PL Capital has reduced its 12-month base-case target for Nifty by over 5 per cent to 25,689, implying a 14 per cent upside from current levels.
Indian markets have seen lower attractiveness due to lower growth and rich valuations in comparison to other markets and high US 10-year treasury yields and rupee depreciation have raised breakeven returns to more than 10 per cent.
PL Capital expects the markets to remain volatile in the near term but stabilise towards the end of this quarter. The impact of various government initiatives and monsoons will likely start reflecting in improved consumer demand in the second quarter of FY26.
FIIs are selling due to global uncertainty and a weak rupee, it said. FIIs have pulled out $20.2 billion from Indian equities and bonds since October last year, marking one of the steepest outflows in recent history.
PL Capital has calculated the hurdle rate for FII investments in India and estimates that the cut-off rate has risen to 10.5 per cent assuming 4 per cent INR depreciation, capital gains tax and 4.5 per cent 10-year US treasury rate in India.
“The lack of strong domestic buffers, persistent global uncertainty, tepid domestic demand and sustained FDI outflows pose a near-term risk to volatility in currency and FPI flows in India,” it said.
Budget impact
The research house believes the growth outlook in India looks far better in FY26 than in FY25. “As the impact of the Budget starts getting reflected in higher capex on a low base and tax cuts and monsoons revive consumer demand, we should see FPI flows turning positive. However, FDI outflows remain a lingering problem that can pressurise INR and add to volatility,” it said.
PL Capital has turned overweight on the consumer space due to an expected uptick in demand following tax cuts, a decline in food inflation and a cut in repo rate, and has increased weight in banks and healthcare.
India is unlikely to experience any meaningful negative effects from US policies, as soft crude oil prices, geopolitical stability and increased technology transfer to India will neutralise the costs of Trump’s tariffs. The reciprocal tariffs announced by the Trump 2.0 administration, incorporating non-tariff barriers, VAT structures, and exchange rate deviations, make the process more complex and its economic cost harder to quantify as of now.
“While tariff negotiations will remain a short-term market overhang, the structural foundation of the India-US trade remains intact. Technology, defence and nuclear energy have high growth potential. India’s ability to navigate tariff negotiations, leverage its geopolitical positioning and realign supply chains ensures that this phase is a momentary recalibration, not a retreat,” PL Capital said.