PL Capital has revised its 12-month target for Nifty downwards by more than 5 per cent to 25,689, indicating a 14 per cent potential upside from current levels. The Indian markets are currently deemed less attractive due to slower growth and high valuations compared to other markets. Factors such as elevated US 10-year treasury yields and a depreciating rupee have pushed the breakeven returns to over 10 per cent.
The firm anticipates continued volatility in the markets in the short term, but a stabilization is expected by the end of the current quarter. The effects of various government initiatives and the monsoon season are likely to contribute to an improvement in consumer demand in the second quarter of the fiscal year 2026.
Foreign Institutional Investors (FIIs) have been selling off due to global uncertainties and a weakening rupee. A total of $20.2 billion has been withdrawn by FIIs from Indian equities and bonds since October of the previous year, representing one of the largest outflows in recent times.
PL Capital has assessed the hurdle rate for FII investments in India and estimates a current cut-off rate of 10.5 per cent, factoring in 4 per cent INR depreciation, capital gains tax, and a 4.5 per cent 10-year US treasury rate in India.
Regarding the budget impact, PL Capital projects a more favorable growth outlook in India for the fiscal year 2026 compared to FY25. They anticipate a positive shift in FPI flows as the effects of the Budget materialize in increased capital expenditures, tax reductions, and a boost in consumer demand driven by agricultural tax cuts and a repo rate decrease. However, concerns persist over FDI outflows which could exert pressure on the INR and contribute to market volatility.
The research firm has expressed an overweight stance on the consumer sector in expectation of increased demand following tax reductions, decreased food inflation, and repo rate cuts. Additionally, they have raised their weighting in banks and healthcare.
Despite potential tariff negotiations and uncertainties in US policies, India is unlikely to experience significant negative impacts. Factors such as soft crude oil prices, geopolitical stability, and enhanced technology transfers to India could offset the costs of tariffs imposed by the current US administration. PL Capital believes that the structural basis of India-US trade remains intact, with high growth potential in technology, defense, and nuclear energy sectors.
In conclusion, the firm anticipates that India will be able to navigate tariff negotiations effectively, leverage its geopolitical position, and adapt its supply chains to mitigate any negative repercussions, ensuring that any challenges faced are temporary adjustments rather than a retreat.
