Foreign investors are cautiously returning to Indian equities, but a durable reallocation of foreign portfolio investment (FPI) to India has yet to be confirmed, according to Venugopal Manghat, chief investment officer at HSBC Mutual Fund.

FPIs — overseas funds registered with Indian regulators to invest in listed securities — have long been among the largest non-domestic participants in Indian equities, and their monthly purchase and sale figures, published by depositories such as NSDL, are widely followed as a barometer of foreign demand for the market. That is what makes the tactical-versus-structural distinction consequential for readers tracking India's market direction.

Manghat points to improving earnings, stable domestic demand and manufacturing growth as key supportive factors, while stressing the importance of valuation discipline. In his assessment, sustained foreign inflows will depend on earnings delivery, rupee stability, global liquidity, and India's valuations relative to other emerging markets. Because most emerging-market mandates allocate across a basket of countries, India's valuations and currency outlook are typically weighed against competing markets within those allocations.

Investors need to see stronger earnings growth and a reasonably stable rupee before treating the revival in foreign inflows as a structural shift rather than a tactical one, the article notes. Those criteria — quarterly earnings delivery, the rupee's trajectory, and global liquidity conditions, which funds read alongside US monetary policy — serve as the practical indicators to watch in coming quarters.

The piece is structured as an interview and frames the discussion around the following questions (references to Q1 FY27 denote the June quarter under India's April–March fiscal calendar). The topics span financial services and information technology — among the heaviest sector weights in India's benchmark indices — alongside the capital expenditure, defence, manufacturing and infrastructure themes that have dominated domestic market commentary:

• Indian equities are increasingly being described as an earnings-driven rather than liquidity-driven market. Is the current earnings trajectory strong enough to support prevailing valuations?
• Q1 FY27 results have produced several positive surprises, but analysts remain cautious about upgrading full-year estimates. Are we seeing a genuine earnings recovery or merely a favourable quarter?
• How do you assess the risk-reward equation across large, mid- and small caps? Does the valuation gap warrant a decisive portfolio shift towards large caps, or can mid- and small-cap earnings catch up?
• Foreign investors have started returning after an extended phase of selling. Is this the beginning of a durable reallocation towards India, or a tactical trade driven by global liquidity and currency movements?
• How do you view the outlook for banks and NBFCs amid improving credit demand but pressure on margins? Where are we positioned in the financial-sector earnings cycle?
• The market remains enthusiastic about capital expenditure, defence, manufacturing and infrastructure themes. Which indicators would suggest that these structural opportunities have become overcrowded or overvalued?
• How is artificial intelligence (AI) changing the investment thesis for Indian IT companies? Is it a near-term risk to traditional revenues, or a potential driver of the sector's next growth cycle?

Source: Economic Times Markets