FY27 structural outlook remains constructive; FIIs could turn positive by H2: Kush Gupta, Director at SKG Investment & Advisory

While FY26 was “bruising”, the structural outlook for FY27 remains “constructive”, Gupta notes.

The 2025-26 financial year (FY26) was bruising– SENSEX fell around 7%, and NIFTY declined about 5%, making India the only major emerging market (EM) to post negative returns. The MSCI India index slipped 3.57% versus MSCI EM's 26.86% surge.

Foreign Institutional Investors (FIIs) triggered a ₹3.31 trillion selloff, driven by India's valuation premium, with MSCI India PE standing at 24.33x, compared to MSCI EM at 14.88x at the beginning of FY26. Brent crude surged around 46% to $105/bbl since the US-Iran escalation on February 27, 2026.

The structural FY27 outlook, however, remains constructive. NIFTY is projected to reach around 27,000, a potential 18% upside from current levels. NIFTY 1-year forward valuations have moderated to around 20x, close to +1SD of the 5-year average.

The SENSEX trailing PE at around 20x is well below its 5-year pre-correction average of around 24x, and the market-cap-to-FY27 nominal GDP ratio has shrunk to around 109% from 152% at the September 2024 peak.

H1FY27 will likely see continued sideways movement and heightened volatility as inflation and interest rate trajectories adjust to the energy shock.

H2FY27 is where the recovery thesis is anchored. Robust DII inflows, an expected NIFTY earnings recovery of 13-15%, and potential geopolitical de-escalation set the stage for a strong rebound.

The single most powerful tailwind from de-escalation would be crude oil normalisation. Brent surged from around $70/bbl pre-conflict to $105-$120/bbl at various peaks, presenting a 46%+ spike. Every $10/bbl decline in crude improves India's current account deficit by around 0.5% of GDP and directly eases inflationary pressures.

Second, rupee stabilisation. The currency currently stands at around 93-95/USD. A calmer crude environment would reduce FII hedging losses and improve dollar-denominated returns, a precondition for foreign capital return.

Third, private consumption, which is expected to contribute strongly to GDP growth by the end of 2027, would accelerate sharply.

The fiscal tailwinds are substantial: income tax relief worth ₹1 lakh crore, GST cuts worth ₹96,000 crore in FY27, and the 8th Pay Commission adding ₹2.4-3.2 lakh crore in additional disposable income.

The rupee closed FY26 at around 95/USD, a record low, after depreciating around 10% over the past year. The RBI's decision to cap banks' Net Open Position (NOP) at around $100 million is a structural intervention; the cumulative dollar sell unwinding from this measure is estimated at $25-30 billion, providing near-term technical support. However, the relief is likely temporary rather than a trend reversal.

In March 2026 alone, forex reserves fell $30 billion, of which $16 billion was a foreign currency asset (FCA) drawdown from direct market intervention.

Fundamental headwinds remain potent: Brent crude above $105/bbl inflates India's import bill; FPIs pulled out around $13 billion in equity and debt in March 2026 alone, the steepest monthly outflow on record.

The RBI's oversold forward position exceeds $100 billion, keeping the market nervous about further depreciation when these positions are squared off.

H1 stabilisation is unlikely unless crude corrects sharply and FII outflows reverse. Federal Reserve rate cuts, a softer dollar, a manageable current account deficit, and potential inclusion in the Bloomberg Global Aggregate Index could support the rupee, but these are predominantly H2 catalysts. The most probable H1 scenario is managed depreciation within the 92.50-96.00 band, not a trend reversal.

Foreign portfolio investors (FPIs) were net sellers of equities worth ₹1.76 trillion in FY26, reflecting a 38% jump over FY25's ₹1.27 trillion outflow. Furthermore, FIIs sold a cumulative ₹3.15 trillion, while domestic institutional investors (DIIs) cushioned the impact with ₹8.31 trillion in buying.

The selloff was driven by India's valuation premium (MSCI India PE at 24.33x vs EM average of 14.88x), crude sensitivity post-conflict, and earnings disappointment. The NIFTY 50 12-month forward EPS growth is projected at around 14%, but could be trimmed to around 10% if elevated crude persists.

