Is this a good time to buy Indian equities? 

Now that Primeinvestor.in has its Portfolio Management Service (PMS) running, one question keeps coming up – ‘I’m convinced about your products. But is this a good time to invest in equities?’

The industry’s standard answers are well-worn: ‘There’s no good time or bad time to invest’ or ‘Time in the market beats timing the market.’ But honestly, every asset class has better and worse entry points. We wouldn’t recommend Silver ETFs, for instance, after a 150% rally in a single year.

At Primeinvestor.in, we assess market timing across five factors: the state of the economy, earnings growth, valuations, government finances, and investor sentiment. On all five counts today, our assessment is that this is a good time to invest in Indian equities. We are not calling it a great time, which only comes around during steep market falls like Covid.

# 1 Economy growing well  

Folks who like to think of the market as a casino argue that stock market moves have nothing to do with the economy. That’s not quite true. Without momentum in the underlying economy, it is pretty tough for corporate earnings can grow. History shows that every big bull market in India has broadly coincided with strong GDP growth, while market corrections have been linked to economic slowdowns or contractions. 

The blowout stock market rally from 2003 to 2008 happened when India’s real GDP growth picked up from 3.8% in 2002 to 7.9% in 2003 and stayed above that level for four years. The 2008 market crash coincided with GDP growth dwindling to 3% that year. The 40% market decline during Covid pre-empted GDP contracting by 5.8% in 2020. 

Yes, stock market returns do not map exactly to GDP growth every year, because markets always anticipate trends and do not follow them. Looking back over the past one year, we can see that the economy experienced a distinct slowdown from Q1 to Q3 FY25 but picked up from Q4 FY25. 

More than the actual GDP prints, what’s important that growth numbers have been consistently exceeding analyst estimates.  Consumption growth has kicked up in recent quarters, as government capex has slowed. Exports have fared better than expected, despite Trump tariffs. 

Now, with the US Supreme Court striking down the reciprocal tariff levy, India may have gained greater leverage in negotiating for concessions in the US-India trade deal. While tariffs are unlikely to go to zero given the US government’s pressing need for revenues, they are likely to settle at 15% thereabouts based on what White House had indicated after this news.  Indian exporters have already been diversifying their export basket to derisk from the US ahead of this event. Re-opening of US goods markets after this can therefore provide a fillip to growth. The recent thawing of India-US relations reduces fears about Trump suddenly imposing creative levies on services exports etc to make up for revenue losses on goods tariffs.  

#2 Improving earnings growth 

For all the obsession with index values, FPI flows and SIP flows, the one thing that really matters to equity returns is earnings growth. In line with the economy, India Inc grew its earnings strongly during the post-Covid recovery from FY21 to FY24. From FY25 onwards, with government spending stalling, earnings growth hit a speed breaker and slipped to the single digits in Q2 FY25. September 2024 saw all the equity indices peak out, after which they’ve slipped into a correction. 

Taking stock of earnings now, we can see that a recovery has been underway from then. The last couple of quarters have seen a pickup in revenues, EBIT and PAT growth for listed companies (See table). The 11-12% EBIT and PAT growth would have been much higher but for one-off hits that most large companies took, on account of the Labour Code implementation. Unlike FY22 or FY23, this growth has also been achieved also without a Covid low-base effect. As stock prices have either fallen or stayed flat during this period, many stocks have suffered either a time or price correction that has reset growth expectations. 

#3 Pricey market, pockets of value

One of the main reasons why the Indian market needed to correct was its sky-high valuation by end of 2024. Four years of continuous outperformance relative to other markets had made Indian equities pricey in relation to every other big market in the world. 

In September 2024, even as the Nifty50 traded at a lofty PE of over 24 times trailing earnings, mid-caps and small-caps showed clear signs of froth with PEs at 45 times and 32 times respectively. Taking stock today, the midcap index has moderated to 33 times and the small-cap index to 26.5 times.

No one can claim that this is cheap. But companies in the mid-cap and small-cap indices have sustained healthy earnings growth in the past year, reducing the mismatch between earnings growth and index PE. Contrary to popular perception, it is companies in the large-cap Nifty50 which have faced earnings growth challenges.  This suggests that hunting for stocks across the market-cap spectrum may work better than huddling with large-caps at this point in time.

Index-level numbers also don’t capture the rout that has played out in small and midcap stocks in the past year. A screener of 2300 listed stocks shows that in September 2024, over 700 stocks traded at a PE of over 50. This number has now dipped to 483. The number of stocks trading at 100 PE has dipped from 220 to 140. The valuation derating has also ensured that 900 of 2300 listed stocks now trade below 20 PE and 600 below 15 times. This indicates value-buying opportunities re-emerging in equities, after a long drought. 

#4 Healthy government finances 

The recent Budget didn’t win any popularity points; it lacked imaginative measures or any stimulus to spending. But one thing it did right was demonstrating the government’s intent to be a frugal spender and reduce its deficit and debt. The Centre met its deficit target of 4.4% despite slow-growing nominal GDP in FY26. The deficit target for FY27 has been set lower at 4.3%. Most importantly, it has promised to bring down Central government debt to GDP from 56.1% in FY26 to 50-51% by FY31. 

