After spending much of 2026 grappling with foreign selling, an earnings slowdown, geopolitical shocks and crude-driven inflation fears, Indian equities are witnessing a subtle but important shift. This week has been highly patchy, led by global and domestic news flow, but foreign investors have begun returning, domestic liquidity remains robust, and corporate earnings have held up, especially among smallcaps in the Q1FY27 results. The question for investors is no longer whether India remains a preferred long-term investment destination, but whether domestic strengths can continue to offset current external headwinds.
Global developments continue to cast a long shadow over Indian markets, particularly through crude oil. Markets were rattled this month by renewed concerns over the possible closure of the Strait of Hormuz, deteriorating global diplomatic and security conditions, threats involving Trump, and tensions between the EU and Russia over the possible seizure of merchant ships. Brent crude briefly moved above US$90 per barrel, with some moderation by the end of the week. Iran has sought to exert greater control over the corridor, while the US and its allies continue efforts to maintain navigational access. For India, the debate over who controls the Strait is less important than the economic consequences. Any prolonged disruption could widen the current account deficit, pressure the rupee and push inflation higher, ultimately affecting corporate profitability and household spending. India’s trade deficit expanded to US$87 billion in Q1FY27 from US$67 billion in Q1FY26, underlining the economy’s sensitivity to external pressures.
The renewed foreign investor interest was not broad-based. FIIs exhibited a clear preference for sectors offering either defensive earnings visibility or attractive valuations. Consumer services, healthcare and consumer durables attracted substantial inflows, reflecting confidence in India’s consumption-driven growth story. At the same time, Indian IT has seen renewed FII buying, marking the sector’s first positive inflow in 2026, driven by attractive valuations after its deep correction. AI concerns are easing, with investors increasingly viewing AI as a growth opportunity rather than a threat. Signs of stabilizing technology spending and a shift toward AI deployment-led business are also improving sentiment. Q1 earnings were broadly in line with expectations, while companies continue to strengthen their AI capabilities. Overall, Indian IT remains an attractive short- to medium-term value-buy opportunity. The Nifty IT Index has rallied 15% in the last three months compared with a 3% gain in the main index. Foreign investors are positioning for a cyclical bet on Indian IT amid concerns over a global AI bubble.
While foreign flows have improved sentiment, domestic policymakers have introduced a new area of debate. The RBI’s draft proposal restricting NBFCs from offering revolving credit facilities such as flexi-loans and overdrafts has created uncertainty around the lending ecosystem. Under the proposed framework, most NBFC lending would need to follow a traditional term-loan structure, where repaid principal cannot be redrawn. Although the measure seeks to strengthen credit discipline, it could affect flexibility for borrowers in the MSME, corporate and unsecured lending segments. Market participants broadly expect lenders to redesign products rather than witness any major disruption to credit growth, limiting the downside risk to valuations and growth.
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India’s July CPI inflation accelerated to 4.45%, a 19-month high, exceeding the RBI’s medium-term target of 4%, though remaining within the mandated tolerance band. Food inflation remained elevated at 5.52%, highlighting lingering supply-side pressures. Meanwhile, US inflation moderated to 3.4%, reducing the likelihood of aggressive near-term tightening by the Fed. These trends provide a broadly supportive backdrop for risk assets, although policymakers in both countries continue to emphasize a data-dependent approach.
Closer to home, the market had to confront succession-related concerns at India’s largest industrial group, Tata, given differences in views between the current Tata Sons Chairman and the Trusts. The announcement sparked a sentiment-driven sell-off across Tata Group companies, eroding around ₹43,000 crore in market capitalization in a single trading session as investors weighed the implications of a leadership transition. However, the long-term concerns for listed Tata companies appear unwarranted, given the group’s deep management bench and strong governance framework.
A similar one-off impact was seen in Birla Group stocks after the introduction of a 0.25% royalty payment by group companies for the use of the brand. The move surprised the market, as it marked a notable policy shift from the group’s traditional family-led stewardship model. However, such royalty arrangements are common among several Indian family-owned business groups. Beyond a one-time impact in 2026–27, the change is unlikely to materially affect the group’s long-term outlook.
The author Vinod Nair is the Head of Research, Geojit Investments Limited.
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