The return of FIIs is expected to be heavily skewed towards H2FY27. H1 corporate earnings will still be impacted by the war scenario, and FII flows would improve only when the rupee stabilises and earnings growth picks up.

Three pre-conditions must be met for aggressive FII return: de-escalation of the West Asia conflict, cooling of Brent crude prices, and stabilisation of the rupee against the dollar.

A successful conclusion of the US-India trade agreement could also inspire FIIs to reallocate capital to India. Additionally, the US Federal Reserve will have room to maintain a downward rate trajectory if geopolitical tensions ease and oil softens in FY27, aiding capital flows into emerging markets in H2.

FIIs currently hold $700-750 billion in Indian equities but may reallocate to other markets if the rupee weakens further. On the DII side, monthly SIP flows remain robust at around ₹30,000 crore, mutual funds hold around 5.9% cash (around $6 billion deployable), and EPFO equity exposure at around 10% has room to increase.

Net-net, FIIs are likely to remain cautious in H1 but could turn incrementally positive by H2 if the macro backdrop improves.

1. Banking & Financial Services (BFSI): System credit growth has accelerated to 14.4% in December 2025 and is projected at 13.5% for FY27E. PSU banks trade at 8-9x PE against historical averages of 11-12x, offering compelling value. Balance sheets are the cleanest in a decade, with improving asset quality. Insurance and capital markets penetration remain low, offering structural tailwinds. Lending financials are expected to benefit from healthy credit demand and the private capex revival.
2. Defence: The FY27 budget allocation stands at ₹7.85 lakh crore, the second-highest ministerial allocation after Finance. India is transitioning from a defence importer to an exporter, with a target of ₹50,000 crore in defence exports by FY29. Geopolitical tensions have structurally elevated the sector's strategic priority, and order book visibility extends several years out.
3. Capital Goods & Infrastructure: The FY27 capex outlay stands at ₹12.5 lakh crore (+09% YoY), directed at railways (₹2.77 lakh crore), roads, and highways. Power and data centre-linked capex are structural themes, as India's current data centre capacity of 1.5GW is expected to scale toward 10GW, supported by hyperscaler investments and data localisation mandates.
4. Discretionary Consumption & Auto: GST 2.0 rate cuts have resulted in a price reduction across auto categories, triggering a sharp demand uptick in passenger vehicles and two-wheelers.

The income tax rebate (₹12 lakh tax-free under the new regime) has increased disposable income by ₹ 35,000- ₹ 50,000 annually for the middle-class, flowing directly into durables, travel, and autos. Consumption's contribution to GDP growth is expected to climb, with particular strength in durables, apparel, and footwear. The benefit to consumers is estimated at around 0.6% of GDP.

5. Power & Renewables: India's power demand is growing at 8% annually, double the pace of the prior decade. The government targets 500 GW of non-fossil capacity by 2030, with installed renewable capacity already at around 452 GW.

Budget 2026 introduced a 20-year tax holiday for foreign companies establishing global data centre services from India, designed to attract international digital infrastructure investment. The West Asia conflict has further underscored the urgency of energy security and diversification.

The correction in small- and Mid-caps has been severe. The NIFTY Smallcap 100 lost 5.5% (891 points) in FY26, closing at 15,203.80 on March 30. The NIFTY Midcap 100 delivered a modest 1.9% gain but fell 2.68% on the last trading day alone. Among them, NIFTY Realty (-21.3%), IT (-19.9%), and FMCG (-13.4%) were the worst-performing sectoral indices in FY26.

The valuations have compressed but remain above long-term averages for Midcaps: NIFTY mid-cap 100 trades at around 33.2x TTM PE versus 5-year median of 30.2x, while NIFTY small-cap 100 is at about 26.7x vs 5-year Median of 29.1x, and trades at a discount on long-term averages.

