The Nifty rise might be a bluff and not a sustainable trust.

Balance payment of India is weak, FDI is in a declining mode, and FII’s well, we all know the number. What we don't know is not to judge the  Indian economy based on the Nifty rally, if any. India's economy and the coming days are not so easy, as the quarterly results will unfold in FY-27

Last week, the Ministry of Finance informed that they are working on some policies to bring back FII’s. Well, it's too late to bring them and offer them only taxation benefits when the internal economy of India is screwed up. Before that, we would like to draw attention towards the balance of payments and its long-term unstoppable impact.

In FY26, exports reached approximately $333 billion while imports rose to $585 billion, creating a trade deficit of about $252 billion. After accounting for net services exports and remittances, India still ran a current account deficit of about $30 billion.

The cost of financing sourcing the same is both expensive for India currently. Financing that deficit normally requires capital account support: FDI, portfolio flows, external commercial borrowings, and NRI deposits. But these flows have waned. Net foreign investment moved from a robust +$54 billion in FY24 to a marginal +$4.5 billion in FY25, and then to -$1.3 billion in FY26. In other words, the external financing that once covered large trade deficits has greatly diminished.

The depreciation of the INR is now more expensive for India in all respects.

The current trade deficit is large relative to GDP (about 8.7% in the latest print), reflecting structural import dependencies in energy, electronics, and certain capital goods. It will balloon more going ahead as INR depreciation, high cost of transportation, high crude prices, impact on demand, impact on corporate earnings and last but not least, demand for higher interest rates on foreign borrowings if any. The best way will be to increase taxes somewhere in between FY-27 on some other products.

Industrial imports are already expensive, and India has not achieved any independence in raw material production for industrial use, nor chips, or other technological products.  It is not crude on fertiliser import where the shoe is pinching for India currently. It’s now a long-term issue

Second, capital flows are volatile and can reverse quickly. Foreign investors and lenders reassess risks rapidly in response to global rate moves, geopolitical shifts, or domestic concerns. When capital inflows decline, a country with a large CAD must either attract new funding, allow its currency to depreciate, run down reserves, or cut import demand — the latter often through recessionary pain.

Coming to FII’s inflow. Well, the global investors' appetite has moved away from Indian sectors to AI-driven sectors and industries. Indian have nothing to offer in that context for the foreign investors. Further, if they invest at 96 levels of INR, then be prepared that they will exit above 100 levels of INR. Now that might sound illogical, but that’s where we are standing now. We became too blind to the gross numbers of SIP, which became an ego issue for the government of India to give a statement in parliament that FII’s are not required.  FII's have better options to invest, where they are making astronomical returns. India doesn't have those sectors and companies.

Now we have UP elections, and without that capital market support, funding is possible. Hence, reducing taxation will not attract FII’s now. It's too late. We don’t have strong earnings, and neither does the outlook look like that to develop in FY-27, hence why FII’s will come back to India? We often get carried away with gross numbers where the Net numbers are the real picture for any economy, company or business.

Indian FDI is declining. India’s gross FDI inflows remain high—around $81 billion in FY24–25—but net FDI (after accounting for outward investment by Indian firms and profit repatriation) has fallen precipitously. Official data shows net FDI dropping from $44 billion in FY20–21 to just $1 billion in FY24–25. The blame goes to Indian corporates who were not investing in India and were busy with shareholder value creation and asking only for an income tax rate cut, PLI schemes, etc., which are nothing but a burden on the Indian economy. In FY25, Indian companies invested a record $25.6 billion abroad — an 80% surge from the previous year. In 2024, outward foreign direct investment reached ₹3,25,631 crore (US$ 37.68 billion) — a nearly 17% increase

This is a crucial piece of the BoP puzzle: while India attracts strong gross FDI (~$81 billion), the net figure is thin because Indian firms are investing heavily abroad.

The Indian capital market will face tough times, and the valuation and market fall are not yet complete. We will witness more tough days in the coming months when the whole picture of the forward outlook will become real. Don’t judge India by its capital market performance. The Nifty rise might be a bluff and not a sustainable trust. Stop being a fund manager and follow your financial advisor for investing in mutual funds. Selecting stocks and making returns from the same is no longer easy, and now it needs expertise like CIOs and Fund managers. Hire a Fund manager or CIO by investing in Mutual Funds compared to direct investing in equities.

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Direct will grow at the cost of MFD's

After quite some time, I am back to pick up our pen and come up on the side of my distributors' fraternity if the Indian economy. They might be termed as advisor/mutual fund agents/brokers, but they are small and medium enterprises of the service industry that create wealth for the poor citizens of the Indian economy. The recent consultation paper of the SEBI regarding mutual funds being given instead of salary in a certain proportion would be a hugely impactful decision for the industry.  Many industry veterans and people have welcomed this consultation paper, but we beg to differ.   This is going to be a perfect recipe for RIA business growth and direct plans where MFDs will be least benefited.

In March 2026, SEBI announced measures, including a working group to review overlaps between MFDs and IAs, digital platforms for advisors, and simplified certification requirements. Unlike commission-based MFDs, RIAs operate on a fee-based model and can recommend direct mutual fund plans with lower expense ratios. The debt distribution framework similarly emphasises transparency and lower costs, which philosophically aligns with the RIA model rather than the commission-driven MFD approach. MFDs will suffer once these modes of investing and allocating mutual fund units from corporates comes into play.

In the last couple of years, we have witnessed a huge transformation in KYC related matter. By simplifying KYC formalities, documentation, and transaction execution, SEBI is effectively reducing the complexity barriers that previously made institutional intermediaries necessary. This democratisation of access allows investors to potentially bypass traditional distribution channels entirely once they become familiar with the process.

The market has been created by the MFDs, and then the same is now being transformed in such a way that traditional business will come to an end. This SME segment of the mutual fund advisors or MFDs will come to an end gradually. Currently, we are already struggling with the burden of GST and rationalisation of several AMFI ARN numbers, which is bound to get consolidated as per compliance and also new markets will stop exploring as the earnings keep coming down with TER rationalisation.

