Edited excerpts from a chat with Arbind Maheshwari, Head of India Equities, BofA Securities:
2025 saw elevated equity supply from IPOs and promoter exits, diluting the impact of domestic flows. How do you see the supply-demand balance shaping up in 2026?We think primary supply is likely to remain elevated in 2026 too. CY25 recorded one of the highest primary market activities at US$56bn and we believe CY26 could surpass that. Domestic inflows remain a key anchor for Indian markets and we expect DII flows to grow ~9% in CY26, with monthly flows stabilizing in the US$4-7bn range, as household equity allocation stays low (~15%) and leaves room for structural expansion. After a record FPI outflow of US$19bn in 2025, our base case assumes limited outflows or marginal inflows, driven by potential Fed rate cuts, a weaker USD, and profit-taking in crowded global themes like AI redirecting capital to EMs including India. Overall, even with high IPO/promoter/PE supply, strong DII flows and minimal FPI outflows should absorb the overhang, lifting secondary market liquidity by 50% to US$46bn vs US$31bn in CY25.How do you see the balance between earnings growth and valuation support evolving for Indian markets?In CY26, Nifty returns will likely be driven by earnings growth rather than valuation re-rating, as Nifty trades near +1SD (~21-21.5x 1Y forward PE), leaving limited scope for further expansion unless earnings accelerate sharply. Our CY26 Nifty target of ~29,000 (+11%) is primarily EPS-driven, not multiple expansion. Earnings trajectory shows FY26 EPS +7%, FY27 +14%. With most cuts behind us, return expectations should be anchored around EPS delivery.
With earnings recovery uneven, will Q3 and Q4 deliver broader growth or remain narrow?Near-term breadth will likely remain narrow through H2 of FY26; we prefer large caps and select SMIDs with reasonable valuations and strong earnings visibility in Financials, Discretionary Consumption, and Healthcare. Real broadening is an FY27 story, with earnings acceleration across ~80% of Nifty market cap, tilting leadership toward rate sensitives, telecom, premium consumption, and select capex plays like defence/T&D.Which sectors are best placed to drive incremental earnings growth in FY26 and FY27?Financials: Loan growth revival, supportive regulation, NIMs bottoming; scope for re-rating.Telecoms: Tariff hikes likely in 1H CY26; operating leverage to boost margins/earnings.Premium Consumption: Jewellery, Durables, Travel/Tourism, QSR, Quick Commerce – premium cohorts drive volumes/mix.Real Estate/Regulated Utilities: Execution resilience; rate cuts supportive for valuations and demand.Selective Capex Plays: Defence, Shipbuilding, Power Transmission/Cables, Aluminium (non-ferrous deficit).Underweights: Mass consumption (Staples, Footwear, Apparel, 2Ws), Steel, Upstream Energy, broad Industrials (ex-defense/T&D), Cement, and IT (only modest uptick).Financials remain a large driver of index earnings. Are there risks of fatigue, or does the sector still have room to compound?Financials have the most supportive setup since COVID: positive earnings surprises, benign regulation, light positioning. Rate cuts may pressure NIMs near term but are net positive for medium-term credit growth. Risks include competitive deposit pricing (NIM squeeze), retail credit normalization slowdown, and policy shocks – yet our base case remains constructive into FY27.How are you viewing consumption? Has recovery broadened or is it still skewed toward discretionary pockets?Consumption recovery remains uneven and K-shaped: strength in premium/discretionary segments, while mass consumption lags. Mass consumption is bottoming but revival will be shallow due to multi-year pressures – high inflation, weak farm incomes, reduced subsidies, rising leverage with households prioritizing deleveraging over spending. Policy support (~1.9% of GDP by Mar’26) aids sentiment but mainly supports balance sheet repair. Premium consumption is structurally stronger, fuelled by wealth gains from real estate, equities, and gold sustaining demand for premium autos, housing, travel, jewellery, durables, and services. Data shows widening divergence: premium categories deliver multi-year growth, while staples, apparel, footwear, 2Ws, and value retail lag pre-COVID trends. Outlook: bifurcated through FY27; mass recovery unlikely before end-FY27, premium as key driver.
With the government shifting focus from capex to consumption, how do you see capex-related plays?Capex growth has slowed to ~13% in FY26 / ~10% in FY27 vs ~19% in FY21-24, with downside risk if the Centre tries to meet 4.4% fiscal deficit. States’ capex is most at risk from lower tax collection, GST challenges, rising subsidies, and elections. We would avoid budget-dependent sectors like Roads, Rail, Metro, Water. We prefer defence, shipbuilding, power transmission & cables, and energy transition themes (renewables, grid, data centers, semiconductors, EMS) least vulnerable with superior visibility.
If the India-US trade deal is completed, will FPIs turn net buyers?A deal would improve sentiment and flows, but macro tailwinds matter more. Our CY26 base case assumes the deal fructifying, plus Fed cuts and weaker USD, which is historically positive for EM/FPI flows. Completion reduces uncertainty for IT/exports and could tilt FPIs net positive, especially if Nifty outperforms S&P. If it slips or tariffs rise materially, FPI risk appetite could weaken with sector-specific drags – but not our base case.
