Indian equity markets have staged a sharp recovery from their March lows, with midcaps and select cyclical sectors outperforming in recent months. However, according to Ambit Capital’s Head of Institutional Equities Nitin Bhasin, the rally should not be mistaken for the beginning of another easy multi-year bull market.

In an interaction with Moneycontrol, Bhasin said Indian markets are now entering what he described as a “structural rotation cycle” where broad index returns may remain muted over the next three years even as leadership narrows toward largecap stocks.

His core argument rests on the changing structure of capital flows in India. Over the last decade, domestic participation through SIPs, retirement-linked investments and institutional allocations has fundamentally altered how markets absorb volatility. According to Bhasin, these flows have become one of the strongest underlying fundamentals for Indian equities, especially for the top 200 listed companies.

He noted that EPFO-linked and institutional retirement allocations now channel roughly $1.5–2 billion every month into Indian equities, with a majority of that capital naturally gravitating toward benchmark-heavy largecap names. At the same time, the rise of passive investing and index-linked products is reinforcing concentration in heavyweight stocks.

This trend, he argues, creates an environment where largecaps may not necessarily deliver extraordinary upside but could continue outperforming smaller companies on a relative basis.

Bhasin maintained a bearish stance on broader market returns, suggesting benchmark indices may generate only marginal annualised gains over the medium term. Instead of a sustained directional rally, he expects a prolonged sideways market supported by liquidity but constrained by uneven earnings growth and global macro risks.

His comments come at a time when Indian markets are witnessing a divergence between price momentum and earnings visibility. Midcap stocks have rebounded strongly after earlier valuation corrections, supported partly by mutual fund cash deployment and relatively stronger March-quarter earnings. The Nifty Midcap index recently touched fresh highs even as benchmark largecap indices remained below peak levels.

Despite that rebound, Ambit Capital continues to favour largecaps over the broader market. The brokerage believes investors are increasingly prioritising balance-sheet quality, earnings resilience and liquidity visibility amid uncertainty around global growth, inflation and trade dynamics.

The sectoral rotation within largecaps has also become more pronounced. Earlier, information technology was considered a defensive allocation during uncertain periods. However, Bhasin suggested that structural concerns linked to global technology spending and changing AI-driven business models have weakened that thesis.

Instead, leadership has rotated between sectors such as oil and gas, utilities, banking and FMCG depending on macro conditions and foreign investor positioning. He also pointed out that foreign institutional investors have recently shown selective interest in metals, capital goods and utilities while remaining cautious on BFSI and consumption-oriented sectors due to concerns around job creation and demand recovery.

One of the most important risks highlighted by Ambit Capital is the possibility of margin compression across corporate India. Bhasin noted that wholesale price inflation is now rising faster than consumer inflation, a trend that historically pressures profitability across the NSE 500 universe.

If input cost inflation continues accelerating while demand remains uneven, companies may struggle to fully pass on higher costs to consumers. That could create pressure on earnings growth even if topline demand remains stable.

The commentary also reflects a broader shift in how global investors are viewing India. According to Bhasin, overseas investors increasingly want exposure to “new India” sectors such as AI infrastructure, digital platforms, CDMOs, renewables and internet-led businesses. Many of these opportunities currently sit outside traditional benchmark indices and are concentrated within midcap and emerging sectors.

At the same time, he argued that traditional sectors may become indirect beneficiaries of this transition. Industries such as power transmission, industrials, logistics, telecom and real estate are likely to play a foundational role in enabling India’s digital and AI-led infrastructure buildout.

This changing investment narrative could gradually alter sector leadership over the coming decade. Bhasin suggested that India may also witness the emergence of entirely new megacap companies beyond traditional private-sector banks.

He identified large NBFCs, digital businesses and infrastructure-linked companies as potential future heavyweight listings. Businesses such as Tata Capital and HDB Financial were cited as examples of firms that could scale significantly over the next five to seven years, while upcoming listings like Jio and the NSE could expand India’s pool of globally investable megacaps.

The broader implication for Indian markets is that liquidity may continue supporting valuations even in the absence of strong index-level earnings acceleration. However, sector dispersion and stock selection could become increasingly important as the market transitions away from broad-based momentum-driven rallies.

For investors, the message from Ambit Capital is not necessarily that Indian equities face an imminent collapse, but rather that the next phase of the market could be defined by lower returns, sharper sector differentiation and greater dependence on domestic capital flows.