The RIA business will grow, and direct channel flow will grow, which will bring down the TER and cause these MFDs to suffer from falling income. The next generation of clients is more focused towards a self-help mode of operating, and this pattern will grow as the entry of new MFDs becomes unattractive. Now with AI coming up and this SEBI’s consultation paper speaks loudly that the MFD business is becoming risky, and this SME segment will narrow down going ahead.  The advisory models will grow for client acquisition, and the mutual fund will be a side business, and it will be more focused on new products and alternative products like PMS, AIF & SIF.

The industry size of PMS, AIF & SIF will grow steadily as the mutual fund business becomes less attractive commercially. Investors are well informed, and corporates will choose their own models of suggestion where a direct model of business will grow more. Don’t be under the assumption that in the coming days corporates will come to MFDs. That segment has a limitation, hence nothing to rejoice much. Overall, MFDs will suffer once this model of operating gets into play. This will impact Tier 2 and 3 markets more, as clients working from these places in companies will get mutual fund investment advice much better and earlier. Clients will win, but at the cost of the SME channel called Mutual Fund Distributor.

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Direct MF investors are growing ....what an IFA need to focus

The Indian mutual fund space has taken a record turnaround not only with new additions of clients' SIP amounts, but also with direct clients’ allocation.  The time has come when mutual fund advisors need to be careful about the transformation in business, which is coming up without any signal of risk as of now. It’s not the regular active funds competition with similar direct schemes. That should not be misunderstood while going through the topic of the article. We need to understand the underlying risks that might change the MFD’s business. The risk of online is growing, and now with AI, the risk goes multi-fold with TER coming down on new and old assets. MFDs need to be cautious.

Direct plans have clearly outpaced regular plans in terms of asset growth since March 2021, reflecting growing investor preference for cost-efficient mutual fund investing. In the coming years, we will find more growth for direct channels as passive industry, index funds, etf’s become a more integral part of investment decisions.

The compounded annual growth rate (CAGR) in average assets under management (AAUM) for direct investors stands at 21.74%, higher than the 18.13% CAGR for regular investors over the same period. Regular plans also expanded during the same period, from ₹22.12 lakh crore to ₹30.31 lakh crore, but the relative growth advantage remained with Direct investments.

Direct AAUM has climbed from about ₹14.6 lakh crore in March 2021 to nearly ₹39.0 lakh crore in March 2026, while regular AAUM has increased from about ₹17.6 lakh crore to roughly ₹40.4 lakh crore. This also reflects that the client has become mature, sophisticated in terms of investments irrespective the decision goes wrong in the choice of funds and investments. Thanks to the rapid growth of fintech platforms, robo-advisory services, and online mutual fund investment channels, which have led to the transformation of investment decisions for investors.  This growth helps to have fewer conversations on the basics of mutual fund investments and more of the advanced topics of investment objectives, long-term dreams, and plans.  

Index funds and passive investing have become a larger part of investors' portfolios, where the end user wants to ride the index journey rather than getting into active fund management. ETFs and Passive Funds recorded an impressive CAGR of 34.42% over the five years, compared to 16.14% CAGR for Active Funds. This sharp divergence highlights the increasing investor preference for low-cost, rule-based, and benchmark-linked investment strategies. EPFO allocations, corporate treasury investments, and large institutional mandates have significantly boosted ETF flows.

Most of this direct investment is from the Tier 1 cities, since Tier II and Tier III cities, where distributor-led advisory remains crucial for investors onboarding, trust-building, and financial handholding.

This also raises the questions of expense ratios and fees earned by a mutual fund distributor. This leads to the demand for goal-based investing, financial planning & behavioural investment planning. The asset management business and distribution are going through a transformation where both models of direct and regular will move simultaneously in the coming years.

The Indian mutual fund ecosystem is gradually moving toward a hybrid model where both channels coexist, but with increasing dominance of informed, digitally enabled, and cost-conscious Direct investors. This transition will redefine distribution economics and advisory models across the industry in the coming years. Mutual fund advisors must increasingly justify active fund recommendations through measurable alpha generation and portfolio outcomes, rather than relying solely on historical brand trust. This needs significant actions to be taken by the MFD’s to make a distinctive impression before AI gets into regular business revenue share.

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Don't Expect much Before Q3- FY-27-Game of Mindset

 On a year-to-date (YTD) basis, the Nifty 50 is down approximately 7%. In comparison, the Dow Jones is marginally higher by 0.17%, the Nasdaq has gained over 3%, and the S&P 500 has risen 2.4%. Among Asian peers, Japan’s Nikkei has surged over 14%, while South Korea’s Kospi has rallied more than 43%. It's more important to be mentally prepared for what to expect in the coming days rather than just making investments or holding the same.

The time is not good, and Q1 of FY-27 also does not look good.  Yes, we are yet to finish the results of Q4 FY-26, and we are discussing here for Q1 of FY-27. The reason being we need to be mentally prepared rather than getting shocked and having night attacks due to investment decisions.

The biggest factor to watch is whether the current market has already discounted it or it's yet to be discounted. We have much pain left as Q1 results will be destructive for the markets, and if the monsoon also falls short, then we will have a perfect recipe for slow growth.

The war might end, but the damage will take time; it is no longer the crude price factor but the ancillary impact due to the current war. The supply disruption is a major factor to be accounted for and figured out. Not a single fund manager across the globe can figure out the impact of the current disruption and its longevity. Indian markets are going to face issues only due to the disruption of the supply chain and domestic reasons, like the weaker monsoon.  If the monsoon is not up to the mark, then India will face issues of demand for goods and services and water supply issues going ahead. Agri inflation will shoot up, making this uncomfortable for the RBI.

In fact its not the Q1 but the Q2 also will be under pressure since all festivals are in September and October stretched to November, hence Q3 of FY-27 will get green shoots, which will be impactful for your current investments being executed by you now.  Provided that there is no Comic Act by Mr Trump going ahead. In short, you need to be prepared to find investment opportunities in FY-27 rather than looking for returns like the last 6 years. Change of mindset is important in FY-27 about the expectations from the market.

Further, due to the war, global inflation will shoot up, which will prompt many nations to press for a rate hike. This will impact INR in the coming days, and markets are bound to face headwinds. Expectation about FII’s coming back to India seems to be more dicey in the coming days due to the structural shifts and long-term issues that are going to arise from the war.  FII’s have better options as of date, like higher US bond yields of 4.3–4.5% and better global opportunities, followed by the US, where tech and AI stocks fuel growth, have pulled more of the funds compared to India, which is dominated by financials and consumption, limiting broader upside. A 2–3% rupee depreciation has further reduced foreign investor returns, keeping markets subdued despite strong domestic inflows and 6–7% GDP growth expectations.

