Jefferies expects foreign investors to return to Indian financial stocks as the earnings growth gap with global peers begins to narrow. While analysts project local sector earnings growth to accelerate to 14% by FY28, immediate foreign flows remain under pressure due to global market factors.
Indian financial stocks may soon see a revival in foreign investor interest, according to a recent report by brokerage firm Jefferies. The sector has faced a difficult period, significantly underperforming global peers, but shifting earnings projections could change the current trend.
Over the past two years, the MSCI ACWI Financials Index—which tracks global financial stocks—has gained 46% in US dollar terms. In contrast, Indian financial stocks have declined by 9% during the same period. This divergence was driven by stronger earnings performance in US and European markets, while Indian lenders faced specific challenges, including margin pressure from interest rate changes and concerns over asset quality.
Jefferies analysts believe this gap is now poised to shrink. While Indian financials recorded earnings-per-share growth of 7% in FY26, the brokerage projects this figure will climb to 9% in FY27 and further accelerate to 14% by FY28. If this growth trajectory holds, it could provide a more compelling case for global investors to increase their exposure to the Indian banking sector, which currently represents only about 2% of the MSCI Financials Index.
However, the immediate market environment presents a contrast to this long-term outlook. Foreign portfolio investors (FPIs) turned net sellers in early September 2026, pulling ₹7,443 crore out of Indian equities. This outflow is largely driven by global macro factors such as rising US bond yields, a stronger dollar, and volatility in crude oil prices, which often lead global investors to reduce risk in emerging markets.
Jefferies has highlighted several financial institutions as preferred picks based on their assessment. Among large-cap banks, the brokerage favours ICICI Bank, State Bank of India, and Axis Bank. In the mid-cap space, AU Small Finance Bank and IndusInd Bank are the noted preferences.
Beyond earnings growth, investors are paying close attention to leadership transitions within the sector. Several major institutions are navigating, or will soon navigate, CEO succession questions. These transitions, along with general asset quality trends and net interest margins, remain key factors for the market to monitor.
Ultimately, whether these stocks regain foreign attention will depend on whether local earnings growth can successfully decouple from global macro headwinds. Investors may continue to track monthly FPI flow data, interest rate movements, and upcoming quarterly result commentary from these lenders to assess if the projected growth materializes.