Edited Excerpts:
India is one of the fastest-growing economies and a global bright spot, yet equity returns lag behind. What does this say about our market?
Over the longer term, stock market returns are linked to corporate earnings growth. In the shorter term, however, fund flows, sentiment, and expectations can influence performance. For example, the Chinese market hasn’t moved anywhere over the last 17 years. But has the Chinese economy done well during this period? The answer is undoubtedly yes.
This is explained by the fact that while the Chinese economy performed well, Chinese corporate profit growth did not, and hence the stock market did not perform well. On the other hand, over the last 17 years, Indian market performance has been very strong because Indian corporate profit growth was very robust.
In the last one year, there has been continuous FPI selling, and corporate earnings performance has been lower than market expectations, which is why stock market returns have not been good.
How do you see Indian markets and FPI trends shaping up in 2026?
We expect corporate earnings growth to move into double digits from single digits in CY26 and FY27. We do not expect market valuations to get re-rated. We are already trading at our historical average valuation and are unlikely to move much further from here. This means that market return performance will be linked to earnings growth.
We expect earnings growth to be positive, and hence we expect stock market returns to be slightly better than last year.
But are we going to see high double-digit returns in the market? The answer is no. Will FPIs come back? There are four kinds of FPIs participating. One is high-frequency traders.
They trade in our market, and because they have better connectivity, better algorithms, and better data analytics, they make money. Now SEBI has tightened regulations, so our feeling is that their activity is dead. The amount of money they were taking out earlier should come down.
Second is passive FPIs. In CY25, emerging markets outperformed developed markets. This should bring some money into passive funds. Of this money coming into passive funds, about 16.5% will come to India. So passive FPI money flows should improve in CY26 over CY25.
Then there are active FPIs, where fund managers take calls. Our feeling is that active fund manager selling intensity in the secondary market will keep coming down. They will continue to sell, but less than what they have sold earlier.
Their buying activity in the primary market is likely to continue. So overall, compared to CY25—when they sold close to ₹2 lakh crore—we believe next year they should be marginally positive.
After that comes corporate FPIs. These are companies like LG, Whirlpool, and Prudential that list their companies in India and sell their shares. Our feeling is that their selling will continue. Market valuations are good, and many of these companies will continue to book profits.
Do you expect India’s earnings to hit double digits and trigger a return of foreign portfolio investments?
So undoubtedly, we expect earnings growth to move into double digits. It should happen from the December quarter itself, and that should give confidence to global investors to invest. But we also need a little bit of luck.
The first element of luck we need is global investors taking money out of the American market. Global investors have put nearly $30 trillion into America—across bonds, equities, and other assets. The dollar is down 12% year-to-date. On $30 trillion, that translates into a loss of $3.6 trillion. Now, if this pushes investors to take money out, some of that money will come to India.
The second factor is China. As I mentioned, Chinese markets are trading today at levels seen 17 years ago. Over these 17 years, markets have gone up and down—five times they have gone up and come down, and now for the sixth time. Will they come down again, or will they go up? If they go up, less money will come to India. If they fall, more money will come to India. So apart from our own double-digit earnings growth, we also need the Chinese market to fall and investors to withdraw money from America.
So, are you saying India’s market fortunes depend on China, and a downturn there could bring investment back?
Performance is dependent on our own talent—like Virat Kohli. If you are batting on a bowling pitch, you will score 50 runs. But if you are batting on a batting pitch, you will probably score 100 runs. But only Virat Kohli can score a century. We need both a good batsman and a good batting pitch.
What’s your hunch—will the Chinese market rise or fall?
We are not experts on the Chinese market, and they don’t share their data, so it is difficult to say.
If we look at the performance of the various kind of stocks like large cap, mid caps and small caps, we have seen a huge divergence. In 2025, do you expect this divergence a sign of a market stress or a healthy reset after years of excess?
I think it is a healthy reset. Small caps were running a sprint, while large caps were running a marathon at a sprint pace. Eventually, the marathon caught up with the sprint. Small caps had delivered substantially higher returns, and hence they needed to slow down to catch up with fundamentals.
Why do you believe mid caps could outperform despite past abrupt rallies?
Essentially, our positive outlook on mid caps comes from better earnings growth and reasonable valuations. In terms of earnings growth, mid caps are expected to post the highest growth, followed by small caps and then large caps. Valuation-wise, mid caps and large caps are trading around their historical averages. Hence, in terms of returns, it should be mid caps first, large caps second, and then small caps further down the line.
Small caps are still trading at significant premiums. Do you see this as a valuation risk, given that investors may be underestimating it globally?
If you are looking for, say, a 30 per cent return in large caps, undoubtedly large-cap valuations are very expensive. You are not going to get a 30 per cent return by investing at these valuations in large caps. But what if your return expectation is 10 per cent? Then these valuations are reasonable for investment.
You cannot look at valuation without the context of your return expectation. If you want a 30 per cent return, don’t invest in this market—wait for a correction. But what if that correction doesn’t come?
Rupee has depreciated 5 per cent till December, a historic move. Where do you see it heading and how will it impact the economy and markets?
The destiny of the rupee is to depreciate. Our inflation differential and productivity differential ensure that we continue to depreciate vis-à-vis our trade partners. So we still believe the rupee will continue to depreciate and may eventually cross three digits someday in the future. As long as rupee depreciation is in line with what is known as the real effective exchange rate, we should be fine.