On the other hand, investors have raised their net inflows into equity funds to ₹40,450 crore in March from ₹25,977 crore in February 2026, a 56 per cent jump. Flows through the Systematic Investment Plan (SIP) route hit a new record in March, bringing in ₹32,087 crore and up 7.5 per cent from the previous month. All this is good news.

Among all these, the good part is that the Indian financial system is strong enough to face any blackouts. Bank credit expanded by 16.08 per cent year-on-year (Y-o-Y) in FY26, marking the fastest pace since FY24, when credit in the system grew by over 20 per cent.  ), During the same period, deposits rose by 13.47 per cent Y-o-Y, also the highest growth since FY24, according to the latest data from the Reserve Bank of India (RBI).

Nifty 50’s trailing twelve-month (TTM) P/E has moderated from around 24.4x in September 2024 to approximately 21.3x as of April 15, 2026, below its five-year average of ~23.0x. This might get cheaper in Q1 of FY-27, which will keep all investors waiting for investments.

Many investors believe that, due to the current correction, large caps have become cheaper and will bounce back significantly, providing a cushion for the portfolio. Well, the Nifty 50's fall has been stable compared to Midcap and small cap; hence, the notion that large caps have corrected and become cheaper is wrong.

The Depth of Fall and & Opportunity

Large Caps: Many large-cap names corrected 10–25% from their 52-week highs (e.g., some IT, auto, and FMCG stocks down 17–48% from peaks in select cases).

Midcaps: In broader mid-cap universes, over 119 out of ~143 stocks turned negative in early 2026, with dozens falling 10–50%+ from 52-week highs. 14+ Nifty Midcap stocks plunged 40–50% from their peaks at points.

Small Caps:  In the Nifty Smallcap 250 or broader small-cap universe, ~50–70%+ of stocks saw double-digit declines; many fell 30–50%+ (some even 50%+ from 52-week highs). Examples: Over 20 small-cap stocks dropped more than 50%, and 82+ fell over 30% in certain drawdown periods.

On the sectoral front, don’t get caught up in investing in defensive. Be open to all sectors since every sector, and your investments, have long-term fortune, and they are bound to come up from the bad cycle

Conclusion:

Invest through the STP mode.  Don’t expect large caps to bounce back compared to the fall since they have failed less compared to midcap and small cap stocks. This is one of the best times to build wealth. Book losses and don’t keep them close to your heart. Exiting from non-performing things increases the opportunity of recouping the losses from good investments. Re-alignment of the portfolio is more important compared to investing fresh money. Don’t go for investments in stocks just because corrections have happened, remember even the best stock that has fallen may not rise quickly. Hence, invest in MF since stocks have fallen my 50%, but not a single mutual fund has fallen by 50%. This is mostly ignored while doing investments decision.  Moreover, as a client, one needs to be mentally prepared that this year is the year of investments and not to chase returns. In every 4-year cycle, the market provides this type of opportunity to investors and creates long-term wealth.

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Be prepared in mind for market behaviour and your investments

 

No Fund manager was able to and would be able to tell where the markets will go in the coming months? But that Doctor is none other than the Financial Advisor with whom you can't invest and is the same one who will be treating the Bull.

Every client is panicked with half-truth on their lips about the market getting worse and doomsday is nearby. Financial advisors are just trying hard to keep clients awake from all sorts of rumours about the market. All foreign brokerage houses have downgraded the outlook of NIFTY and the Indian GDP. Well, it's very easy to point fingers at other countries rather than rating themselves more critically.

Well, the current market fall is an opportunity, but what type of opportunity? Will there be no war in CY 2026? Will tariffs come down? Will Mr Trump sit quietly and avoid page 3? Do you think midcaps and small caps will not fall more from here?

The client’s behaviour towards investment has several categories. Those clients who have bounced back from the Global Financial Crisis have strong faith in the market, and the same with those who came out of Covid. But the Gen Z community of investors and the 1st time investors in the financial market are the ones who are the 1st time student of this volatile market rally. Since 2020 to 2024 the rally of the market have created approximately 10–12 crore (100–120 million) new demat accounts were added in India from 2020 to 2024. This surge reflects the massive post-COVID boom in retail participation in the Indian stock market, driven by digital onboarding (e.g., Aadhaar eKYC), low brokerage costs, IPO frenzy, and rising awareness via apps and social media.

These clients are hungry for investing as well as scared to face losses beyond a certain point. Leveraged trades and traders are at the peak of risk, which impacts the market too in these times. The same is getting well reflected.

Every financial advisor is important in these times to keep these clients informed about the various market cycles witnessed over the past 2 decades. In the current scenario

 The Indian equity market has undergone a significant transformation over the past year, particularly within the midcap and smallcap segments. After a prolonged phase of exuberance through 2024 and early 2025, valuations in these segments had reached levels that were increasingly difficult to justify purely on fundamentals. The subsequent correction, rather than signalling structural weakness, has brought much-needed balance back to the market.

At present, the Nifty Midcap 150 trades at a price-to-earnings (P/E) multiple of around 29.7x, while the Nifty Smallcap 250 is at approximately 24.1x. Earlier during the 2024 rally, Midcaps reached levels of around 42–45x, while smallcaps climbed to approximately 34–35x. The correction that followed has been substantial, with midcap valuations declining by over 30% from their peak and smallcaps witnessing even deeper cuts. Today, midcaps are trading slightly below their long-term median multiples, while smallcaps are significantly below theirs, marking one of the most meaningful valuation resets in recent years.

Yes, the market has witnessed time correction and price correction beyond the market cap/earnings outlook in the mid & small cap segment. Now, when we try to figure out the growth of the segment, we find that  based on consensus estimates for the next two to three years, midcap companies are expected to deliver earnings growth of around 15–18%, while smallcaps are projected to grow at a faster pace of 18–21%. Translating this into PEG terms, midcaps are currently positioned at around 1.65–1.98, which is broadly considered reasonable. Smallcaps, with PEG ratios in the range of 1.15–1.34, appear more attractive, suggesting that investors are paying less for each unit of growth compared to the recent past.

