The Indian stock market has gone through a tough phase for almost two years now. However, Raamdeo Agrawal, chairman and co-founder of Motilal Oswal Financial Services, believes that after going through a perfect storm, things are likely to change sooner rather than later. He tells Kushan Shah and Joydeep Ghosh that a sustained growth rate of 7.5%-8% is the only way to ensure that foreign portfolio investors (FPIs) make a comeback. Excerpts:
How are you looking at the stock market currently?
The market has gone through one of its longest corrections in the past two years. While the indices have not fallen sharply, they have remained range-bound, with valuations staying elevated because of earnings growth. A combination of delayed monsoon, outflows from FPIs, and volatility in commodities and crude oil put pressure on the currency. Despite these challenges, the market has held up much better than in previous cycles.
I believe the Indian economy has become more resilient, and that has made the markets more resilient as well. Retail savings have increasingly moved into equities. The number of demat accounts has risen from 40 million to 240 million since 2020. Monthly inflows of around Rs 30,000 crore through systematic investment plans (SIPs) have ensured that the markets have not collapsed.
Some are advocating that the government should take steps to slow down SIPs as it is helping FPIs get exits at higher prices. Also, it is not allowing the market to fall meaningfully. What are your views?
It is not possible for policymakers to take a sharp turn when both the economy and the markets are under stress. I believe the current pressures will ease. We could see oil near $60 a barrel and gold around $3,000 in the near future.
The only sustainable way out is through growth. Credit growth and GDP growth are essential. If earnings per share (EPS) grow by 20% while the Nifty remains at 24,000, the price-to-earnings multiple could fall from around 20x to 15-16x, making Indian equities attractive again for foreign investors.
India needs sustained GDP growth of 7.5-8% over the next decade, even if inflation remains in the 4-6% range. For foreign investors, the two most important metrics are GDP growth and valuations. Indian equities have traditionally traded at a premium because of their long-term compounding potential and diversified growth, unlike markets such as South Korea and Taiwan. The BSE Sensex has grown nearly 800 times since 1980, compared with roughly 70-80 times for the Kospi, despite the latter’s recent rally.
What would be your advice to investors if the market remains flat for another year?
I would advise investors to commit more capital. If the market remains flat while earnings continue to grow, valuations will become increasingly attractive.
Of course, this assumes that risks such as oil prices, the monsoon, inflation and the impact of AI evolve favourably for India.
Over the next three years, I see downside risk for the market of about 2,000 points, while the upside could be as much as 10,000 points. If there are no major geopolitical shocks, the market could double over the next five to six years.
What are your expectations from the upcoming earnings season?
I expect a strong quarter. Early indicators, including volume growth of 25-40% in the first quarter of FY27, are encouraging. GST rationalisation has been a major positive.
Revenue growth should be robust, although margins could remain under pressure because of higher input costs, including petrochemicals and freight, following recent geopolitical disruptions.
While GST collections may grow only 4-5%, job creation resulting from stronger business activity that could rise 20-30%. Another round of GST rate cuts over the next one to two years could trigger another growth cycle.
How do you see the Indian economy faring?
For a country like India, growth can come either from raising incomes or making goods and services more affordable. The latter is often easier to achieve.
An 8% GDP growth rate expands affordability every year. For instance, if a product is affordable to one million people at a 28% GST rate and 1.5 million people after the rate is cut to 18%, the addressable market will continue to expand as incomes grow.
India has tremendous long-term potential, particularly in services. The rise of global capability centres (GCCs) could be an even bigger transformation than the IT boom of the 1990s.
No country can match India on the combination of cost competitiveness, skilled labour and an undervalued currency. This is India’s biggest opportunity. We should maximise our potential across services, including tourism and exports. Continued improvements in ease of doing business will further support investment, job creation and economic growth.
Have recent regulations addressed concerns over excessive retail participation in the F&O segment?
About one to two years ago, daily turnover in the derivatives market had reached Rs 7-8 lakh crore and was growing at 30-40%. Volumes have since moderated following the shift from daily to weekly expiry contracts. Higher securities transaction tax (STT) has also made many trades uneconomical.
I believe inexperienced traders will continue to lose significant amounts of money.
Despite valuation concerns, mid- and small-cap stocks have continued to outperform large caps. Why?
Growth is stronger in the mid- and small-cap segments, which also have a much larger universe of companies. By comparison, the large-cap space is limited to around 100 companies and is heavily dominated by banking, financial services and IT.
The IT sector is undergoing a transition because of artificial intelligence, while BFSI earnings have been affected by slower credit growth. As credit growth improves and GST rationalisation supports economic activity, earnings in these sectors should strengthen.
I expect Nifty EPS to be around 1,200-1,250 this year. I believe the worst phase for the markets is behind us. If oil prices remain benign, earnings could eventually rise to 1,400-1,500 over the coming quarters.
What are the biggest downside risks?
Globally, the key risks remain geopolitical tensions, particularly in West Asia and the war in Ukraine.
Domestically, a sharp rise in inflation to 4-5% or a weak monsoon could slow growth. In that case, policymakers would have to prioritise inflation control over growth, which would weigh on the markets.
How do you see the slowdown in IPO market?
India has one of the world’s most vibrant IPO markets. Activity slowed for three to four months, but if the broader market regains momentum, the primary market will also revive.
The venture capital and private equity ecosystem is also expanding, providing seed capital to many more companies. It typically takes 10-20 years for a startup to evolve into a listed company. If seed funding increases from one million entrepreneurs to 10 million, the number of successful listed companies will multiply over time. That process has already begun, with strong policy support from the government.
Have any new investment trends emerged during this period of range-bound markets?
One notable trend is the growing interest among high-net-worth individuals in investing overseas through GIFT City. This trend has spread beyond metros to Tier-II and Tier-III cities.
With domestic mutual funds constrained by overseas investment limits, many HNIs are using GIFT City as a gateway to global markets.