Veteran banker Uday Kotak notes that Indian equities have become more attractive after recent valuation corrections. While global capital shifts away from AI-focused stocks, India faces macroeconomic hurdles, including potential further interest rate hikes. Domestic retail participation remains a strong support for the market amidst global volatility.
Indian stock valuations have shifted toward more competitive levels, according to veteran banker Uday Kotak. After a period where high valuations deterred foreign money, the gap between Indian market prices and global peers has narrowed significantly over the past year. This change has caught the attention of investors who are now looking for alternatives to the technology-heavy markets that dominated capital flows for much of 2026.
The global trend of pouring money into artificial intelligence and related technology has been a major driver for international markets. However, growing concerns about the massive amounts of money being spent on AI—often referred to as capital expenditure—has started to worry investors. There are questions about whether this level of spending can be sustained, which could lead to a 'reverse flow' of capital. As global investors reassess these technology-heavy bets, money may rotate back toward high-growth, established markets like India.
The year 2026 has been challenging for the Indian market, characterized by a significant exit of foreign institutional funds. Data shows that approximately $29 billion was withdrawn from Indian markets this year, as investors chased the global AI-driven rally. Despite this outflow, the domestic market has shown resilience, rebounding by about 10% from the lows seen in October 2026. This recovery is largely attributed to steady buying by domestic retail investors, who have acted as a cushion against the selling pressure from international funds.
While the valuation outlook has improved, the economic path ahead is not free of obstacles. The Reserve Bank of India (RBI) remains in a cycle of tightening to manage inflation. Following a 25 basis point hike in October 2026, which brought the repo rate to 5.50%, market observers like Kotak suggest there could be further increases of 50 to 75 basis points. Such hikes typically lead to higher borrowing costs for businesses and increased yields on bonds, which can put pressure on stock market sentiment.
Beyond domestic interest rates, the economy remains sensitive to global energy prices. Geopolitical tensions, particularly in the Middle East, continue to threaten crude oil costs. Because India relies heavily on oil imports, any sharp rise in energy prices creates immediate pressure on the country's trade balance and corporate profit margins.
Investors looking at the market right now are monitoring several specific factors. The most important updates to follow will be the Reserve Bank of India's stance on future interest rate hikes, as this will dictate the cost of capital for Indian companies. Additionally, any changes in global oil prices will be a key indicator for inflationary pressure. Finally, the sustainability of global AI spending will be watched closely, as it will determine whether foreign capital continues to look for opportunities in markets like India.