There’s been a lot of concern about the rupee hitting record lows. Is this something you see as worrisome right now?
So if people come and say that you have become older and are at an all-time high in terms of age, will you get worried? Not really. The same thing applies to the rupee. All of us are going to continue to grow every day; we are going to become older and older.
But if, every year, I start worrying that I have reached my all-time high age, I may die in the next year. So why take unnecessary tension? The destiny of the rupee is to depreciate as long as we do not improve our productivity and do not reduce our inflation.
With Indian equities trading at a premium to historical averages and peers, do you think earnings growth, rather than narrative, will now drive returns?
No, stocks are slaves of earnings power. Over the long term, stocks will move in line with earnings power. So instead of focusing only on narrative, I have to focus on creating earnings. But if I build earnings and also build narrative, that is sone pe suhaga.
We should not ignore one in favour of the other. The majority of our efforts should go towards improving fundamentals—towards building sustainable earnings growth. But we should also focus on managing the narrative. How many people know that Chinese markets are trading at the same level they were 17 years ago? Not many. How many people know that Indian markets have underperformed their peer group over the last one year? Almost everyone. That’s the power of narrative.
Which sectors do you see as having strong growth potential and likely to perform well in India in 2026?
Sectors that will do well include consumer discretionary, as the government is putting more money into the pockets of consumers, and banking and financial services, as NIMs start bottoming out. These are the sectors where we believe there is opportunity.
There is one sector where we are not sure about the next 12 months, but we believe there could be a good opportunity over the next three years. So the 12-month outlook is uncertain, while the medium-term outlook is positive.
That sector is chemicals. Indian companies have created capacities, but they are not able to utilise them because Chinese dumping is significant. Chinese players are selling below their cost of production. At some point, this will stop. When it does, Indian companies that are focused on becoming more cost-competitive will do well.
Do you think the government will again have to lead on Capex since private investment remains muted?
We believe that the government will have to continue doing the heavy lifting. There are areas where the government can make investments—for example, defence, roads, and certain infrastructure projects. There are also areas in which the private sector can participate and provide support. However, the heavy lifting will still need to be done by the government.
When do you expect private Capex to revive and drive the economy as strongly as government spending?
Private capex is like five blind men trying to identify an elephant. In some cases, there are succession challenges—the children don’t want to do what their parents were doing. In some cases, the children have settled abroad and don’t want to come back to India. In some cases, technology is changing rapidly, and hence investors want to wait before making investments. In some cases, ease of doing business is a challenge.
So private capex is a combination of many factors, and we will have to keep working on improving ease of doing business and ensuring that finance is available so that entrepreneurs are willing to take risks.
Sir, what is the most urgent reform you think the government should address in the upcoming Budget?
I think there is one. The gold-to-GDP ratio of India is about 120%. We don’t know the exact quantity of gold we have, but even if we take 35,000 tonnes of gold as our holdings, it is valued at about $5 trillion. Our GDP is about $4 trillion. That means around 120% of our GDP is gold lying with people.
And where is it locked? It is in tijoris. It is in the parallel economy. If we can monetise that gold, it could benefit the country.
So I would request the Hon’ble Finance Minister to think out of the box about defreezing India’s gold reserves and gold savings so that they can contribute to growth.
What’s your view on the government’s fiscal consolidation path, and do you see challenges ahead?
So again, if they follow what I have suggested on gold disclosure and gold buying by the RBI, fiscal prudence can be achieved immediately. $60 billion is almost one and a half percent of GDP, which is not a bad number at all.
Do you think fiscal consolidation will get harder, and will the government’s approach to reducing the debt-to-GDP ratio succeed?
I don’t think so. The path of fiscal prudence is easy, provided we can monetise our resources. Asset monetisation and divestment have not received the kind of response the government was looking for.
Yes, absolutely. Nothing is going to happen on its own; one has to work towards it. If we utilise our resources well, a large part of fiscal prudence becomes easy, not difficult
What corrective measures would you suggest for the government to better mobilize resources?
You yourself have mentioned that asset monetisation and divestment are two things we need to do right now. We haven’t done them well in the past, and we need to learn from those mistakes and start doing them better.
For example, when divestment and asset monetisation are handled as a wing of the government under the Finance Ministry through DIPAM, they have not received the desired traction. Maybe DIPAM should be converted into a sovereign entity equivalent to GIC or Temasek, run on a professional basis. We can then see whether DIPAM, in the reincarnation of GIC or Temasek, can do a better job.
What’s your advice for investors in 2026, and how should they structure their portfolios?
Good news and good prices don’t come together. In bad news, you get good prices to invest. So don’t worry about bad news—stay optimistic. Follow dharma of asset allocation. Put some money in gold and silver. Put some money in equity. Put some money in real estate. Put some money in commodities. Put some money in India and put some money abroad.
The best way to do this is to follow a multi-asset allocation fund. If you look at our Multi Asset Allocation Fund, you will see how we have divided our portfolio across debt, equity, gold, and silver. If you look at two or three other multi-asset allocation funds, you will roughly understand where fund managers are bullish or bearish.
So follow the dharma of asset allocation. Invest across debt, equity, gold, and real estate, both in India and abroad.
