The GAM Emerging Markets Equity team’s Ygal Sebban and Meera Patel share their views on India, pointing to elevated valuations and limited direct exposure to the global AI investment cycle. That said, they see selective opportunities emerging within the market.
31 March 2026
Being a major energy importer, India has been strongly impacted by the Middle East war. Although India has underperformed other emerging markets (EMs) since H2 2024, valuations remain elevated in our view1, leaving scope for further de-rating if earnings momentum does not strengthen.
While India’s long term fundamentals remain attractive, elevated valuations and limited exposure to the global AI cycle justify a cautious stance in the near term. The impact of higher-for-longer oil and gas prices will be detrimental to the Indian economy.
Good structural story, but not yet
India is the world’s fastest-growing major economy, with a forecast 2026 GDP growth rate of 7.0% in 20262, supported by compelling structural growth drivers including a large, youthful demographic with an average age of 29.
India can appear to be an attractive investment opportunity, yet it underperformed most EMs in 2025, returning 3.8% in USD terms versus 30.6% for the broader MSCI Emerging Markets Index3. Between 1 January and 20 March 2026, India lagged broader EMs by 20.3% in USD terms4.
In our view, India faces several short- to medium-term challenges, that may be masked by headline GDP growth.
Macro and geopolitical factors
Accounting for 20% of India’s goods exports, the US tariff overhang dominated headlines in 2025, with a 50% tariff on certain exports creating uncertainty around future growth prospects. A much-awaited trade deal was announced in early February 2026, reducing tariffs to 18% which appeared to contribute to a quick reversal in sentiment.
By the end of February 2026, the US Supreme Court struck down Trump’s tariffs imposed under International Emergency Economic Powers Act (IEEPA) on constitutional grounds. In response, Trump imposed a universally applied 15% global tariffs under Section 122, effectively reducing India’s headline tariff from 18% to 15%, amid renewed uncertainty. Electronics and pharmaceuticals remain exempt, and we expect some sectors, namely autos, steel and aluminium, could be likely facing differential tariffs. Direct beneficiaries of the trade deal include industrials such as cables and wires, machinery and speciality chemicals, cyclical areas.
The coordinated US and Israeli attack on Iran has injected a fresh wave of geopolitical risk into markets, with India particularly vulnerable to spikes in oil prices, given 85% of its crude oil is imported, half from the Middle East5, and more than 70% of its natural gas imports cross the Strait of Hormuz6. Already four days into the war, India begun curtailing gas supplies to industries by 10-30%. By the sixth day, the US government issued a 30-day sanction waiver, allowing Indian refiners to temporarily purchase Russian and Iranian energy. This has kept oil supply relatively well buffered, however, gas availability remains critically tight, with approximately 15 days of inventory as at 17 March7. Second-order effects are now emerging across supply chains for fertilisers, plastics and packaging, as well as downstream consumer goods and eventually households. The expected fiscal response and administered price hikes are likely to be passed through to corporates and households.
These geopolitical concerns continue to dampen sentiments, which in turn are accelerating foreign institutional investment (FII) outflows in the short term. Foreign investors sold USD 18.3 billion of Indian equities in 20258 compared to USD 410 billion of portfolio inflows for broader EM equities9. Over the last five years, foreign ownership of Indian equities has declined and is now at its lowest level since 2012, particularly in large-cap stocks.
Chart 1: Domestic exceeds foreign ownership in Indian equities
Source: Morgan Stanley, as at December 2025. FIIs = foreign institutional investment. DIIs (incl DMFs) = domestic institutional investors (including domestic mutual funds).
In addition to FII outflows, India has struggled to attract significant foreign direct investment (FDI), relative to other emerging Asian economies, which is essential for sustainable growth. Net FDI stood at just around 0.5% of GDP in FY25, an 18-year low due to elevated repatriation by foreign firms. New Delhi has brought in several reforms over the past year aimed at attracting more capital, including simplification of bankruptcy rules and the labour code. A lighter state-election calendar reduces political uncertainty, allowing implementation of long-term structural reforms and steady fiscal spending, providing a tailwind for Indian equities.
Chart 2: Net FDI inflow (as % of GDP)
Source: World Bank, Ambit Capital research, as at December 2024. Note: CY refers to calendar year.
Remittances, which now exceed gross FDI, have become an increasingly crucial source of external funding. 38% of India’s remittances come from the Gulf Cooperation Council (GCC), leaving them vulnerable to a prolonged regional conflict.10
Chart 3: Remittances are a more important source of foreign inflows than FDI
Inflows of remittances vs group FDI (USD billion)
Source: RBI, Economic Survey, TS Lombard, as at December 2025. *Note: Private transfers mainly include remittances by Indians employed overseas.
