India equity update: valuation reset meets changing backdrop

Beneath the weak price action, the real economy has proved more resilient than the headlines implied. Growth registered close to 7.8% year-on-year in early 2026, holding up through global tariff noise and the oil spike that accompanied the West Asia conflict. That resilience reflects years of monetary and fiscal consolidation that have left India structurally sturdier than in previous episodes of global stress, with credit growth and purchasing managers’ indices (PMIs) staying firm even as energy prices rose. With the subsequent US–Iran agreement and the reopening of the Strait of Hormuz, crude has eased, inflation sits comfortably within the Reserve Bank of India’s (RBI) target band, and the currency has steadied. The external picture, in short, has substantially improved, in our opinion.

Policy is adding a further, more deliberate impulse. The Reserve Bank of India’s reintroduced FCNR(B) deposit scheme – similar in intent but structured more generously than its successful 2013 predecessor with the central bank absorbing the hedging cost – is designed to channel a wave of foreign-currency inflows into the system over the coming months. Broker estimates for the combined deposit and external-commercial-borrowing response vary widely, but the direction is unambiguous, and India’s diaspora is roughly 70% larger than it was in 2013¹ , widening the investor pool. Inflows of this kind have historically supported deposit and credit growth and rippled across the economy. The variable worth watching is transmission: how quickly this liquidity converts into actual lending activity.

The long-awaited handoff from public infrastructure spending to private capital expenditure is finally underway, with corporate loan approvals starting to accelerate. Two growth engines look particularly important, with structural rather than cyclical impact.

We believe power is the most obvious beneficiary: capacity additions in FY26 ran at roughly double the prior year, with transmission being the binding constraint. We see this as a multi-year opportunity for transmitting electricity using direct current at very high voltages instead of more traditional currents used in most power grids today. Indeed, global majors are expanding Indian transmission capacity, while sector capex is projected to more than double towards US$280bn over the second half of the decade.²

Defence is the second: defence-related exports have reached record levels, as domestic production is now being mandated rather than merely encouraged through an expanding list of import bans. We see higher and rising capital outlay pointing to a durable build out rather than a one-off, with defense offering staying power given its particular role at the intersection of industrial policy, supply chain security and technological upgrade.

Layered on top is a broader digital dimension that is easy to underestimate amidst the global AI battle. India has climbed sharply up global AI-vibrancy rankings and now contributes more to the world’s open-source code base than any other country. As the data-centre build-out gathers pace, India sits in a prime space to capitalise on its large cost advantage. We think India’s population-scale digital public infrastructure and rapidly digitising economy create an unparalleled foundation for training and deploying AI models in real-world settings. India is pioneering highvolume, low-cost AI applications across financial inclusion, healthcare diagnostics, language translation and government services. The rise of India-specific AI models for multilingual use cases and the government’s push under the national IndiaAI Mission to expand compute access and data platforms could significantly lower barriers to innovation, with knock-on effects across sectors.

After six to eight quarters of consolidation, consumer demand is reviving. Income-tax relief and Goods and Services Tax (GST) 2.0 reforms are feeding through the real economy, and the breadth of the pickup stands out. The clearest new signal is in the staples sector, where domestic fast moving consumer goods (FMCG) sales growth has accelerated from a low-single-digit trough in late 2024 to mid-teens growth in early 2026. More tellingly, real (inflation-adjusted) retail sales numbers have swung from negative a year ago to double-digit positive, confirming that volumes, not merely prices, are rising.

Retail credit tells a similar story, with personal loan growth re-accelerating while still sitting well below its 2023–24 peak — signaling demand reviving without the excesses that earlier drew regulatory scrutiny. Beyond this, autos remain the key consumer headline, with record FY26 sales across every category – historically a reliable read on broad-based consumer confidence – and further supported by a steady labour market backdrop.

This is indeed the demand pickup that had been conspicuously absent, and it is arriving alongside the investment recovery, creating potential multiplier effects. We continue to view aspirational consumption as a structural, long-term trend in India. Premiumisation is set to play out across autos, food and beverage, personal care, travel and tourism, apparel, mobile phones and electronics, and home upgrades. It also marks a genuine point of differentiation from China, where the consumer has, by contrast, remained notably subdued.

Recent elections across five states — representing about a fifth of India’s GDP — extended the gains of Prime Minister Narendra Modi’s National Democratic Alliance (NDA), which held two states and won West Bengal for the first time in history. The relevance for investors is policy continuity: closer centre–state alignment tends to widen the runway for investment-led growth and reform and to speed-up project execution.

Externally, a sequence of trade agreements — and the prospect of an India–US deal — has restored India’s standing as a neutral ground for global business. The evidence is visible in resilient foreign direct investment, projected near US$73bn this year, with net flows up over 50% year-on-year, and in supply-chain decisions such as the relocation of a growing share of US-bound electronics production to India.⁴ As other jurisdictions like China and Vietnam, for example, continue to face tariff pressure, India increasingly presents itself as a credible alternative across a meaningful slice of its export base.

Risks clearly remain — a renewed flare-up in the West Asia conflict, a global hard landing, and a weaker-thannormal monsoon stand out among the most prominent. On balance, however, we believe these are outweighed by the combination of undemanding starting valuations and accelerating economic momentum, which should ultimately be reflected in improving corporate earnings. On that basis, the risk-reward for Indian equities has, in our view, turned more constructive.

India equity valuations have now come back to more reasonable levels, and they are being met with improving fundamentals across a number of dimensions including liquidity, capital expenditure, consumption and policy at the same time — a strikingly broad alignment. In our view, these attractive near-term dynamics, coupled with India’s long-term growth story, support a multi-year structural compounding opportunity across a deep, diverse and evolving equity universe.

 

1. Khan Study Group, 2026.
2. Jefferies, 2026
3. Cash reserve ratio/Statutory liquidity ratio
4. CLSA, 2026.