“I wouldn’t be surprised if we start seeing positive FII inflows in March”

“We’re not necessarily at the absolute bottom, but we’re hovering close to it," Sarkar told Mint in an interview.

From a lofty 24 times price-to-earnings earnings multiples to around 19x PE on FY26 estimates and 17.5x on FY27, Sarkar said that valuations now look far more reasonable.

As Trump's tariff war raises the spectre of a US slowdown and fuels inflation, and as the strength in dollar peaks, there’s little reason for foreign institutional investors (FIIs) to keep pulling money out of India, he said.

“I wouldn’t be surprised if we start seeing positive FII inflows in March," he said.

Yet, earnings recovery will likely be the key trigger for the markets to rise, just as weak earnings drove them down, Sarkar emphasized.

Edited excerpts:

What is your view on the reasons behind the market correction seen in India, which has led to it being one of the worst performing markets of 2025?

India’s valuation premium over other global emerging market peers has long been backed by strong corporate earnings growth. Post-covid, India’s corporate earnings expanded at 15–18% annually, which was much higher than the global average of low to mid-single digits. This earnings growth in India was driven by a surge in domestic consumption and a pick up in manufacturing. A revival in real estate demand after a span of nearly 5-6 years also fuelled this earnings growth.

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The tide began to turn in FY25, as India was in the midst of back-to-back elections since the beginning of last year and that took a toll on government capex. Also, low-income growth over past one year impacted consumption among urban middle class. These got reflected in weak earnings growth in the first half of FY25. After the September-quarter numbers, questions arose on the justification for India’s premium over MSCI EM Index and MSCI World Index. This marked the start of a valuation reset from October 2024. This coincided with rising expectations of (Donald) Trump’s return as US president, fuelling fears of protectionism, tariffs and a shift towards make-in- America narrative. FIIs have been strong net sellers beginning October 2024 and gaining pace in January-February 2025.

A common view in the market is to move towards the large-caps and reduce exposure to small-caps and mid-caps. What is your take?

I think the recent correction in the market has been market-cap-agnostic, as we have seen sharp corrections across companies, irrespective of whether they are small-caps, mid-caps or large-caps. Interestingly, Nifty50 and Nifty Next50, which are both large-cap indices, have a huge variation in returns, highlighting that beyond a few selected Nifty 50 stocks, even other large-caps have corrected sharply. It’s not about market cap—it’s about valuations and stock run-up. Stocks that underperformed last year have held up better, while those that outperformed are now bearing the brunt of the correction, as investors are booking profits wherever possible. Also, many stocks which ran up had gone into expensive zone on valuations.

In the long run, markets thrive on earnings growth—whether it's from small, mid, large, or even micro caps. The right approach is to invest where earnings growth is strong and avoid companies rallying without fundamental support. India’s valuations have seen a meaningful correction — from a lofty 24x PE to around 19x on FY26 estimates and 17.5x on FY27. What seemed expensive at 24-25x now looks far more reasonable. If you don’t buy at 18-19x, you might be waiting for doomsday.

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Panic-driven selling often leads to poor decisions, with people offloading stocks simply because others are saying, “raise cash or buy large-caps". In my view, while it’s wise for investors to hold some cash, keeping an eye on earnings is equally important. Though Q2 was weak, Q3 numbers showed a clear improvement year-on-year. Overall, FY25 is likely to close with around 7% earnings growth.

Is that decent, according to you?

FY25 looks weak compared to FY24, where earnings grew around 16–17%. On a high base, FY25 is expected to end at around 6.5–7%. The key drag was weak government capital expenditure (capex), typical in an election year when spending slows down around Lok Sabha elections. April to July, the peak election period, saw sluggish capex. Post-elections, the government shifted focus to state polls in Haryana and Maharashtra, further delaying capex recovery. This slowdown rippled across the economy.

Urban consumption also softened. After a post-covid boom in 2021–23, FY24 took a hit as wage growth barely kept pace with inflation. The wealth effect also faded—when markets and property values plateaued, people hesitated to spend on big-ticket items.

The good news is that the government has addressed capex in the budget, with revised targets likely driving 18–20% year-on-year capex growth in Q4FY25. This signals that capex cycle, which had hit a pause button, is now picking up pace.

Which sectors are likely to benefit the most from this?

Capex-related sectors like capital goods, power and infrastructure should post strong Q4 numbers, driven by the pickup in government spending. The budget’s tax incentives could also boost urban middle-class consumption which should see improvement from April onwards. In consumer discretionary, hotels stand out because people have not stopped travelling despite income concerns. I have reduced exposure to real estate after a strong run and remain underweight on IT due to weak deal pipelines and Trump-related uncertainty. Pharma also looks uninspiring. Banking, however, looks attractive with improving valuations.

How are things shaping up now?

Most of the price correction seems done—I don’t expect any major downside from here. We’re not necessarily at the absolute bottom, but we’re hovering close to it. FII outflows, which had been a major factor, also could see reducing the intensity of sell-off as US bond yields cool. With signs of a US slowdown, higher tariffs driving inflation, and the dollar index peaking, there’s little reason for FIIs to keep pulling money from India.

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What’s needed now are one or two strong triggers to lift the market, and selective buying has already started to emerge. The panic selling seen in January and February has largely settled. Another trend I am noticing is tax planning. Many investors might be wanting to book some losses to reduce their tax liability for the gains made in beginning of the year.

How is India positioned within the emerging market basket right now? Is the money flowing back primarily to the US, or are both India and China seeing inflows?

Most of the outflows were driven by hedge funds, not long-term sovereign wealth funds or pension funds. Hedge funds typically chase short-term returns, so when US yields look more attractive and the rupee is under pressure, they tend to pull out. Interestingly, some of the largest sovereign wealth funds—like Norges, Abu Dhabi Investment Authority (ADIA), and Singapore’s GIC—are increasing their India allocation, indicating that long-term money remains committed to India.

The money flowing into China is largely the same capital that exited earlier, as China’s markets have delivered poor returns over the past eight years. Despite this, China’s weight in the MSCI Emerging Markets Index has dropped from 38% at its peak to around 24%, while India’s share has climbed from 8% to around 19–20% now. With growing concerns about a US recession, rate cuts, bond yields and inflation, the tide could once again shift in favour of India.

I wouldn’t be surprised if we start seeing positive FII inflows in March.

What key factors should we keep an eye on going forward, apart from earnings growth?

Earnings recovery will likely be the key trigger for markets to rise, just as weak earnings drove them down. The recovery should come from two areas: a pickup in capex, supported by government spending, and a rebound in domestic consumption from April onwards. On the global front, if US interest rates decline, it will push bond yields lower, making emerging markets more appealing. The only wild card is Trump—his unpredictable statements could cause short-term noise, but markets are starting to discount his impact.

What do you advise investors at this stage of correction?

Investor psychology plays a crucial role in investing, and over the past two months, emotions have taken the driver’s seat—often leading to irrational decisions and costly mistakes.

We've been advising investors not to panic-sell if they’re in for the long haul. Just stay patient—markets have recovered before and will again.

And read | India Inc’s dull earnings outlook signals tougher times ahead for markets

Here’s a fact: Over the past 20 years, the Nifty has fallen more than 15% from its peak in 8 out of 20 years. The small-cap index has dropped over 15% in 15 of the last 20 years. Corrections are part of the market cycle, not a one-off event. This won’t be the last time you see a 15–20% dip—the key is to stay calm and let the market cycle play out.