ROE another powerful tool to find out how the above two numbers are justified and to believe in investing in midcap and small cap. Midcaps currently exhibit median ROCE levels of around 15.5–16%, while smallcaps are in a similar range of 15–15.8%. With ROCE levels around 15–16%, P/E multiples in the range of 24–30x appear more justified than they did a year ago. Investors today are effectively paying lower prices for businesses that are generating similar or even better returns on capital. Speculative prices in midcap and small cap has died currently in this market correction. This is one of the biggest gifts given by the current correction. The threat of falling GDP, crude oil price risk, etc., is less impactful compared to the COVID times and the GFCs. The only risk is that if we get another war, then that would add further fall, but with that fear, no one will ever make money, nor any investments.

STP and a staggered way of investing are best suited in this market, taking a bet for the next 4 months. The current quarter results will be on the higher side since the war impact will be reflected in the 1^st quarter of FY-27. But by that time, the monsoon will kick in, and the demand scenario of the Indian market will change, giving a new path to the market. As an investor, be prepared that you will get more falls and certain short-term ups. Don't try to predict the market and keep your ears open, but don't act in haste. This mental preparation for the market to invest, particularly as long as Mr Donald is on chair, will be fruitful and will gain you more success.

Well, those who are still scared of them, the message is that if we look at the FII’s and DII’s pattern of investments, we find

Ownership Shift (as of late 2025 data)

• DIIs: Record ~18.7% of NSE-listed equities (up significantly; mutual funds alone ~10-11%).
• FIIs/FPIs: ~16.7% (13-year low in some metrics).
• Retail + HNIs (Household): Direct + via MFs reached ~18.5% combined by mid-2025 (fivefold increase since 2020). Equities' share in household financial savings rose from ~2.5% in FY20 to over 5% by FY24.
• One of the biggest trends in 2025 was the sharp divergence between FIIs and DIIs in Indian equities.
• While FIIs were heavy sellers, DIIs stepped in aggressively.
• DIIs invested a record $90 billion in 2025 (vs $63B in 2024)
• FIIs pulled out nearly $19 billion, their highest-ever outflow
• Over the last decade, DIIs have invested ~$256 billion, showing strong and consistent domestic support for markets.
• Bottom line: Domestic money is now the key pillar of the Indian market, cushioning FII volatility.

 

So invest through the advice of your financial advisors and don’t try on your own, since you don’t know which stocks will perform better.  Many investors have the question in mind: MF or direct stock. Well, MF is 1^st preference since you have new expertise to manage the money. Only correction and rich valuation will not make money from where, and don’t expect a broader market rally to happen; it will be more of a stock-specific rally.  

Once you get comfortable in MF, you can start cherry-picking.  If you think that under the current scenario every stock is a mouthwatering cherry pick, well, you are bound to incur losses.  It is better to retain the ability to invest and be an investor rather than taking short-term bets and losing a long-term behavioural mindset of not investing in the market for the next 2 to 3 years.   When the price in the market is too low, and there are too many options, then as an investor, you are bound to get carried away with the price being low. Remember, price being low is also a trap since during these times many basic fundamental aspects of companies go for toss-like management, debt levels, pressure from private equity to shut down many important projects and delay product launches. Hence, seek a financial advisor. More than investing, now it's the mental framework required to be built for facing any bad days further. If, as an investor under the guidance of a financial advisor, you are well prepared mentally for any upside or downside rally of the market, your investments will remain safe, and your mindset to invest will too.

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NAZAR & SABAR- Investor & MFD for both required

Portfolio advisory has become a major issue now since Nazar and Sabar are highly required for investment decisions to be made ahead of time.   Falling GDP growth, rising inflation, pay cuts and job cuts through AI, confused central banks regarding whether to hike interest rates or not and last but not least, the tariff war and war alone. All these are making the global economy beyond uncertainty. The latest warning from the Organisation for Economic Co-operation and Development underscores a familiar but dangerous sequence: war-driven disruptions in energy markets are reigniting inflationary pressures and clouding the global growth outlook just as the world economy was attempting to stabilise. I am surprised people who do not come from a finance background have come up with podcasts and YouTube videos. Is SEBI keeping a watch on them? Loss of investments is notional till the same is booked. 90% of the investors are worried about notional loss and not real loss. This makes decision-making hard for an advisor to guide and convince their clients.  The statement of our Prime Minister, Mr Narendra Modi, is a matter of concern and should not be shredded.

Don't think about returns since now is the time to wait and watch, since Sabar will make you win, and nazar will help you to identify the fake rallies.

Let’s be very frank and open that we don’t know whether this is the last war or if more stuff is awaited. Past returns have turned out to be negative, despite the long-term investment objective, since the behavioural aspect of the client getting scared and greedy is hard to align.  NRI-focused MFDs' business will take a hit since remittance will dry up.  Maharashtra and Kerala top the list, together capturing over 40% of India's Gulf remittances, based on FY2023-24 RBI data that holds steady into 2026 amid ongoing flows. Hence, MFDs will take a hit this year due to the current war issues.

Rising energy costs from the conflict directly hit consumer prices, with secondary effects on core inflation via supply chain strains and wage pressures. Europe faces steeper risks due to energy import reliance, potentially forcing ECB rate hikes. Early 2026 growth has held from prior momentum, but analysts see tariffs and uncertainty clouding the outlook further.

The Middle East remains a critical artery for global oil and gas supply, and any disruption—whether physical or perceived—immediately translates into higher prices. Energy, unlike many other commodities, sits at the base of the economic pyramid. It influences transportation, manufacturing, logistics, and even food production. As prices rise, the effect cascades across sectors, creating a classic case of cost-push inflation. The OECD’s projection of G20 inflation at around 4%, with U.S. inflation near 4.2%, reflects not just temporary volatility but the risk of inflation becoming structurally sticky. Over the past two years, monetary authorities have worked aggressively to tame price pressures through rate hikes. The immediate impact is not so much since inflation has been low and adjustments have been mixed across different countries.

