The domestic brokerage noted that FY26 was a near six-sigma year, marked by major geo-economic and geopolitical events that led to extreme volatility in equity markets and heightened economic uncertainty.
“After a long period of outperformance, the Indian equity market was among the worst-performing major markets in FY26,” it said.
Notably, this came despite an improvement in the earnings revision trajectory from what Motilal called the “depressing lows” of FY25, along with a generally better setup for corporate earnings.
“For a major part of FY26, sentiment in Indian equities was driven more by global headwinds, often overlooking the undercurrents of improving domestic trends in corporate earnings. These trends are likely to benefit from stimulative policy reforms on both the fiscal and monetary fronts,” the brokerage said.
Motilal attributed the underperformance of Indian equities to multiple factors, including better growth visibility in other markets, a compelling valuation differential in favour of other emerging markets, and improving prospects in countries such as South Korea, Taiwan, Brazil, South Africa and Thailand, driven by an AI-led boom or rising commodity prices. It also cited India’s conspicuous absence in the global AI ‘gold rush’ and a perceived decline in geopolitical leverage following a brief kinetic conflict with Pakistan.
The tale of two investors
FY26 also saw a sharp divergence between DII and FII flows. Domestic institutional investors remained the largest buyers, purchasing stocks worth $96 billion, while FII outflows surged to a multi-year high of $20 billion. This was accompanied by a sharp depreciation in the rupee.Motilal noted a shift from the earlier trend where markets did not react significantly to FII behaviour. “This pattern break suggests markets may now respond more sensitively to FII flows going forward. However, the reaction could be asymmetric, with any moderation in FII outflows likely to be viewed positively, signalling improving confidence in India relative to other emerging markets,” it said.
Policy overdrive and delayed payoff
The brokerage highlighted that both the government and the Reserve Bank of India were in policy overdrive through FY26 to stimulate demand, counter global headwinds and support growth. The RBI implemented phased CRR and repo rate cuts, alongside liquidity injections via OMOs, FX swaps and other measures.
On the fiscal front, the Finance Ministry introduced GST reforms, while FY26 also saw progress on key bilateral trade agreements, particularly with the UK, EU and the US.
“While markets have not fully reacted to these measures due to adverse global developments, the heavy policy push through FY26 is likely to yield delayed benefits in FY27, supporting demand and corporate earnings. However, the trajectory of the Iran-Israel/US conflict remains a key risk,” Motilal said.
The brokerage also flagged upcoming elections in politically sensitive states such as West Bengal, Tamil Nadu, Kerala and Assam as an additional variable for FY27.
A favourable base for FY27
“Following India’s sharp underperformance in FY26 and record FII outflows, a favourable base appears to have been set for Indian equities,” Motilal said.
It added that a resolution to the ongoing geopolitical conflict could unlock pent-up positive sentiment and help markets recover lost ground.
The brokerage noted that policy support should provide a floor to earnings, while the impact of the current conflict may be less severe than the shocks seen at the start of FY25.
“After a correction of around 10% since the onset of the Iran-Israel/US conflict, valuations have moderated significantly. The Nifty is now trading at 17.7x, a 15% discount to its long-period average of 20.9x. India’s valuation premium over emerging markets has also narrowed sharply to 27%, compared to a 10-year average of 73% and a peak of 145%, bringing it closer to decadal lows. This correction offers an attractive entry point, given India’s strong structural growth story,” it added.
Motilal Oswal’s top picks within the Nifty 50 include Bharti Airtel, SBI, ICICI Bank, M&M, Titan, Bharat Electronics, Tata Steel, Infosys and IndiGo.
Outside the index, it prefers TVS Motor, Indian Hotels, AU Small Finance Bank, Dixon Technologies, Premier Energies, Coforge, Radico Khaitan, Delhivery and ACME Solar.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)