On the AI disruption to the IT sector, Chawla believes that the last mile, comprising governance, data plumbing, workflows, etc., is where Indian IT has always created value, but it remains to be seen how companies adapt to new challenges.
Edited excerpts:
Do you think the India-US trade deal will be the next trigger for the markets, alongside earnings recovery, or will investors parse the terms in March when a final deal is negotiated?
A broad consensus on the terms of the trade deal announced at the beginning of February, which appears favourable to India, has brought cheer to the equity market. This also helped calm the forex market. In the last 12 months, the rupee has been one of the worst-performing currencies. There were potentially two factors leading to the depreciation of the rupee: potential lower exports to US due to punitive tariffs making Indian exports uncompetitive, and FPI selling. One could argue that foreign flows were also impacted due to relative premium valuations to other Emerging Market (EM) countries and due to slower earnings growth.
Prima facie, from the terms of the deal, it does seem tariffs on Indian exports to US will be lower than those of competing countries like Bangladesh, Pakistan and Vietnam, making Indian goods competitive.
Since equity markets discount the future, barring any significant deviations in the actual Indo-US deal proposed to be inked in March, I would expect the markets to start focusing on earnings. While the US is one of our largest trading partners, India has signed multiple bilateral trade deals, including those with EU and UK. We understand there are some more bilateral negotiations with other countries. This should mitigate the risk further from a single trading partner. All these factors should help financial markets and make India an attractive destination for both domestic and international investors.
FPI and foreign direct investment (FDI) flows dried up sharply and turned to outflows in 2025. Do you think that with a final deal in the works, the outflows will reverse?
FPI flows are a function of both domestic factors and alternative opportunities for international investors. In 2024, FPI flows were marginally negative. In 2025, FPI flows turned distinctly negative.
Domestically, earnings growth was tepid, in the low single digits. India traded at the highest valuation premia to other emerging markets. Globally, we have seen an AI wave. Most of the investments were directed to hardware and companies related to the AI value chain. We had seen chip manufacturers in Korea and Taiwan growing rapidly on the back of huge demand. Unfortunately, India did not have any AI play to offer.
The AI wave is expected to gain further momentum and is expected to disrupt many traditional services. We need to see how India transits and adapts to the new technology challenge.
In the meantime, better earnings growth on the back of consumption demand improving (lower taxes in the previous budget and lower Goods and Services Tax or GST) and higher capex allocation in the recent budget are likely to have a favourable impact on corporate profitability. The breadth and depth that Indian equity markets offer to foreign investors are difficult to ignore.
How do you feel our IT companies are faced with respect to AI?
In the last two years, there has been a paradigm shift in technology advancement. The pace at which new AI models are being developed and rolled out is even surprising those who are leading these changes. The proof was visible after the announcement of Anthropic’s new tools and Palantir’s latest demonstrations around the SAP transformation. There is no doubt that AI compresses the time and effort, which is a large part of the business of Indian IT services.
AI is not just replacing work but also creating new work. AI-assisted tasks are things companies simply weren’t doing earlier; it means it will create new opportunities which were not open in the past. So, companies which adapt new technology as consumers, developers or service providers will thrive in future.
Large companies run on complex, structured data, ERP stacks, and integrations built over years. AI models can’t replace that infrastructure easily because they need to be integrated into it. That last mile work, that is governance, data plumbing, workflows, etc., is exactly where Indian IT has always created value. And that doesn’t change with AI.
There is no doubt that the older model of time and material will feel a lot of pressure as AI productivity rises. But IT companies have started pivoting with the new business model of productized services, outcome-based models, and Software-as-a-Service (SaaS), where Indian firms can build reusable AI components instead of selling hours.
How would you analyse the results for the December quarter, adjusting for the exceptionals? After several quarters, is India Inc. seeing a qualitative revival in earnings growth?
Results for the December quarter are looking better than expected. Based on the results announced, Nifty 500 earnings have expanded by around 12% year on year (y-o-y), which is healthy. While the results season is not completely over, after many quarters of single-digit growth, we are witnessing double-digit earnings growth. Hopefully, the momentum sustains for the rest of the season.
Large caps continue to be resilient with high single-digit growth. Mid-caps continue to outperform with mid-teens earnings growth. The big turnaround is in small-cap earnings growth. After many quarters of near-zero earnings growth, we are witnessing much better growth.