The bull case is compelling at a macro level. The market-cap-to-nominal-GDP ratio has dropped to approximately 109% from 152% at peak, and the SENSEX trailing PE at about 20x is attractive relative to the 5-year average of 24x. Smaller companies have the potential to give better growth at these valuations, which carries a higher scope for alpha.

The median operating profit grew 14.1% YoY in Q3FY26 for companies in the ₹500 crore to ₹50,000 crore market cap bucket, ahead of larger companies at 12.1%. However, caution is warranted. Around 40% of small-cap companies missed earnings expectations in Q2 of FY26, and small-cap earnings growth actually fell 5% YoY in Q2FY26 against their 3% growth expectations.

Small-caps are expected to outperform both large-caps and mid-caps in FY27, provided stock selection is done through proper due diligence, though the margin of outperformance may remain narrow.

The prudent approach: accumulate quality small-cap and midcaps with earnings visibility on dips, avoid chasing high-beta names above 50x PE without demonstrable growth.

The narrative shift is real but incomplete. The NIFTY IT index fell 19.9% in FY26, the worst-performing sectoral index after Realty. Trent (-36%), TCS (-34%), and Wipro (-28%) were among the biggest Nifty losers in FY26. Notably, on April 2, IT was the sector trading in strong green as HCLTech and Tech Mahindra led the Nifty recovery.

Estimated AI-led revenue deflation of 2-3% is now being factored into both FY27 and FY28 projections, while valuation multiples have been cut approximately 20% for IT services and about 32% for business process outsourcing (BPO) firms.

Yet the counter-thesis is building. The IT services industry is projected to recover to 7.7% growth in FY27 versus the approximate 3% average over the past three years, driven by AI-centric deal wins. Furthermore, 74% of all contracts signed in the last six quarters were AI-focused, spanning generative AI, agentic AI, machine learning, and AI-led automation.

GenAI bookings at Accenture, which has a substantial India employee base, nearly doubled to $5.9 billion in FY25. Large-cap IT revenue growth is expected at 4.5% in FY27, above FY26 levels, with EBIT margins expanding about 30 bps for large caps and approximately 50 bps for mid-caps.

Enterprise-scale AI adoption is anticipated to ramp up significantly in FY27, providing a new opportunity for Indian IT providers to deliver transformation projects and managed services. A 200-300 bps improvement in revenue growth is projected as macroeconomic conditions stabilise in the US and Europe.

The sector now trades at 16-17x forward PE, a 20-30% discount to historical averages, making it a classic value play for patient investors. The path forward is front-ended pressure (GenAI automating testing, documentation, and support) and back-ended opportunity (companies repositioning as AI-led transformation partners, capturing a larger addressable market). The FY27 Q1 guidance cycle (April-May 2026) will be the definitive inflection test.

Given the volatile macro backdrop, a balanced, diversified approach with an equity tilt is the consensus recommendation.

The ideal asset allocation for moderate-risk investors with a 4-5-year horizon is 65-70% equities, 15-20% debt, and 10-15% precious metals (gold as a hedge against macro uncertainty), irrespective of market and economic conditions.

Within equities, a 65% allocation can potentially deliver 12-15% returns in FY27, though dispersion across sectors will remain high and stock selection will be critical. The sectors to overweight are discretionary consumption (auto), lending financials, defence, power, and select infra bets like ports and airports.

NIFTY earnings should grow around 11-13% in FY27. BFSI, consumption (including auto), healthcare, and industrials are well-positioned given reasonable valuations, robust asset quality, and improving credit growth. IT at 16-17x forward PE offers a contrarian value entry.

Phasing matters. Equities in FY27 can deliver mid-to-high single-digit returns, but a more than three-year investment horizon is advisable, with some more correction to be awaited before entering aggressively.

Gold and silver deserve a 25% allocation with expected returns of 10-12% over the medium term, justified by currency volatility and elevated global debt, though gold may correct in the near term after its recent surge. Fixed-income at 7-8% yields provides portfolio stability.

The core principle: deploy systematically through SIPs in H1 to average through the volatility, stay sector-selective, and let the H2 earnings recovery thesis play out.