Fresh from a North America roadshow where he met sovereign funds, pension managers and family offices, Nilesh Shah, Managing Director of Kotak AMC, says global investors are rediscovering India. Shah said he remains constructive on equities, but argues that India is now a compounding market rather than a multi-bagger story, while making a strong case for tax reforms, particularly around the continued coexistence of STT and LTCG.
You have just returned from North America. What are global investors saying about India?
India remains firmly on the radar of global investors. We met sovereign wealth funds, pension funds, endowments and family offices, and there wasn’t a single investor who was unwilling to discuss India. Some have already committed capital, while others are evaluating allocations. What has changed is the narrative. Two years ago, India was seen as an expensive growth story. Today, we can confidently present India as a structural bull market available at a cyclical valuation discount. Valuations have become far more reasonable, even as the long-term growth story remains intact. Lower oil prices and the reversal of the AI-driven capital allocation trend have also strengthened India’s investment appeal.
Are foreign investors returning because of valuations or because the AI trade is losing steam?
It is a combination of both. Earlier, capital was concentrated in AI-related opportunities, especially in the US. As investors book profits there, emerging markets are receiving renewed attention. India stands out because many competing emerging markets carry political, geopolitical or economic challenges. Investors see India as one of the few large and relatively-stable growth opportunities available. That said, investors should recognise that India is largely a compounding story rather than a multi-bagger opportunity.
How should investors think about returns from Indian equities over the next decade?
Expectations need to be realistic. If someone expects 25-30 per cent annual returns, India may appear expensive. However, if an investor seeks high-single-digit to low-double-digit compounding over a long period, India remains attractive. We are not at distressed valuations, nor are we exceptionally cheap. India is fairly valued. Future wealth creation is likely to be driven more by earnings growth and compounding than by a significant rerating of valuations.
Domestic investors have continued to support the market despite foreign selling. Do you see that continuing?
Domestic participation remains extremely resilient. SIP flows continue to be strong and lump-sum investments tend to increase whenever market sentiment improves. What I expect, going forward, is significantly more supply through IPOs, QIPs and offer-for-sale transactions. India’s capital markets are becoming deeper and broader. That should help absorb both domestic and foreign demand without creating excessive valuation pressure.
Markets have recovered strongly, but what are the key risks or concerns investors should monitor?
Investors should always remember that markets do not move in a straight line. A few risks deserve close attention. First, global factors such as energy prices, geopolitical tensions and the trajectory of the US economy can impact capital flows into emerging markets. Second, domestic consumption has benefited from credit growth and rising leverage. If lenders become more cautious or borrowing costs remain elevated, consumption growth could slow. Another important variable is how the government manages subsidies and the fiscal impact of the Eighth Pay Commission. The balance between growth support and fiscal discipline will matter.
Which sectors and themes look most attractive to you today?
Three themes stand out. First is banking and financial services. Asset quality is strong, credit growth remains healthy and valuations are still attractive in several areas. Second is premium consumption. The implementation of the Eighth Pay Commission could provide a meaningful boost to spending across automobiles, consumer durables, travel, tourism and other discretionary segments. Third is modern manufacturing. India is creating globally-competitive manufacturing businesses that are increasingly becoming part of international supply chains. These companies have significant long-term growth opportunities.
Do you expect foreign investors to become aggressively overweight India?
I would be cautious about that assumption. Most global investors are benchmark-driven. What we are seeing today is largely a normalisation of allocations. Investors who were underweight India are moving back toward neutral positions. Those who were already overweight are often looking to rebalance. Therefore, the current trend is more about correcting underexposure rather than creating a major overweight India trade.
How are global investors viewing the rupee and currency risks?
Sophisticated investors already account for currency movements in their return expectations. Most long-term allocators understand that the rupee may depreciate gradually over time, and they build that assumption into their models. It is generally not a major concern for pension funds, endowments and long-duration investors. They focus more on real returns and economic growth opportunities.
You have often spoken about tax reforms. What changes would you like to see?
The biggest requirement is consistency. The Securities Transaction Tax (STT) was originally introduced as an alternative to capital gains taxation, yet today both exist simultaneously. In my view, STT and LTCG should not co-exist; one of them must go. Beyond that, STT should better reflect leverage in the market. Promoters and financial investors serve different roles in the ecosystem and should not necessarily be subject to identical tax treatment. Interest income should also receive more consistent tax treatment across financial products. Simplification would improve both transparency and investor confidence.
What is your outlook on interest rates and economic growth?
India continues to be a steady compounding economy. Growth above 5 per cent is achievable even in challenging global conditions, while favourable conditions can push growth closer to 7 per cent. To consistently move into double-digit growth territory, India will have to undertake more difficult structural reforms. Land acquisition, labour flexibility, agricultural reforms, ease of doing business and faster execution remain critical areas. One key difference between India and China historically has been execution speed. Improving that will be central to the next phase of India’s development.
What are your earnings growth expectations for corporate India?
We remain constructive on earnings. For FY27, we expect large-cap earnings growth of around 12-15, mid-caps around 20-25 per cent and small-caps around 15-20 per cent. The precise outcome will depend on commodity prices, subsidy sharing and overall economic conditions, but the broader earnings trajectory remains healthy.
What is the single biggest takeaway for investors today?
Moderate your expectations and stay patient. India is not a deep-value market, but it remains one of the most compelling long-term investment destinations globally. Investors should use market corrections to gradually add exposure rather than chase short-term excitement. The real opportunity lies in compounding. Those who remain disciplined and invested over long periods are likely to create meaningful wealth.
