Foreign institutional investors continue to maintain an underweight position on Indian equities, signalling that meaningful capital deployment into the market may take longer despite sustained global interest in the country’s economic story.

According to Pratik Gupta, CEO and Co-Head of Kotak Institutional Equities, most overseas investors attending the brokerage’s annual investor conference in Mumbai were primarily focused on understanding the evolving market environment rather than making immediate investment commitments. The conference, held over four days, saw participation from around 984 investors representing 240 institutions and interactions with 246 companies, reflecting strong global engagement with Indian corporates.

However, the large turnout did not translate into immediate buying intent. Gupta noted that several global funds have remained structurally underweight India for some time and are waiting for a deeper correction in equity markets or fresh inflows into emerging market funds before increasing their allocations.

Some investors also indicated that India is not currently their top priority within emerging markets. Slower growth expectations and relatively expensive valuations compared with other emerging economies have prompted portfolio managers to remain selective. The Indian market continues to trade at a notable premium to most emerging market peers, which limits the scope for aggressive reallocation by global funds in the near term.

Geopolitical developments add fresh uncertainty

Investor sentiment has also been influenced by rising geopolitical tensions. According to Gupta, the recent escalation involving Iran has made foreign investors more cautious toward oil-import dependent economies such as India.

Higher geopolitical risk in the Middle East raises the possibility of disruptions to crude oil and natural gas supplies, which could have macroeconomic implications for India given its heavy dependence on energy imports. A sustained increase in global oil prices can pressure India’s current account balance, increase inflation risks, and complicate monetary policy decisions.

For global investors evaluating emerging markets, such macro vulnerabilities often influence asset allocation decisions. As a result, geopolitical uncertainty could delay incremental foreign inflows even if India’s long-term structural growth narrative remains intact.

Artificial intelligence concerns weigh on IT outlook

Another major theme emerging from discussions at the conference was the potential impact of artificial intelligence on the Indian IT services sector. Several US-based investors questioned companies about whether advances in AI could disrupt traditional outsourcing models and reduce demand for labour-intensive services.

According to Gupta, investors came away with mixed views, with many remaining unconvinced that AI will have only a limited impact on the sector. The uncertainty is already visible in market performance. The Nifty IT index has declined around 17 percent over the past month, compared with roughly a 5 percent fall in the broader Nifty index.

This divergence suggests that investors are reassessing long-term growth assumptions for the sector, particularly as generative AI tools increasingly automate coding, testing, and other technology services tasks traditionally handled by outsourcing firms.

At the same time, some investors are beginning to focus on emerging opportunities linked to the expansion of digital infrastructure. Companies connected to data centre development including power utilities, transmission equipment suppliers, cable manufacturers and backup power providers are attracting growing attention as potential beneficiaries of rising computing demand.

Domestic investors also turning cautious on smaller stocks

The conference also revealed a shift in sentiment among domestic investors, particularly those managing portfolios concentrated in small- and mid-cap companies.

Portfolio managers running portfolio management services (PMS) strategies are reportedly becoming increasingly concerned about liquidity risks in certain small- and mid-cap holdings. Many of these stocks delivered strong returns in recent years but could face sharp price corrections if investor redemptions accelerate.

Gupta noted that several funds remain worried about the potential difficulty of exiting illiquid positions if market conditions deteriorate. Despite recent corrections in broader indices, Kotak Institutional Equities believes valuations across many small- and mid-cap companies remain stretched relative to fundamentals.

Limited near term upside for benchmark indices

From a market valuation perspective, Kotak Institutional Equities expects only modest gains for Indian equities in the near term. The brokerage estimates that the Nifty is currently trading at roughly 20 times its projected earnings for March 2027, which still represents a meaningful premium to the MSCI Emerging Markets index.

While steady domestic inflows through systematic investment plans and India’s structural growth narrative continue to support market valuations, the brokerage believes that upside could remain capped in the short term unless earnings growth accelerates significantly.

Several macro risks could also influence market direction. These include a prolonged escalation in Middle East conflicts pushing oil prices higher, a sharper-than-expected slowdown in global growth, an unfavourable monsoon affecting rural demand, or a moderation in domestic retail inflows into equities.

Sectoral positioning among institutional investors

Despite near-term caution on the broader market, Kotak Institutional Equities continues to prefer select sectors where earnings visibility remains relatively strong.

Large private sector banks and non-banking financial companies remain among the brokerage’s preferred segments due to their credit growth potential and balance sheet strength. Life insurance companies, telecom operators, domestic-focused pharmaceutical and healthcare firms, non-ferrous metals producers, residential real estate developers and aviation or hospitality businesses are also viewed favourably.

In contrast, the brokerage remains cautious on certain consumer companies as well as segments such as oil and gas and chemicals, where demand trends and margin visibility appear less certain.