Higher interest rates, combined with rising input costs, create a dual burden on economic growth. Further, the global nature of this challenge makes it particularly complex. Import-dependent economies, such as those in Europe and parts of Asia, face additional pressure through worsening trade balances and currency volatility. But as I said, nazar and sabar are important-the current impact of this war is not uniformly negative across all sectors. Many countries benefit and get opportunities where the cost of manufacturing is less, which leads to the supply of goods at lower production costs. India stands to benefit from the judicious use of its abilities and resources through government agencies.

India's strategic oil reserves, diversification to Russia, and robust fundamentals (e.g., 7%+ GDP growth momentum) provide buffers against prolonged shocks. RBI may delay rate cuts to tame inflation, prioritising stability over stimulus. Prolonged conflict could shave 0.5-1% off growth if oil averages $90+/barrel.

Conclusion:

Investment opportunities for MFDs from their clients will slow down as reduced Gulf remittances from the Middle East conflict would strain millions of Indian households, particularly in migrant-heavy states like Kerala, Uttar Pradesh, and Tamil Nadu, where these inflows fund 30-50% of consumption for recipient families. India received $51.4 billion from Gulf nations in FY2025 (38% of $135.4 billion total remittances), supporting essentials like food, housing, education, healthcare, and real estate. A 10-20% drop—potentially $5-10 billion annually in a prolonged conflict—could curb spending, raise poverty risks, and slow rural-urban consumption that drives 60% of GDP.  

The bottom line is clear: war acts as a multiplier of economic risk. By pushing up energy costs, sustaining inflation, and delaying monetary easing, it constrains the very conditions needed for a durable global recovery. As long as these geopolitical tensions persist, the world economy will remain in a state of cautious resilience—growing, but below potential, and always vulnerable to the next shock.

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How Far Could the Rupee Slide?

The whole market and Indian economy, and its analyst community, are busy focusing on uplifting the statements that will get Nifty back to the 26000 levels. For this, we want to ignore every negative aspect and risk of the market. We have diverted our mind to the Iran war and its impact on the Indian market, whereas at home, we have a major issue of depreciating uncontrolled INR. INR have been a major issue in the last  6 years since the day we got into Covid lockdown. The FII’s are also sceptical to invest in India for this particular reason, more than the valuations and earnings. The current fall is an opportunity that DIIs and FII’s both know, but does that excite FIIs to invest or redeem?

India's forex reserves at ~$710 billion look ample (covering ~11 months of imports), but quality matters more than quantity:

Foreign Currency Assets (FCA) erosion: Down to $555 billion from $621 billion in September 2024—a 10%+ drop. FCA's share has shrunk to <78% from >90% pre-2020, limiting RBI's dollar-selling firepower for interventions.

Gold dominance: Holdings up ~4x in five years (now ~$70–80 billion equivalent at current prices), boosting total reserves but illiquid for daily FX defence. RBI sold minimal gold historically; it prefers spot USD.

Likely $80–100 billion now (official data lags), tying up future dollars for importers/exporters. This amplifies intervention costs without immediate liquidity. RBI data (weekly bulletins up to March 2026) confirms these trends. Similar 2021–22 dips saw INR hit 80/USD before a partial recovery.

External and Domestic Triggers:

Current account flip: Q4 surpluses (0.2–0.7% GDP) relied on services exports ($110B+ annually) and remittances ($30B+ quarterly). Now, trade deficit widened to $30B/month (oil at $75–80/barrel, imports up 15% YoY), Middle East tensions cut remittances 5–10%, risking 1–2% GDP deficit.

Capital outflows: FIIs pulled $10B+ in 2025 amid US rate hikes (Fed funds at 4.5%) and global risk-off. India's 7%+ fiscal deficit deters inflows.

REER signal: Below 100 since mid-2025 (RBI index), indicating overvaluation correction—INR "should" weaken 5–10% for competitiveness, per BIS models.

Historical parallels: 2013 taper tantrum (INR 68/USD), 2022 Ukraine shock (83/USD)—each saw 10–15% slides over 6–12 months.

India’s foreign exchange reserves have dipped below $710 billion, falling from a recent high of over $728 billion just weeks ago. On the surface, this still appears to be a comfortable buffer. However, a deeper look at the structure of these reserves points to growing vulnerabilities.

A key area of concern is Foreign Currency Assets (FCA), which have declined to roughly $555 billion. This level is not only lower than recent months but also below what India held back in 2021. Over time, the share of FCA in total reserves has steadily fallen to under 78%, compared to more than 90% a few years ago. While rising gold prices explain part of this shift, the drop in absolute FCA levels—around 10% lower than in September 2024—highlights a more structural issue.

Gold, on the other hand, has become a much larger component of reserves. Driven by both higher prices and increased accumulation, India’s gold holdings have expanded nearly fourfold over the past five years. While this adds strength to the balance sheet, it reduces the Reserve Bank of India’s (RBI) ability to actively manage the currency, since interventions typically rely on selling dollars rather than gold.

Adding to the pressure is the RBI’s forward book, which has already exceeded $60 billion and may now be approaching $100 billion. This reflects ongoing efforts to manage currency volatility but also signals rising commitments in the market.

Externally, India’s position may also weaken. The country recorded a current account surplus in the fourth quarter over the past two years, supported by strong services exports and steady remittances. This time, however, the outlook is less optimistic. A widening trade deficit and softer remittance inflows—particularly due to tensions in the Middle East, which contributes about 40% of such flows—could push the current account back into deficit.

While further RBI intervention is likely, its effectiveness has limits. It can help contain sharp volatility and speculative movements, but it cannot fully counter persistent global pressures. Continued foreign investor outflows and an unfavourable global environment could keep the rupee under strain. This is the place where FII's are concerned about, and this does not attract them to invest in India. The biggest question is that despite the current sharp correction in very pockets, will FII's invest in India now?  Unless the rupee gets into a stable form, the currency risk does not attract them. This also raises the risk of investments for DII's since they alone cannot keep the market alive for long. The SIP book might look attractive today, but it's not sustainable since, currently, every portfolio has wiped out the last 2 years' gains.

Coming to the rupee, if these trends continue, the rupee could drift toward the 97–98 range against the US dollar. The real effective exchange rate (REER), a measure of currency competitiveness, had already fallen below 100 by mid-2025 after a prolonged period of overvaluation. Past episodes—such as the oil price surges in 2007–08 and 2011–14—also saw extended periods of rupee weakness.

