Indian equities have weathered global uncertainties remarkably well over the past year, even as geopolitical tensions, volatile crude oil prices and shifting expectations around US interest rates have kept investors on edge. At the same time, domestic participation in financial markets continues to deepen, with retail investors from smaller cities playing an increasingly important role in sustaining market flows.
In an exclusive interaction with BW Businessworld, Sachin Shah, Fund Manager & Executive Director, Emkay Investment Managers, shared his outlook on the rupee, foreign investment flows, sectoral opportunities, evolving investor preferences and the growing role of passive investing. He also explained why Indian equities continue to offer an attractive risk-reward proposition despite elevated global uncertainty.
Edited excerpts:
The rupee appreciated from nearly 97 against the USD in May to around 94.3 currently. Could a stronger rupee improve FIIs sentiments towards Indian equities?
Currency movements have a significant impact on foreign flows into a country's capital markets, both equity and debt. An appreciating currency enhances the overall returns earned by foreign investors, while a depreciating currency has the opposite effect. A stable or appreciating currency provides confidence to foreign investors that the returns generated from their investments will not be eroded by adverse currency movements.
Over the last few quarters, particularly in CY2026 (the last six months), the Indian rupee has been under considerable pressure due to geopolitical challenges. The Middle East crisis pushed oil and gas prices significantly higher, and India, being heavily dependent on imports for its fossil fuel requirements, remains vulnerable to such shocks. This created some panic in the currency markets. Additionally, sustained FII selling in Indian equities over the past few quarters has not helped currency stability.
Nevertheless, the recent cooling of oil and gas prices should provide meaningful relief to India's import bill. Further, recent measures undertaken by the RBI and the Government to attract foreign investments through the NRI Deposit Scheme are likely to receive a strong response. India also remains in a comfortable position with forex reserves of nearly USD 700 billion.
We therefore believe that the rupee's recent depreciation from around Rs 88-90 per US dollar to Rs 95-97 per US dollar was somewhat exaggerated. As conditions stabilize over the next few quarters, we would not be surprised to see the rupee appreciate back towards the Rs 88-90 range. Such an appreciation trend would, in all probability, improve FII sentiment towards Indian equities.
Which sectors stand to gain the most from a stronger rupee, and which could face near-term headwinds?
When the rupee appreciates, imported raw materials and inputs become cheaper. As a result, industries that are heavily dependent on imported commodities tend to benefit the most.
A classic example is the aviation industry, where fuel costs and aircraft purchases are largely denominated in foreign currencies. A stronger rupee lowers input costs and allows airlines greater flexibility in pricing, making air travel more affordable for a larger section of the population and thereby expanding their potential customer base.
Another key beneficiary is the automobile industry. As fuel costs moderate and affordability improves, demand for automobiles tends to increase. Other sectors that may benefit include oil marketing companies, electronics, consumer durables, and capital goods, as lower import costs can support both margins and demand growth.
Among the sectors that may face some pressure are IT services and pharmaceuticals. For IT companies, a stronger rupee may reduce the currency-related boost to profitability, as a significant portion of their revenues is earned overseas while costs are largely rupee-denominated. However, the impact is generally manageable. Similarly, pharmaceutical companies may see some moderation in export-related gains, although many also import raw materials, limiting the overall impact.
Have investors begun shifting allocations between large caps, midcaps and small caps as valuations evolve?
Over the past year, investors have gradually adopted a more balanced allocation approach. In CY2025, large-cap stocks outperformed mid and small-cap stocks, primarily due to stretched valuations in the broader market, which led to profit-taking after a multi-year rally, as well as heightened volatility arising from geopolitical developments.
As a result, there has been a noticeable shift towards large-cap funds over the past year. At the same time, flexi-cap and multi-cap funds continue to attract healthy allocations. Multi-asset funds have also gained traction and are witnessing strong inflows.
Nevertheless, SIP inflows have remained remarkably resilient and disciplined, with allocations continuing to be fairly balanced across capitalisations.
How are investment habits changing among investors from Tier-2 and Tier-3 cities?
There has been a significant shift in the mindset of investors from Tier-2 and Tier-3 cities over the last few years. They are no longer solely reliant on bank fixed deposits and traditional fixed-income products. The awareness that long-term returns need to outpace inflation is gradually becoming more widespread.
Today, more than 25 per cent of mutual fund assets under management originate from Tier-2 and Tier-3 cities. In monthly SIP flows, these regions account for over 50 per cent of total contributions. The democratisation of information, greater financial awareness, and easy access to digital investment platforms have been key drivers of this transformation. Additionally, as a younger workforce enters the economy, there is greater awareness of financial assets compared to traditional physical assets such as real estate and gold.
Passive investing has grown rapidly in recent years. Do you expect index funds and ETFs to attract an even larger share of retail flows?
Index funds and ETFs will undoubtedly remain an important part of most investors' portfolio allocations. In fact, passive funds already account for assets of approximately Rs 15 lakh crore. Over the last decade, India's ETF landscape has evolved significantly, from a handful of products tracking the Nifty and Sensex to a much broader range covering large caps, midcaps, small caps, factor strategies, sectoral themes, commodities, and debt.
One of the biggest advantages of passive investing is its extremely low expense ratio. In addition, many investors prefer allocating a portion of their portfolios to passive funds to ensure participation in overall market returns without taking the risk associated with active attempts to generate alpha.
Passive funds are particularly well-suited for goal-based investing, such as saving for a child's education or purchasing a home, where long-term market participation is often more important than attempting to outperform benchmarks.
Looking ahead, which asset class offers the most attractive risk-adjusted returns over the next 12 months?
Indian equity valuations are currently trading close to their 10-year and 15-year historical averages of around 20 times price to earnings (P/E) multiples. At the same time, the earnings outlook remains healthy, with corporate earnings expected to grow at a CAGR of 15 per cent or more over the next two to three years.
From both a risk perspective, given reasonable valuation comfort, and a return perspective, supported by strong earnings growth, Indian equities continue to offer an attractive risk-adjusted opportunity. Consequently, equities should account for a significant share of investor asset allocations at the current juncture. |