Another driver of equity market underperformance in USD has been currency weakness. The Indian rupee (INR) has depreciated by 11.2% from 5 May 2025 to 20 March 2026, with the real effective exchange rate (REER) at levels last seen in 2014. The path to recovery is highly dependent on the Reserve Bank of India’s (RBI) FX policy, which has been cushioning the rupee’s decline. In the meantime, the rupee could be negatively impacted by the widening deterioration of the current account deficit related to the current war and higher commodity prices.
Chart 4: The Indian rupee real effective exchange rate depreciated in recent months
Source: Bloomberg, Reserve Bank of India (RBI), HSBC, as at February 2026. Note: REER growth shown relative to the 2015–2016 base value = 100.
Inflation has rebounded following record lows of 0.25% year-on-year (yoy) in October 2025, partly due to an adjusted Consumer Price Index (CPI) base year series, rising to 3.2% yoy in February 202611. This is driven by a reversal in food price deflation and rapid precious metal price growth, rather than a fundamental shift in demand. The RBI, which targets inflation in the range of 2-6%, raised its FY26 inflation projection to 2.1% in February12. We believe inflation could continue to ramp up over the coming months with higher energy and food prices ahead.
Depending on the extent and duration of disruption to the Strait of Hormuz, UBS estimates that India should be able to tolerate a maximum oil price of around USD 80 for inflation to remain manageable. A prolonged period above this level - oil is already over USD 100 - would likely weaken the INR and further strain external balances. UBS also estimates this would translate into a 75 basis points (bps) impact on CPI inflation13.
Investor positioning
Chart 5: Investor positioning in India relative to MSCI EM Index
Source: JP Morgan, MSCI, Refinitiv, EPFR Global, as at February 2026. Notes: OW/UW = Overweight/Underweight (percentage points relative to benchmark); avg wts rel benchmark = average weights relative to benchmark (MSCI EM Index); RHS = right‑hand scale; 10yma = 10‑year moving average.
Within EM funds, investor positioning in India is increasingly underweight. This can be explained by three underlying drivers:
- Limited exposure to the global AI theme
The global AI theme, across both hardware and software, has dominated headlines and market performance over the last 18 months. The Indian equity market, however, is heavily weighted towards financials and consumer-oriented companies, accounting for close to 50% of the MSCI India Index14. With limited pure-play AI-exposed companies, India has served as a funding source for reallocating capital into AI investments elsewhere in Asia.
Indian information technology (IT) service companies, which enable the deployment and servicing of AI tools in corporates to a certain extent, have come under pressure in recent months alongside the wider software sell-off. Concerns around AI driven automation have spilled over into labour-intensive technology models, including payments and platform businesses. Despite recent de-rating, the sector remains expensive relative to the broader emerging market universe and, in our view, is structurally at risk as the IT outsourcing model is outdated and will require less labour. It is estimated that 5% of the Indian workforce is employed in the IT sector, with average pay of approximately six times the national average, accounting for an estimated 5–6% of India’s consumption and residential property transactions15.
Over the longer term, we expect India’s AI capabilities to rapidly develop, as illustrated by the recent India AI Impact Summit 2026 in New Delhi, which secured more than USD 250 billion in AI infrastructure investment pledges and USD 20 billion in deep-tech venture commitments16. One key challenge for AI development is the retention of highly skilled talent within India and the creation of high-quality employment opportunities. - Reallocation of capital into other EMs
Throughout 2025, net investor outflows were recorded in eight out of the twelve months, due to uncertainty around growth prospects. Capital reallocated away from India has been redirected to South Korea and Taiwan, home to leading AI companies across the value chain: foundry (TSMC), memory (SK Hynix, Samsung Electronics), integrated-circuit (IC) design (MediaTek) and the broader hardware ecosystem, including packaging, testing, IDM and ODM17.
Earnings expectations within EMs have significantly increased over the last month, with 94% of upgrades driven by the IT sector, primarily concentrated in Korea and Taiwan.
Chart 6: MSCI EM contribution to the three-month change in 12-month forward earnings
Source: UBS, MSCI, as at February 2026.
In addition, part of this capital reallocation has also rotated back to China, following a period in which investors questioned if the second largest economy is even investible and pivoted funds to India instead. Negative sentiment and depressed valuations in 2024 led Beijing to use significant stimulus measures in 2025, including monetary easing, property sector support and increased fiscal spending. These measures have gradually drawn investor interest back to the market.