In summary, while India’s reserves still offer a degree of protection, their shifting composition and external risks suggest that maintaining currency stability may become increasingly difficult in the near term.

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India’s Buffett Indicator & Midcap/Small cap Signals Moderation-MF is best option

 

One of the biggest questions that has come up from everyone is whether this is the time to invest in stocks or Mutual Funds. For investors, this evolving landscape necessitates a disciplined approach. Staggered investment strategies, such as systematic investment plans, can help mitigate the risks associated with timing the market at elevated levels. A sharper focus on fundamentals—particularly companies with strong return on equity, low leverage, and sustainable competitive advantages—will be critical in navigating the next phase of the market cycle. At the same time, asset allocation assumes greater importance, as diversified portfolios can help balance the impact of potentially lower equity returns. Identification and placing bets on stocks directly is tough, and a mutual fund stands to be more advantageous based on the current market cycles of war.

On the other hand, the widely referenced Buffett Indicator, which measures the ratio of total market capitalisation to GDP, currently places India in the “modestly overvalued” zone. With readings ranging between approximately 115% and 128%, depending on the source and methodology, the signal is clear: markets are not in bubble territory, but neither are they cheap.

Where the Indicator Stands

Recent data points to a market cap-to-GDP ratio in the range of 115% to 128%, depending on the methodology and timing:

• Standard Ratio: ~128% (late January 2026 reference), placing markets firmly in the modestly overvalued band (115–136%)
• Modified Ratio (adjusted for central bank assets): ~114.9%, also within a similar valuation zone

A notable development is the recent market correction, which saw India’s total market capitalisation decline from approximately $5.3 trillion to $4.77 trillion. This pullback has marginally eased valuation pressures, though not enough to shift the broader classification.

With India’s nominal GDP hovering around $3.9 trillion, valuations remain elevated relative to historical comfort zones.

 Now, the other part of the story is that India’s macroeconomic backdrop remains robust. Nominal GDP is projected to grow at approximately 8.6% in FY26, with real GDP growth estimated at 7.6%. This growth is being driven by a combination of manufacturing expansion, services sector resilience, and sustained domestic consumption. Such a strong economic foundation provides a degree of justification for elevated valuations and supports the long-term investment narrative.

Now, does midcap have corrected and small cap, or is further correction expected?

Mid/small caps saw extreme PE multiples (e.g., Smallcap 250 hit 35x vs. long-term median ~24x; Midcap >30-43x at peaks vs. historical ~22x). Even after declines, many remain elevated compared to historical norms or earnings growth.

Current P/E (as of ~March 16-17, 2026)

• Nifty Midcap 150: 30.0 – 30.14 (Fairly Valued zone)
• Nifty Smallcap 250: 24.4 (Moderately Undervalued zone)

Midcap P/E remains higher than Smallcap P/E, reflecting better average quality, scale, and earnings visibility in midcaps. However, the gap has narrowed compared to peak valuations.

• Midcap 150: 3-month PE range = 30.0 – 34.1. It has fallen from the upper end of the range and is now hugging the 3-month low.
• Smallcap 250: 3-month PE range = 24.4 – 29.7. Even steeper compression, now sitting at its 3-month low.

This de-rating aligns with the ~8-11% drop in Midcap 150 and ~9-17% drop in Smallcap 250 over the same period (from their recent highs).

• Midcap 150: Current 30.0 is below its 1-year median (33.5) and closer to 5-7 year medians (31).
• Smallcap 250: Current 24.4 is well below its 1-year median (30.3) and 3-year median (28.7) → more attractive on a relative basis now.

Note: These are trailing P/E ratios. Forward P/E would look slightly different depending on expected FY27 earnings growth.

Any further fall of markets is an opportunity for investments and a bounce back of midcap and small cap.

 Conclusion:

The recent fall has made smallcaps look relatively cheaper than midcaps on a P/E basis, but smallcaps carry higher risk and volatility. Midcaps continue to command a premium due to stronger fundamentals on average. This correction has eased some of the extreme froth seen in 2024-early 2025 (when Midcap PE often exceeded 35-40x and Smallcap approached 35x+). Valuations are now closer to long-term averages, though not yet deeply cheap. The era of liquidity-driven, broad-based rallies appears to be giving way to a more discerning phase in which valuations and earnings quality take centre stage. 

In such an environment, beta-driven strategies are likely to deliver diminishing returns, while alpha generation through careful stock selection becomes increasingly important. Volatility, too, is expected to rise, particularly as markets react more sensitively to earnings disappointments and macroeconomic signals. Invest in mutual funds and not through stocks since during war, you don't know which stock will perform.

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Is this time for Midcap /Small cap or till to be on the large cap side?

 The 3^rd quarter is over, and the results have been mixed. But among so many results, what we need to find out is where the funds will flow in the coming days? Which sectors are going to be attractive? Are we still betting on large caps and avoiding  Midcap and small cap? Those who kept crying that small and midcap should be avoided, and they are overvalued and will not perform in the coming quarters -are they correct?

Out of 5,130 companies, 4,455 reported Q3 FY26 results, delivering 14.07% YoY topline growth and 10.75% bottom line growth, driven mainly by mid, small, and micro-caps. India Inc saw adjusted PAT rise 15% YoY to ₹3.97 trillion, the highest in eight quarters, with revenue up 11.6%. Large caps grew moderately at around 13%, while small caps surged 32%. The two trade deals will open up more opportunities and growth for the Indian small and midcap companies, where the earnings will become more visisble supported by domestic macro factors. In short, large caps have become like bank FD rates, where you will not create wealth but only safety and erosion of returns, where inflation is being adjusted. 

Large-Cap Performance

Nifty 50 companies posted 9.33% topline growth but just 0.57% PAT growth YoY after new labour code adjustments, marking the seventh straight single-digit quarter since June 2020. Five firms—SBI, Tata Steel, HDFC Bank, TCS, Bharti Airtel—drove 78% of earnings accretion.