Sectorally, we have seen improvement in financials, with credit growth accelerating and NIM (net interest margin) contraction much lower than feared. Autos have seen a sharp recovery since the implementation of the GST, and the outlook remains strong. Consumer staples have seen volume and margin expansion in selective cases. In IT, results were better than feared, with companies reporting sequential growth in an otherwise seasonally weak quarter. Valuation headwinds are due to AI’s impact.
Large cement companies reported strong volume and Ebitda growth on y-o-y basis during the quarter. And lastly on metals, ferrous companies reported strong growth led by a rally in global metal prices. For non-ferrous, results came in weaker than expected, though the outlook has improved.
Sector-wise, which are the hot plays to benefit from the deal?
Gems and jewellery, textiles/garments, leather goods, chemicals and engineering machinery, pharma and IT services were the biggest forex earners from US. Just to recall, pharma and IT services were exempt from tariffs. Logically, post the new deal, other sectors should see a revival in demand.
I would like to highlight that the sectors which were impacted did not form a material part of any indices. Hence, there were no earnings impacts either way. However, all the sectors are labour-intensive. The second-order impact in terms of livelihood and consumption demand would gradually improve as exports pick up.
Coincidentally, sentimentally pharma sector had been de-rated since the time higher tariffs were announced on Indian exports, even though pharma goods were explicitly excluded. We did not see material deterioration in earnings during the same period. With stable earnings, the sector’s negative overhang may be alleviated.
While Systematic Investment Plan (SIP) flows are at record highs, we also saw in January ₹33,000-34,000 crore of precious metal exchange-traded fund (ETF) buying. What does that suggest to you?
Clearly, investors are chasing returns. Precious metals have done exceptionally well in the recent past. Investors want a piece of the action and are diversifying.
I would like to share a couple of thoughts on this emerging trend. Firstly, domestic investors have a risk appetite and are looking for investment alternatives. This is a good sign since it means that when earnings revive, we shall continue to see domestic flows into equity, leading to capital formation in the country. This is a productive asset class.
Historically, we have seen precious metals do well whenever there are geopolitical tensions or disruptions in the global financial order. Hopefully, 2026 should be much calmer.
There is a pick-up in private capex seen this year from non-financial listed players in H1FY26. Do you think it will sustain?
Not only is the nature of capex changing, but so are the sources of funding.
The incentive for private capex is to defend market share or when there is a sustained demand or confidence in future growth. Since the global financial crisis, we have not seen any meaningful pick-up in capex, as the average capacity utilization for the industry has been hovering below the trigger for expansion. Over a period, we have seen demand inching up.
The nature of capex is changing with a focus on new emerging segments like renewable energy, investment in battery storage, and the creation of capacity to cater to the requirements of Global Capability Centres (GCCs) in India. This is different from the historical large chunky investments in steel and cement, and infrastructure projects.
Typical capex per project is of lower capital outlay, quicker implementation and better returns than past. This results in a virtuous cycle. The good news is that there is a healthy ecosystem of funding from VC (venture capital) and capital markets for good projects.
On the macro front, how do the fiscal and current account deficits look like unravelling, the latter in the context of the India-US trade deal? Also, your take on interest rates and the rupee.
Over the last few years, the government has played a very fine balancing act of fiscal prudence. The fiscal deficit glide path has been achieved as per the Fiscal Responsibility and Budget Management Act of 2003 (FRBM). The fiscal deficit is targeted at moving towards 4.2% in FY 2027.
The Current Account Deficit (CAD) too has been manageable. While India has signed multiple trade deals (some already concluded, others in progress), CAD risks widening until exports pick up.
The pressure on the rupee has significantly reduced after the announcement of the trade deals. Hopefully, this would reduce the rupee’s volatility in the near term.
Given the budget behind us and a government adhering to fiscal glide path, near term conclusion of trade deals, high credit to deposit (CD) ratio in the banking system which hints at demand in the economy, a pick up in private capex and close to an 11% nominal gross domestic product (GDP), makes a case for a stable range bound year ahead for interest rates and foreign exchange rates.
The returns of Nifty were a little above 10% last year. Do you expect a material change this year? Or should investors be content with returns of 12-13%?
Over the long run, markets are slaves to earnings. In recent years, earnings growth has slowed due to internal and external factors. This is how equity markets have mirrored the performance.
Given the base effect, stronger consumption demand, and government infrastructure spending, we may see stronger earnings growth. With forex volatility reducing, foreign investors may also be looking at India a lot more favourably, especially after the huge underperformance last year. Barring the monsoon, both macro and micro factors seem aligned for Indian equity markets in the coming times.
(Views expressed are personal)