- High valuations
Despite recent corrections, we believe the Indian equity market remains expensive, trading at a forward price to earnings (P/E) ratio of around 21x, higher than many other EMs, with the MSCI Emerging Market Index trading at approximately 13x18. Although this is cheaper than the 2023 peak of 25x, the multiple has remained consistently elevated over the last five years19.
Chart 7: MSCI India 12 month forward P/E
Source: FactSet, MSCI, Goldman Sachs Global Investment Research, as at February 2026.
India’s growth story is primarily driven by the domestic consumer, and the consumer discretionary sector is expected to grow at a compound annual growth rate (CAGR) of 12% between 2025 to 203020. The sector trades at elevated multiples of 42–50x P/E, with high growth retail players commanding the highest multiples and price/earnings to growth (PEG) ratios, as high as 2 in the case of retailer Titan, for example.
The sector is further supported by the 8th Pay Commission, a review of salary and pension structures impacting approximately 11.2 million government employees and pensioners21. Expected to be finalised by 2027, this commission could increase government salaries by around 6% annually22, boosting demand for discretionary goods and increasing flows to capital markets through higher pension fund allocations.
Financials appear to be more reasonably valued at around 20x P/E and a PEG ratio typically between 0.65 to 123. The sector has been supported by steady credit growth of 14.4% yoy24 and record low non performing assets. However, the new macro environment of higher energy and food prices could affect bank profitability, supporting higher net interest margins (NIMs) but also posing risks of rising non performing loans (NPLs). Many banks are diversifying into specialised financial services, such as wealth management, which is growing at a CAGR of 15-17% between FY25-3025.
Where do we see the greatest potential?
In India, we see the greatest potential in Indian conglomerate Reliance Industries, which operates in the energy, petrochemicals, retail, digital services, new energy and media segments.
Reliance is in the process of transitioning from a primarily oil-to-chemicals business, currently accounting for more than 50% of revenues26, towards a more diversified tech-driven conglomerate. A key element of this transformation is the establishment of Reliance Intelligence, a new subsidiary focused on large scale AI investments. Given management’s track record of executing large, capital-intensive projects, this initiative has the potential to support long term value creation, subject to execution and market factors.
Over the long term, Reliance’s AI strategy is expected to cover national-scale AI infrastructure alongside consumer and enterprise AI services. This is supported by a commitment to invest USD 110 billion in data centres, related energy supply and cloud platforms over the next seven years27. These data centres will be powered entirely by Reliance’s green energy ecosystem, comprised of solar, fuel cells, green hydrogen and battery storage, allowing for complete vertical integration, which we view as a key competitive edge. We estimate the new-energy business currently makes up around 9% of Reliance’s enterprise value, with significant potential for growth.
Just as Reliance democratised voice calls and data services in India in 2016 via its digital services arm Jio, we expect the same pattern could emerge in the adoption of AI tools. Jio Platforms is estimated at 30% of total group value28 , has a user base of over 500 million customers29 and is expected to be spun off and listed in H1 202630, providing an additional potential catalyst for the stock.
Reliance also operates a leading retail business, currently contributing to over one-third of total revenues31. Although the segment has faced challenges in the short term with a slowdown in domestic spending, we expect it to remain a key long-term growth driver. The fast moving consumer goods (FMCG) vertical is currently organised under Reliance Retail Ventures Limited, and there are plans underway to restructure the unit into a direct subsidiary of Reliance Industries. We estimate the offline retail business represents approximately 26% of total group value.
The recent de-rating of the consumer business has been partially offset by tighter energy markets following the Middle East war, which has driven higher refining margins that are likely to stay elevated until supply visibility improves. Reliance has already started diverting shipments from the Middle East to Southeast Asia in response.
Reliance is now entering a phase of monetisation following its fourth capital expenditure (CapEx) cycle, with earnings growth of around 12% forecast between 2025-202832. Trading at a 2028E P/E of 17x, around 10% below its historical average33, we believe Reliance could represent a compelling exposure for investors seeking access to retail, new energy and AI related growth at a valuation that appears reasonable compared to its own history.
Our view
India’s long-term structural story remains compelling, in our view, supported by favourable demographics, reform momentum and rising domestic consumption. However, elevated valuations, shifting global capital allocation and the negative implications of the evolving geopolitical context argue for a selective approach in the near term. In this context, we believe selective opportunities, rather than broad-based exposure, may offer the most attractive risk-reward profile at this stage of the cycle.
The GAM Emerging Markets Equity team, led by Ygal Sebban, manages the Emerging Markets Equity strategies at GAM Investments. Read more about Ygal and Meera.