Indian equity markets present a nuanced valuation landscape as global fund managers recalibrate their portfolios at the start of 2026. While Indian equities have retreated from their recent peaks, they continue to trade at a premium compared to most regional Asian markets, highlighting the complex dynamics facing investors in the world's most populous nation.

Current Valuation Metrics Show Meaningful Cooling

The Nifty index now trades at a price-to-earnings ratio of 22.75 times, representing a notable decline from its five-year average of 24.51x. This valuation moderation marks a significant cooling-off period following sustained underperformance against global markets.

This retreat reflects the challenging environment that characterized 2025 for Indian equities, including cautious earnings growth, global risk aversion, and nearly 15 months of intermittent foreign institutional investor selling.

Regional Comparison Reveals Persistent Premium

Despite the domestic valuation moderation, Indian equities maintain a substantial premium when compared to other emerging Asian markets. Regional peers trade at significantly lower multiples, creating a stark contrast in investor expectations.

This persistent premium underscores India's positioning as a structural growth story rather than a deep value opportunity. The higher multiples are supported by strong domestic consumption patterns, infrastructure-led capital expenditure, and relative macroeconomic stability.

Global Context and Market Dynamics

The valuation landscape becomes more complex when considering global markets, particularly the United States. US equities remain the most expensive among major markets, trading at elevated valuations despite concerns around inflation, economic uncertainty, and trade-related disruptions. The resilience of Wall Street, powered by large technology and AI-linked stocks, has diverted global capital away from emerging markets, including India, throughout the past year.

Outlook and Investment Implications

Looking toward 2026, expectations are building for potential renewed global investor interest in Indian markets. The below-average valuations relative to historical norms improve the risk-reward equation, though this factor alone may not be sufficient to trigger substantial capital inflows.

Several catalysts could drive reassessment of Indian equities:

• Sustained pickup in earnings growth momentum
• Progress on US-India tariff arrangements
• Signs of fatigue in the crowded US AI investment theme
• Improvement in global capital flow patterns

Market Positioning and Future Prospects

India currently occupies a middle ground in the global valuation spectrum. While no longer expensive relative to its own historical standards, the market continues to command a premium over regional competitors. Whether this premium narrows or strengthens in 2026 will depend primarily on the return of earnings momentum and shifts in global capital allocation patterns, rather than valuation comfort alone.

The success of Indian equity markets in 2026 will ultimately hinge on the market's ability to deliver on the growth expectations that justify its premium positioning, while navigating the complex dynamics of global investor sentiment and capital flows.

Indian equity markets are positioned for a stronger performance in 2026, driven primarily by improving domestic corporate earnings, according to market expert Sudip Bandyopadhyay. Speaking in an interview with ET Now, he outlined the factors supporting this optimistic outlook while highlighting the critical role of foreign institutional investor (FII) participation for a sustained market rally.

Corporate Earnings Show Strong Recovery

Bandyopadhyay noted a significant improvement in corporate earnings performance following a weak start to 2025. The market expert highlighted that Q2 numbers exceeded expectations, with even stronger projections for the upcoming quarters.

The earnings recovery stems from multiple policy and economic factors. Bandyopadhyay attributed the improving outlook to GST rationalization, income tax relief announced in the previous Budget, expectations around pay commission revisions, and a notable pickup in consumption demand during the festive and winter season. He emphasized that the previously anemic consumption that weighed on earnings has started to revive, which should translate into healthier corporate performance in the second half of the financial year.

FII Return Critical for Sustained Rally

Despite the positive domestic earnings trajectory, Bandyopadhyay cautioned that domestic factors alone may not be sufficient to trigger a sustained market uptrend. He stressed that while corporate earnings will improve, the real market momentum will come when FIIs start buying back into Indian equities.

Currently, FIIs have remained net sellers due to several concerns:

• Valuation concerns compared to other Asian markets
• Global geopolitical risks
• Absence of clarity on India-US trade deal
• India's relatively higher valuations versus regional peers

Policy Reforms Could Boost Investor Sentiment

Looking ahead to potential policy triggers for a broader market rally, Bandyopadhyay identified specific tax reforms that could significantly improve investor sentiment. He suggested that rationalization of capital gains tax and securities transaction tax (STT) could particularly benefit foreign investors, as these taxes complicate returns and reduce post-tax gains compared to other markets.

Macro Risks and Wealth Concentration Concerns

Addressing recent concerns about billionaire wealth shrinkage, Bandyopadhyay dismissed this as a sign of deeper economic distress. He explained that such calculations depend on time periods and listed market performance, with sectoral underperformance naturally impacting promoter wealth, citing IT and select real estate segments as examples.

However, he flagged ultra-low inflation as a key macro risk. While falling inflation may appear positive, Bandyopadhyay warned that persistently low or negative inflation could hurt nominal GDP growth and rural incomes, eventually impacting consumption. He emphasized that the economy needs healthy inflation of around 3-4%, requiring coordinated monetary and fiscal policy efforts.

Outlook for 2026

Bandyopadhyay remains constructive on India's long-term outlook, emphasizing that the combination of improving earnings, policy clarity, and the return of foreign capital will be crucial for markets to transition from the current selective, range-bound phase to a sustained rally in 2026. The market expert's analysis suggests that while domestic fundamentals are strengthening, international investor confidence remains the key catalyst for broader market momentum.