Mid/Small-Cap Strength

Nifty Next 50 delivered 28% EPS growth on a TTM basis, with mid-caps achieving double-digit growth for the fourth consecutive quarter. Mid-caps hit 16% PAT growth, small-caps 30-32%, led by real estate, industrials, and cement. This resilience highlights mid- and small-caps as earnings champions post-consolidation. Midcap stocks showed strong earnings beats in Q3 FY26, with 50% reporting positive surprises versus 39% for large caps and small caps (42%). Operational discipline and sustained business momentum drove EBITDA expansion of over 50% in select mid-cap companies, underscoring robust demand and margin strength. The rate of missing was materially lower at 28% versus ~40% in small caps, highlighting superior resilience amid global macro uncertainty. Strength in industrial metals and digital commerce further supported earnings recovery, positioning mid-caps for selective alpha generation even as large-cap headwinds persist.

Midcaps led with double-digit PAT growth and higher beat ratios (50% positive results), outperforming small caps (42%) amid resilient operations. 

 Top Sectors

Key contributors included Gems & Jewellery (strong YoY revenue/margins), FMCG, Oil & Gas, Chemicals, Real Estate, Electricals, Capital Goods, Hospitality, and Finance. Cyclicals like metals, autos (25%), real estate (64%) fueled index growth.

Lagging Sectors

Drag factors were Telecom, Textiles, Construction Materials, Auto & Ancillaries, Consumer Durables, Software/IT Services, and Manufacturing. IT faced margin pressure from labour costs; financials hit a decade-low growth. Non-cyclicals like IT/FMCG showed subdued performance.

For H1 FY26 (April–September 2025), smallcaps and midcaps showed positive gains in some reports (e.g., BSE MidCap +7.7%, BSE SmallCap +12.1% in April–September 2025), but Q3 specifically aligned with volatility and uncertainty leading into year-end.

Post-Q3 (into January–February 2026), smallcaps saw a sharp rebound (e.g., Nifty Smallcap 100 up over 6% in early February 2026 sessions, tied to better-than-expected Q3 earnings in some sectors and global sentiment shifts).

Midcaps outperformed large caps in Q3 FY26 earnings, posting 16% PAT growth and 50% positive surprises versus large caps' 13% growth and 39% positives. This is well reflected when we find out that the exposure to high-growth areas such as e-commerce (e.g., FSN E-Commerce's robust revenue/margins), real estate, cement, metals, and NBFCs boosted results, unlike largecaps weighed by IT slowdowns and banks. Smaller scale enabled faster growth at their size, with midcaps showing superior compounding potential amid capex revival. The same story is applicable for mutual funds where IT has a larger exposure. Now, a short-term flip of 10 % or 15% gain in prices is not an IT sector recovery. The divergence highlights midcaps' role in India's expansion story, offering re-rating, which many of us have been ignoring.

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Indian IT -Look into your investments & Mutual Funds .

Fund managers and CIOs who invested and bet on the growth of the Indian IT industry despite knowing that the industry faces AI-related risks are a type of blind act by the fund management community. Mutual Funds which are having IT exposure are simply impacting two segments of mutual fund returns: 1) Loss of return from the sector, 2) Loss of investing opportunity in other sectors in place of IT.  Financial advisors need to look into such portfolios and need to rebalance and reinvest in other funds where IT is either very low or next to zero allocation. Now the biggest question in mind will be why one acts like this?  

Does this mean the IT sector will struggle for long, and one will not get the historical returns, also? When we further investigated and found a huge long-term gap which impact the long-term returns too. One needs to revisit the thematic funds allocation.

One must understand the various angles of the IT industry problems created over the past 10 years, and there is no immediate relief or solution.  The Indian IT sector is an old-age home. Mr Murthy might criticise people asking to work 70 hours but not investing enough in R&D. The biggest problem with the IT industry, which is like a disease, is that they have a sales mindset and not an R&D mindset, which creates more problems to adapt to the culture of R&D in IT. Supply of cheap labour and aggressive buyout of companies to uplift the shareholders' value and market capitalisation of shares is no longer going to survive in the Indian IT industry. Get ready for more correction in in the Indian IT sector since the culture of R&D will take time to get adopted and reflected in numbers on the P&L and balance sheet.

The Indian IT industry has historically allocated a low percentage of revenue to research and development (R&D), typically ranging from 0.5% to 1.2% across major firms. This is significantly below global averages for tech sectors, where peers in the US, China, and other countries invest 29-55% of profits in R&D. The industry as a whole has focused more on operational efficiency and shareholder returns rather than innovation-led growth.

Annual R&D Spending (Recent Years)

·        TCS: ~₹2,751 crore (1.1% of revenue) in FY24, consistent at 1.0-1.2% since FY15.

·        Infosys:  ~₹655 crore (0.5% of revenue) in FY23, stable at 0.5% since FY17 (down from 1.3% in FY15).

·        HCL Tech: ~₹552 crore (1.1-1.3% of revenue) in FY23, up from 0.6-1.0% pre-FY20

·        Wipro and Tech Mahindra: Similar patterns, with R&D at 0.5-1.0% of revenue, estimating ~₹500-600 crore each annually based on comparable peers.

 

 

 Further, in the last 10 years (FY16-FY25) its estimated total over 10 Years Aggregating data for the top 5 firms, cumulative R&D spending is approximately ₹40,000-50,000 crore. This is derived from average annual spends of ₹4,000-5,000 crore across these companies, scaled over the decade.

The broader IT/software sector (including mid-tier firms), annual R&D was ₹1,500-1,600 crore in recent years, suggesting a 10-year total of ~₹15,000-20,000 crore, though this may undercount expensed R&D not always reported as a separate line item.

Now, how much profits they earn, and what is the contribution to R&D, shareholders wealth and executives perks?  The top 5 IT firms generated ₹8.9 trillion in cash profits since FY16 but reinvested only 13.5% (~₹1.2 trillion) in growth/expansion (including some R&D), highlighting a preference for other uses of capital.

The buybacks are the biggest use of profits, where the company utilises its funds rather than investing in R&D.

For the top 5 IT firms, cumulative buybacks exceed ₹200,000 crore.  Including mid-tier firms (e.g., Persistent Systems, L&T Infotech), the industry total is likely ₹220,000-250,000 crore. In 2023 alone, IT-heavy buybacks contributed to ~₹48,000 crore across 48 companies, with TCS spending ₹17,000 crore.

