Expert View: India’s equity markets are navigating one of their most complex macro phases in recent years. Sustained foreign investor outflows, a record-low rupee, and elevated crude oil prices have together triggered a meaningful reset in valuations across sectors. While large-cap valuations have moderated closer to historical averages, pressure on earnings expectations and liquidity remains elevated, particularly in parts of the mid- and small-cap universe. At the same time, rising domestic institutional participation is reshaping the ownership structure of Indian markets and providing an important cushion against external volatility.
In an interview with Mint, Siddhartha Khemka – Head of Research, Wealth Management, Motilal Oswal Financial Services, discusses how FII selling and currency weakness are altering market dynamics, the sectors best positioned to withstand the ongoing oil shock, why selective large-caps are turning attractive again, and what retail investors should watch as volatility persists. Edited excerpts:
How are FII outflows and rupee weakness reshaping valuations for the Indian stock market?
The combination of sustained FII outflows and rupee depreciation has triggered a meaningful valuation reset for Indian equities. FII holdings in the Nifty-500 have declined to a decade-low of 17.1% as of March 2026, with the sharpest reductions visible in Private Banks, Technology, Real Estate, and Consumer sectors. At the same time, the FII-DII ownership ratio has compressed from 1.7x a decade ago to 0.8x currently, highlighting the growing role of domestic institutions in absorbing market liquidity.
The rupee has added to the pressure, weakening beyond 96/USD and touching a record low of 96.47 in May amid elevated crude prices, widening trade deficits, and higher global bond yields. Currency weakness has worsened returns for foreign investors and partly explains the persistence of FII outflows, resulting in the moderation of headline valuations.
At the index level, Nifty valuations have corrected closer to long-term averages at ~18.1x trailing earnings versus peaks of 22–23x seen in mid-FY25. However, the correction remains uneven. Nifty Midcap-100 and Smallcap-100 continue to trade at 24.6x and 19.8x respectively, leaving them relatively more vulnerable if FY27 earnings expectations are revised lower.
That said, record DII ownership of 20.9% continues to provide a structural demand cushion, and even a moderation in FII selling could support a meaningful improvement in market sentiment.
Where do you see opportunities for investors as crude oil remains a major headwind?
Elevated crude — Brent currently around USD 107–111 per barrel, driven by US-Iran conflict and effective closure of the Strait of Hormuz — is a material terms-of-trade shock for India. Not every sector, however, absorbs it equally, and the disruption itself creates identifiable positioning opportunities.
Within Pharma, export-oriented generic manufacturers are reasonably well-positioned — revenues are largely USD-denominated while costs remain predominantly in INR, providing a natural hedge against currency weakness. The sector is also structurally insulated from crude price transmission, and DII additions here over the past year reflect that assessment.
Manufacturing and Industrials, particularly Capital Goods, Defence, and power transmission-linked businesses, also appear better positioned as earnings visibility here is being driven more by policy support and order inflows than commodity cycles. The FY27 Union Budget increased defence spending by over 15% to nearly INR7.8t, with capital expenditure rising ~22%. At the same time, ordering momentum across HVDC projects and transmission infrastructure remains robust. Broader government capex on defence and infrastructure is expected to rise ~11% in FY27, supporting a multi-year earnings pipeline that remains relatively insulated from near-term consumption weakness.
On the other side, Aviation, Chemicals, Tyres, Paints, and mid-cap Textiles remain most exposed to margin pressure. In contrast, upstream Oil & Gas, Pharma, select IT, and parts of Financials appear relatively better insulated due to stronger pass-through mechanisms or dollar-linked revenues.
How much of an impact can India Inc expect on earnings amid the ongoing oil shock?
The ongoing oil shock is likely to have a meaningful, though uneven, impact on India Inc earnings. Rising crude prices are already pushing up freight, transportation, packaging, and industrial input costs, with WPI inflation surging to 8.3% YoY in April 2026 — the highest since October 2022 — while fuel and power inflation touched a 42-month high of 24.7%. Historically, such upstream cost pressures filter into corporate margins and consumer inflation with a lag, suggesting the full earnings impact is still unfolding.
Current FY27 Nifty EPS growth expectations of ~18% were built on materially lower crude assumptions. With Brent sustaining around USD107–111/bbl, those estimates appear vulnerable to downward revisions. Historically, every sustained USD10/bbl increase in crude has translated into a 40–60bp drag on aggregate Nifty margins.
