Indian equity markets may be heading into a phase where patience and selectivity matter more than momentum. At CNBC-TV18’s market conclave The Alpha Managers 2026 (CNBC-TV18 coverage), seasoned investors Raamdeo Agrawal and Manish Chokhani laid out a cautious yet opportunity-driven outlook for the year ahead, warning investors against expecting broad-based rallies while highlighting clear pockets of potential alpha.

The broader context, according to both investors, is one of transition rather than acceleration. After a multi-year run marked by valuation re-rating and liquidity-driven gains, Indian equities are now confronting a reality of more modest index-level returns. Agrawal, chairman and co-founder of Motilal Oswal Financial Services, framed this shift succinctly: when median market returns compress, earnings visibility and balance sheet strength become decisive differentiators. In such an environment, he argued, large-cap companies with predictable cash flows stand a better chance of outperforming the benchmark than speculative or purely valuation-led bets.

What is changing, however, is the macro-policy backdrop. Agrawal pointed to a combination of monetary easing and fiscal recalibration that is beginning to restore growth momentum. A cumulative 125 basis point reduction in interest rates has eased borrowing costs, while credit growth which had slowed to high single digits is now recovering into the low double digits. He also highlighted a sharp reduction in GST rates as a liquidity-supportive move. Taken together, these measures suggest a clear policy pivot from restraint toward revival, with the explicit objective of reactivating credit transmission across the economy.

Why this matters for markets is straightforward. Credit growth is a key driver of nominal GDP expansion, corporate earnings, and ultimately equity returns. Agrawal’s view is that once credit growth stabilises in the 11–12 percent range, it creates a sustainable base for earnings compounding, even if headline index returns remain capped. This, in his assessment, transforms the market from one driven by sentiment and liquidity to one driven by execution and earnings delivery.

On sectors, Agrawal identified automobiles and financials as potential beneficiaries of this shift. Autos, in particular, could see a cyclical recovery as demand normalises, input cost pressures stabilise, and rural and urban consumption gradually improves. Financials especially PSU banks stand to gain directly from a revival in credit growth, improved asset quality, and repaired balance sheets. While he stopped short of making stock-specific recommendations, he suggested that investors seeking diversified exposure could look at sector-wide vehicles such as auto-focused or PSU-oriented funds.

Manish Chokhani of Enam Holdings echoed the cautious stance on index returns, pegging reasonable expectations for 2026 at around 8 to 10 percent. His focus, however, extended beyond monetary policy to the role of the state in unlocking private investment. Chokhani argued that global uncertainty continues to weigh on corporate capex decisions, making public sector initiatives — including privatisation, disinvestment, and production-linked incentive schemes — crucial levers for reviving confidence. Drawing parallels with the early 2000s, he suggested that meaningful asset transfers to private hands could reignite entrepreneurial risk-taking and improve market sentiment.

Chokhani also flagged a less discussed but important issue: rising compliance and accounting costs following labour reforms. While structurally positive, these changes have near-term implications for profitability, reinforcing the need for policy measures that directly support earnings growth rather than merely improving sentiment. In this context, he sees PSU banks and select public sector companies as offering attractive risk-reward, supported by valuations and improving fundamentals.

Both investors were aligned in downplaying the market impact of capital gains tax tweaks. While acknowledging their role as sentiment boosters, they stressed that taxation alone does not alter the long-term earnings trajectory of companies. Sustainable returns, they argued, will be driven by policy transmission, credit availability, and the ability of firms to convert growth into profits.

From a market impact perspective, their comments suggest a narrowing of leadership in Indian equities. Instead of broad participation, returns are likely to be concentrated in sectors and companies aligned with domestic policy tailwinds. Aggregate earnings for large listed companies are expected to grow significantly faster than the index itself, reinforcing the case for selective stock-picking.