However, the escalation of conflict in West Asia has emerged as a significant near-term risk, especially considering India's heavy reliance on energy imports. Approximately 35–40% of crude oil demand and around 54% of pre-war liquefied petroleum gas (LPG) flows are routed through the strategically vital Strait of Hormuz, making any disruption a critical concern.
FY26 Performance: Global Factors Dominate
The financial year 2026 was largely influenced by global factors rather than domestic weaknesses. A series of events, from the US "Liberation Day" tariff announcement in April 2025 to the intensification of geopolitical tensions towards the year's end, kept market volatility elevated. The Nifty 50 index declined by approximately 5%, marking its weakest performance in six years. Midcap stocks demonstrated relative resilience, with the Nifty Midcap-100 gaining 2.1%, while the Nifty Smallcap-100 fell by about 6%. In global terms, India's underperformance was more pronounced. After a prolonged phase of outperformance, India emerged as the worst-performing major market in FY26, dropping 14% in US dollar terms compared to a 27% rise in the MSCI Emerging Markets index and a 16% increase in the S&P 500. This divergence occurred despite improving earnings trends, reflecting a shift in global capital allocation strategies.
Drivers of Underperformance and Domestic Counterbalance
Three primary factors drove this trend. First, global uncertainties dominated investor sentiment, heightening risk aversion. Second, India's limited involvement in the global artificial intelligence (AI) investment cycle diverted capital flows to other markets. Third, and most significantly, was the scale of foreign institutional investor (FII) selling, with outflows reaching a record ₹3.3 lakh crore in FY26, including ₹1.2 lakh crore in March 2026 alone.
In contrast, domestic institutional investors (DIIs) provided a strong counterbalance, investing a record ₹8.5 lakh crore during the year, supported by systematic investment plan (SIP) inflows exceeding ₹32,000 crore per month. Equity mutual fund assets under management (AUM) rose to approximately ₹39 lakh crore, with inflows sustained for 61 consecutive months. This structural shift towards domestic participation continues to anchor the market during periods of global volatility.
Geopolitical Risks and Policy Responses
The Iran–Israel/US conflict remains the most critical near-term variable. With over 85% of crude oil requirements imported, any disruption in the Strait of Hormuz poses risks through higher inflation, currency pressure, and margin compression for businesses. India has responded by diversifying its supply sources, with Russian crude imports increasing by about 90% in March 2026 and limited Iranian supplies resuming after a seven-year gap. However, the duration and intensity of the conflict remain uncertain.
Simultaneously, India's balanced geopolitical approach has helped mitigate risks. Strong relationships across key global blocs have enabled continued access to energy and trade routes, positioning India relatively well in a fragmented global environment.
Macroeconomic Policy and Valuation Reset
The macroeconomic response from both the Reserve Bank of India (RBI) and the central government has been substantial through FY26, even if markets have not yet fully priced it in. The RBI delivered cumulative repo rate cuts of 100 basis points, along with cash reserve ratio (CRR) reductions and liquidity measures. On the fiscal side, reforms such as personal income tax relief, GST rationalisation, and progress on trade agreements with the UK, EU, and US are expected to support consumption and investment. While the market has yet to fully price in these measures, their impact should become more visible over FY27.
The RBI's April 2026 policy underscores a calibrated stance, with rates held at 5.25%. Growth for FY26 has been revised up to 7.6%, with FY27 projected at 6.9%. Inflation, currently at 1.95% for 11 months of FY26, is expected to rise to 4.6% in FY27, driven by higher crude prices and currency pressures. Assumptions have also been revised, with crude oil at USD 85 per barrel and the exchange rate at INR 94 per US dollar.
Despite the index-level correction, India's macroeconomic fundamentals have remained more resilient than the price action might suggest. Following an approximately 10% decline since the onset of the Iran-Israel/US conflict, the Nifty 50 is now trading at a 12-month forward price-to-earnings (P/E) ratio of 17.7x, a 15% discount to its long-period average of 20.9x. More significantly, India's valuation premium versus MSCI EM has compressed sharply from a 10-year average of 73% to just 27%, approaching a multi-decadal low of 21%. Broader market valuations require more nuance: the Nifty Midcap-100 trades at 24.6x forward P/E, a modest 4% premium to its long-period average, while the Nifty Smallcap-100 is at 19.8x, a 15% premium to its historical average. The most attractive valuation case is therefore concentrated in large-cap equities, where the absolute discount and the narrowing EM premium together present a meaningful entry point for investors with a 12–18 month view.
Earnings Growth and Sectoral Outlook
Earnings remain the key medium-term driver. We estimate a 16% compound annual growth rate (CAGR) in earnings for both the Nifty 50 and the MOFSL universe over FY26–28. Nifty earnings per share (EPS) is expected to grow from ₹1,060 in FY26 to ₹1,246 in FY27 and ₹1,440 in FY28, implying growth of 18% and 16%, respectively. The policy tailwinds from rate cuts, GST simplification, and improved trade agreements—none of which are yet fully reflected in reported earnings—are expected to progressively support corporate profitability from FY27 onwards as domestic demand conditions improve.
The near-term outlook for Indian equities is one of gradual, phased recovery, with the pace and sustainability of that recovery tied closely to developments in the West Asia conflict. A resolution—even a durable ceasefire—would improve the risk-reward calculus through multiple channels simultaneously: lower crude prices, rupee stabilisation, a reduction in near-term earnings downgrade risk, and the potential for a meaningful reversal in FII flows. Any reversal of FII flow against the backdrop of the current valuation setup could result in a sharp re-rating over a relatively short timeframe.
After witnessing sharp underperformance in CY25, Indian markets still declined with similar intensity to other EM peers post the start of the war. This suggests that despite the lower absolute and relative valuation, the Indian market is still not a top-down market, and portfolios should be designed on a bottom-up basis with growth visibility. Given the current valuation level, where we see limited downside, the upmove will be driven by earnings growth. Consequently, we recommend investing in companies with high earnings growth visibility that have experienced reasonable valuation contraction. Within this framework, we remain constructive on a few key themes. The sectors best positioned for the year ahead are:
- Financials: Where credit quality and return ratios have both improved materially.
- Consumption: Where rural demand recovery and two good agricultural years create tailwinds.
- Capital Goods and Infrastructure: Where the government capex cycle remains structurally unbroken.
IT warrants selectivity given US headwinds. Power and energy transition plays—driven by AI infrastructure and electrification demand—are the emerging structural theme of the decade.
Structural Case and Long-Term Perspective
The structural case for India remains intact. Growth is steady, policy support is strong, and domestic flows provide stability. What has changed is valuation—markets are now at more reasonable levels. The key risk remains a prolonged geopolitical conflict. An extended disruption could keep crude prices elevated, pressure inflation and the currency, and weigh on corporate profitability.
History offers perspective. The COVID-led 38% decline was recovered in six months, and past corrections have consistently rewarded investors who stayed invested rather than waited for certainty. The current disruption is cyclical and geopolitical. India's structural drivers—rising incomes, financialisation (still around 5% of household wealth versus 40–50% in developed markets), manufacturing-led formalisation, and a young workforce—remain firmly in place. For long-term investors, this is not a setback, but an opportunity to stay invested and participate in the next phase of growth.
Motilal Oswal is the Group CEO and Co-founder of Motilal Oswal Financial Services.