While Q4FY26 earnings have broadly held up so far, the more meaningful test will likely emerge in Q1FY27 results, which will fully capture elevated fuel prices and the recent INR3/litre retail fuel hike.
Volatility has been a defining feature of markets. How should retail investors navigate this period?
Over the past year, Indian markets have absorbed a sequence of overlapping shocks — record FII outflows, a rupee at all-time lows, crude at multi-year highs, and a global rate environment that remains restrictive. The India VIX has stayed elevated, and the range of outcomes on key macro variables like crude, currency, RBI policy remains uncertain.
For retail investors, the priority should be portfolio resilience rather than aggressive directional positioning. Systematic investing through SIPs continues to remain an effective strategy, particularly because it enforces allocation discipline during periods of heightened volatility. Domestic flows have consistently absorbed a large part of foreign selling, providing an important structural support to the market.
Within direct equities, investors should focus more on balance-sheet strength, pricing power, earnings visibility, and cash-flow generation rather than chasing short-term momentum. Exposure to sectors with elevated macro sensitivity or weaker margin visibility may need to be moderated until broader macro conditions stabilize.
Is buying the dip still an ideal strategy, or are investors opening themselves to greater risk?
Buying the dip remains a reasonable strategy, but the current environment warrants greater selectivity. At the large-cap level, valuations have turned more comfortable, with the Nifty trading at ~19.1x FY27 earnings — closer to long-term averages after the recent correction. Quality names in BFSI, Healthcare, and Manufacturing appear materially better priced than they were six to nine months ago.
While elevated crude prices, rupee weakness, and geopolitical uncertainty could keep markets volatile in the near term, India’s broader structural growth story remains intact, supported by domestic consumption, financialization, manufacturing expansion, and government-led capex. Historically, periods of stress and valuation compression have often created better long-term entry opportunities for patient investors.
That said, caution remains warranted across parts of the mid- and small-cap space, where valuations remain relatively elevated and earnings are more vulnerable to crude prices and liquidity conditions. A selective bottom-up approach focused on earnings delivery, balance-sheet strength, and business quality appears more appropriate, particularly within mid-caps, while a relatively cautious stance on small-caps remains warranted in the current environment.
What signals should retail investors track before making portfolio allocation changes?
Crude oil remains the single most important variable in the current environment. Brent sustaining around USD107–111/bbl on Strait of Hormuz disruption fears has direct implications for India’s inflation, fiscal balance, rupee stability, and corporate margins. A correction below USD85–90 would materially improve the macro outlook, while another leg higher could alter earnings and monetary policy expectations.
The rupee is equally important. Having touched a record low of 96.47 in May, sustained weakness beyond the 97 mark could intensify imported inflation and prolong FII risk aversion. Conversely, currency stabilization through RBI intervention or improved capital flows would ease pressure on sentiment.
FII flow trends should be monitored on a rolling basis rather than day-to-day. Given the strong domestic institutional demand base, even a moderation in foreign selling has historically been enough to support markets.
RBI policy signals are also becoming increasingly relevant as inflation risks rise. Any hawkish shift in commentary — particularly if CPI moves toward the 5–5.5% range — could weigh on NBFCs, Real Estate, and other rate-sensitive sectors.
Finally, Q1FY27 management commentary will be critical in determining whether current FY27 earnings expectations remain achievable or require downward revisions.
Will India’s consumption story be impacted as the government hikes fuel prices?
The government’s decision to raise petrol and diesel prices by INR3/litre does create a near-term headwind for consumption, particularly after tax relief measures and RBI easing had started improving discretionary demand sentiment. Higher fuel prices reduce disposable incomes and are likely to weigh most on mass-market categories such as two-wheelers, QSR, and value retail over the next few quarters. The risk would increase further if crude sustains above USD95–100/bbl and necessitates another round of fuel price hikes.
That said, the broader structural consumption story for India remains firmly intact in our view. India continues to benefit from rising formalization, urbanization, premiumization, improving financial penetration, and a steadily expanding middle-income population. Household balance sheets are structurally stronger than in previous cycles, while premium and urban consumption trends have remained relatively resilient even during periods of macro stress.
Historically, temporary inflation-led slowdowns have impacted the pace of consumption recovery rather than altering the long-term trajectory itself.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
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