Why should this matter to stock market investors? It does on three counts. 

• One, it shows that government borrowings will not be crowding out private borrowers. This will allow corporates to tap debt markets, while keeping cost of capital under check.  
• Two, it shows the Indian economy is well-managed and unlikely to run into sovereign debt troubles. While this may seem par for course, India is currently an outlier on a well-managed fisc. With a single-minded focus on deficit reduction, the Indian government has brought down its fiscal deficit from over 9% of GDP in FY21 to 4.4% now. Government debt in India (Centre plus States) is at about 82% of GDP, while advanced economies such as US (124%), Japan (230%), UK (103%), France (117%) run far more precarious levels of debt. 
  
  Today, one of the main worries for global investors betting on advanced economies is how their governments will manage debt servicing, as they continue to binge on borrowings. Worries about the debt spiral have seen bond yields in UK, Japan and US spike. Spiralling sovereign debt stokes worries about a blowup in the financial system and jacks up country risks for global investors. In India however, sovereign debt worries are largely absent and corporate and household debt is well within control.  
• Three, India’s healthy debt position can attract FPI flows into domestic bonds, which is good for the Rupee. While FPIs have been on a selling spree in Indian stocks in the last two years, they’ve continued to buy into Indian debt. This is despite narrowing rate differentials between the US and India. FPI debt flows, apart from keeping domestic bond yields in check, bring in much-needed dollars to support the Rupee.

#5 Doubt and uncertainty  

More than earnings or valuations though, it is behavioural indicators that give you an accurate read on whether it is a good time to buy or flee from an asset class. When greed is the dominant mood, it is best to stay away. When fear and uncertainty are pervasive, that’s a good time to invest. Today, investor mood about Indian equities ranges from sceptical to extremely bearish. 

FPIs, having sold Indian stocks for two consecutive years now, are sitting at their lowest levels of ownership in 15 years.  The Indian market has been the worst performing both in the Emerging Markets and Asia pack since the beginning of 2025, with MSCI India up barely 6% in 2025 while the MSCI EM index surged 30%. 

FPI bearishness about India has stemmed from three factors.

• One, from the second half of 2024, India experienced a sharp slowdown in economic activity and earnings growth, which sat poorly with sky-high valuations. At the time, Indian markets traded at an 80% valuation premium to emerging markets. This sparked the first leg of FPI selloff. 
• Two, as AI models made headway, global investors began to actively chase markets seen as direct beneficiaries of the AI capex race and sold markets seen as vulnerable to AI disruption. This saw global liquidity flooding out of India and into China, South Korea, Taiwan, the US Mag 7 and Nasdaq 100. 
• Three, Trump’s rough treatment of India on tariffs and the year-long uncertainty about a trade deal added to FPI bearishness. As a result, global funds were underweight on India by 250-300 basis points relative to EMs by end 2025.  

Now however, many of these negatives are abating. One, the US-India trade deal has been agreed upon. The striking down of Trump’s reciprocal tariffs, now mean that tariffs for India may settle at 10% – an outcome far better than expected. India may also win freedom to buy Russian oil and negotiate on stronger terms with the US. 

Two, the time correction in stock prices along with recent recovery in earnings has narrowed the disconnect between growth and valuations. 

Three, global investors are beginning to seek hedges against their concentrated AI capex bet and India with its lack of AI capex play, fits the bill. Of late, US Mag 7 stocks have experienced sharp reversals on doubts about whether their eyewatering investments in AI infrastructure will pay off.  All this has resulted in a mild turnaround in FPI flows recently, with FPIs aggressively selling Indian IT services majors, but nibbling at positions in other sectors. Even if global funds were to marginally correct their India-underweight positions, this can trigger a rally. 

But what about domestic investors? Aren’t they still over-bullish? No, they aren’t. In the trailing 12 months ended January 2026, net inflows into equity MFs fell 13% from Rs 5.36 lakh crore to Rs 4.63 lakh crore. NFO flows have dwindled from Rs 1.1 lakh crore to Rs 65,100 crore.  MFs added only 68 lakh investors in the year to January 2026 against 103 lakh in the same period last year. 

Inflows into gold ETFs surpassing equity inflows in January, show that retail investors are not all that positive on Indian equities after the 18-month patch of negative/flat returns. It is just that with debt returns and taxation being what they are, they see no other avenues to park their rising savings. 

What about the threat to the Indian economy itself from AI disrupting its services and IT jobs? Let’s not forget that over 47% of India’s population is under the age of 25, and has a very good shot at adapting to AI as a productivity-enhancing tool. This is a demographic advantage that few other nations have! 

Overall, the best opportunities to buy into equities arise when there are uncertainties and risks hovering on the horizon. In a blue-sky scenario, valuations also tend to be sky-high!