Indian equities: resilience with opportunity in sight

Indian equities are positioned for a potential turnaround as resilient growth, improving earnings and returning foreign flows broaden market leadership beyond crowded AI themes.

• The first half of 2026 was among India's weakest recent half-years, as muted foreign participation, sharply higher energy costs and a weaker rupee weighed on equities; in the third quarter, investors began diversifying away from a narrow group of AI winners.
• GDP growth reached 7.8% year-on-year in the second quarter of 2026, above expectations, supported by investment, exports and consumption despite the Middle East-related energy shock.
• Policy support includes 2025 income-tax cuts, GST rationalisation, lower fuel excise duties and public-sector capital expenditure; bank credit growth reached around 19%, a two-year high, after the RBI cut rates by 125 basis points in 2025 and eased regulations.
• Inflation was 4.4% in July and remained within the RBI's target range, while NIFTY companies posted their strongest revenue growth in 10 quarters and approximately 19% earnings growth in the second-quarter reporting season.
• Foreign institutional investors turned net buyers from mid-June, recording more than USD 6 billion of inflows after approximately USD 29 billion of peak-to-trough outflows in the first half; a steadier rupee and India's under-owned status could support further reallocations.

Takeaway: The authors see Indian financials, real estate and consumer discretionary as the areas most likely to benefit from improving credit and demand, while warning that geopolitics and US Federal Reserve policy remain key risks.