Over the decade, ~73% of cash profits from top IT firms (₹6.46 trillion out of ₹8.9 trillion) went to dividends and buybacks.  For the last 5 years (FY21-FY25), buybacks by top IT firms totalled ~₹120,000-150,000 crore, driven by post-pandemic cash surpluses.

So when you don’t have an AI agent of your own, you are bound to lose jobs and lose investment value in the Indian IT industry. Now the funny part will be that these giants will ask the government for freebies for setting up R&D.

Now the final chunk of profits went to the back of C-suit salaries. Top executive (CEO and C-suite) compensation in Indian IT has surged significantly, outpacing general employee wage growth amid strong profitability. Over the last 5 years, CEO pay at top IT firms rose by ~160%, while fresher salaries increased only by ~4%.

In the past decade, average CEO pay across listed firms doubled to ~₹7.2 crore (9% CAGR), but IT executives earn far higher, often in the ₹50-150 crore range due to performance bonuses, stock options, and variable pay (60% of total).

The investment is so low that this sector will struggle for a long time. Even some buyouts of IT platforms will not be of any help for the sector. It's time for financial advisors to relook into various sectors and realign the funds accordingly and investments. Those who are thinking that the current fall is an opportunity to buy well, the cheap is yet to become cheaper and the cheapest. Hence, wait and watch.

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For FII's, we can't stop the sell off, we offered nothing

 

There is little to celebrate in the fiscal math. There is nothing to be bullish about FII's. Earnings will take time to motivate FII's, and the buyback hammer will look for more re-adjustment in portfolios.  This budget does not create confidence instantly, but increases the volatility in the market.  best time to pick and choose rather than going blindly. Sunday, we saw the market and now wait for the week to see where we head.  We can't run the show of the Indian capital market on SIP and retail money. Even a risk free retun earns 4.5 for  FII's. We are just assuming falling interest rates will get inflows back to India, well china and other markets are looking ahead to attract FII's. Outlook does not exite FII's.  India needs to understand that capital market is too under competetion with other countries just like trade agreements.

Gone are the days when one used to expect tax cuts in budgets, reduction in gas cylinder prices,  reforms in 80cc and reduction in capital gain tax.  The new budget mechanism speaks loudly that we don’t expect big announcements as expected in the last 10 or 15 years. You will not find a galloping market but a real fight for earnings to let the market grow and, more importantly, investors' wealth to grow.

For FII’s, this budget is of no value. They will not find this market to be attractive compared to other markets. We lack confidence in our own maths. INR will be deprecated more and more rupees will flow out of India. STT is another pinch where FII’s and institutional players will have to cough up more. Gold will look super interesting now.

The financial performance of the Union Government in FY 2025–26, as reflected in the Revised Estimates, raises uncomfortable questions about the quality of fiscal consolidation underway in India.  It’s a balanced budget and focuses more on job creation. The time has come to focus on being an entrepreneur rather than just being a salaried person. The budget is balanced and focused on job creation.  Revenue receipts and net tax collections are under pressure, signalling an economic slowdown well before it becomes visible in headline GDP data. FII's now also lost the NRI gateway for deploying money in India. Now the NRI can come directly. On one side, it's okay, but on the other side, it will fuel redemption.

There have been cuts in many places. Revised revenue receipts for FY 2025–26 have been scaled down by ₹78,086 crore, while net tax collections are lower by a substantial ₹1,62,748 crore. These revisions are not marginal adjustments; they point to a clear slowdown in underlying economic activity, weaker consumption, and subdued profitability across segments of the economy. In response, the government has opted for expenditure cuts totalling ₹1,00,503 crore, with capital expenditure alone bearing a reduction of ₹1,44,376 crore. This is particularly concerning because public capex has been positioned as the primary engine of growth in recent years.

While the headline narrative highlights a controlled fiscal deficit and macro stability, a closer examination of the numbers reveals that this outcome has been achieved largely through sharp expenditure compression, rather than through durable revenue strength or economic buoyancy.

Despite optimistic headline numbers, Budget Estimates for FY 2026–27 reveal continued fiscal compression.

Lower Allocations in FY27 (BE) vs FY26 (RE)

• Crop Insurance Scheme
• Urea Subsidy
• PM Garib Kalyan Anna Yojana
• Aircraft & Aero Engines (Defence)
• Naval Dockyard Projects
• Air Force Projects
• National Security Technology
• LPG Connections for Poor Households
• Estimated nominal GDP growth for FY27: 10%, lower than the current fiscal year

Key Takeaways

• The fiscal deficit target of 4.4% has been achieved primarily through aggressive expenditure cuts, not through revenue strength.
• Critical sectors—health, education, agriculture, social welfare, and SC/ST/OBC scholarships—have borne the brunt of fiscal consolidation.
• Capital expenditure credibility is weakened, given that ₹1.44 lakh crore of capex was cut in FY26 itself, raising doubts over the sustainability of the ₹17.15 lakh crore capex headline for FY27.
• Sharp weakness in revenue and tax receipts signals an underlying economic slowdown.
• Cuts to essential schemes like drinking water and housing, amid ongoing public health concerns, raise serious policy questions.

These focus on direct cash to adult women via DBT:

• Madhya Pradesh: Mukhyamantri Ladli Behna Yojana — ₹1,500/month, ~1.27-1.29 crore beneficiaries.
• Maharashtra: Mukhyamantri Majhi Ladki Bahin Yojana — ₹1,500/month.
• Karnataka: Gruha Lakshmi Scheme — ₹2,000/month to the female head of household.
• Tamil Nadu: Kalaignar Magalir Urimai Thogai Thittam — ₹1,000/month.
• Others in states like Jharkhand (Maiyan Samman Yojana, up to ₹2,500/month), Assam, West Bengal, etc.

As of 2025-26 estimates, 12 states collectively allocate ~₹1.68 lakh crore annually for such women's UCT schemes (up sharply from just 2 states in 2022-23). This reflects political popularity, especially post-elections, but raises fiscal concerns (e.g., state debt increases in MP/Maharashtra, some allocations slashed in FY26 budgets). Hence, the announcement of Rs1.46lakh cr given to the state is given for this purpose only.

Supporters will argue that “tough choices” are necessary. But tough choices usually demand confronting structural issues—tax buoyancy, employment creation, widening inequality—not quietly withdrawing the state from sectors that lack immediate market visibility. Are the government freebies pinching?

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