AI could slow affluent India; QSRs, credit cards may show stress first: BNP Paribas’ Kunal Vora

India's affluent consumption story is entering a more challenging phase as artificial intelligence begins reshaping white-collar employment. Kunal Vora, Head of India Equity Research at BNP Paribas, says early signs of stress could emerge in entry-level discretionary categories such as quick-service restaurants and credit cards if AI-led disruption intensifies. Even so, policy support, easing interest rates and an expected recovery in corporate earnings should keep consumption resilient, while the brokerage continues to prefer large-cap stocks and sees the Nifty 50 rising to 25,500 by December 2026.

Edited excerpts from a chat:

Your recent report argues that AI could slow rather than stall affluent consumption. What would invalidate that thesis? Which indicators would provide the earliest warning of structural stress?
In our last report in this series which was in 2024, we had identified that Affluent India is in a sweet spot with strong growth in wages, rising access to credit and buoyant equity markets. In that report we had looked into the factors that were driving the luxury boom in India after the pandemic. However, our review of data for FY25 and FY26 shows a deceleration in these trends. For incomes, we looked at the employee cost trends for NSE500 companies, where we observed slowing growth for the two key sectors that account for over 50% of NSE500 companies’ salary bill. NSE500 companies’ salary expenses increased by c7% in FY25 and FY26 after having grown by c14-15% over FY22-24.


Coming to loans, personal loans increased by 13% in FY25 and FY26 which is softer versus the earlier years. Also, the recent resurgence in personal loans has been supported by the GST rate cut which is driving the demand for automobiles and the spike in gold price is driving the gold loans growth. Some of these factors will be in the base by 2HFY27. Besides income and credit, the boost in wealth due to asset price increases (equities, real estate, gold) can have a positive impact on consumer spending. Equities returns have moderated in the last two years.

While some of the factors we have discussed earlier look negative, we have also identified the potential offsets. We have seen positive trends in affluent spending in recent quarters, supported by some policy actions such as GST and income tax rate cut. There has also been a cut in interest rates which increases the borrowing capacity. While the benefit of these measures is yet to fully play out, we expect a further stimulus from the government in the form of the implementation of the eighth pay commission. Besides this, GCC and start-up economy hiring as well as investments in data centre infrastructure are positives.

Risks to our view that AI could slow rather than stall affluent consumption include 1) Higher than expected impact of AI on white-collar jobs and 2) The rub-off effect of the same on other parts of the economy which depend on spending by these consumers. For early signs of AI impact we are watching out for hiring trends in sectors like IT and BFSI. These sectors have seen a slight decline in employee base in the last two years but it is difficult to conclude to what extent AI is playing a role, as there was excess hiring in these sectors after the pandemic. If the decline in employee base continues in the coming years, it would strengthen the argument that AI is having an impact.

At a sectoral level, companies that depend on entry level employees seem to be at a larger risk of slowing compared to those that depend on the experienced, high income employees.

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Wage growth has slowed, equity returns have moderated and household debt has risen to about 48% of GDP. Is affluent consumption increasingly being sustained by leverage rather than income and where could stress surface first: housing in technology hubs, credit cards, travel, QSRs or other discretionary categories?
Companies from sectors such as jewellery, beauty, personal vehicles, food delivery etc have laid out their 4-5 year growth aspirations. Drivers for this growth include increase in market share, penetration levels and the increase in income levels. However, a meaningful expansion of the target market through creation of new jobs and salary hikes is also an essential ingredient for growth and this applies to all sectors.

We expect the early signs of stress to be visible in entry level discretionary categories such as QSR and credit cards. Other areas to watch out for are property companies and hiring intermediaries.

What is your base case outlook for Indian equities over the next 12 months? How much upside can the Nifty deliver, and will it be driven primarily by earnings growth, valuation expansion, or a revival in foreign flows?

We anticipate the Nifty 50 reaching 25,500 by December 2026, which represents roughly a 4.6 % upside. The index is currently trading near its ten‑year average; although it remains relatively expensive compared with other emerging markets, its attractiveness has improved because of the recent valuation correction in the Nifty and the AI‑driven rally across other emerging‑market equities. Nevertheless, we do not consider valuations to be sufficiently cheap to justify a broad valuation expansion. While July saw modest FII inflows after net outflows in the first quarter, a decisive return of foreign institutional capital will likely require clearer earnings revival and a more predictable outlook for oil prices, given their wider impact on India’s macroeconomic environment. Looking ahead, earnings will be the primary driver of returns which if sustained may drive FII inflows and some rerating.

How bullish have you become amid the Q1 earnings season? Which sectors are surprising you and why? Would you also agree that the broader market earnings is way better than largecaps?
The first half of the year was highly volatile. Early optimism around economic recovery, tax relief, lower interest rates and infrastructure spending was followed by concerns over AI, renewed conflict in West Asia, higher crude-oil prices and heavy foreign selling. In our view, the current consensus projecting 15‑16% earnings growth for FY27 is optimistic. We anticipate actual earnings growth to be closer to 12‑13%.

In Q1, several sectors may face margin pressure. However, assuming the oil prices will remain at current level or will decline, the greatest impact is expected in 1QFY27, with some pressure continuing into 2QFY27 as companies consume inventory bought when commodity prices were higher. By October or November, businesses should begin using lower-cost inventory. Earnings should start normalising during the December quarter, and the West Asian conflict’s effect should be largely absent in 2HFY27. We may see increasing pressure in earnings If we see escalation in west Asia conflict and oil prices move materially higher for an extended period of time.

Financial sector earnings grew only in the low single digits in FY26, but growth could exceed 15% in FY27. Credit growth remains strong, while bank margins should stabilise as deposits are repriced and interest rates become steadier. Healthy credit expansion and improving margins should support a recovery. Automobile companies should benefit from strong volumes, while consumer staples may gain from improving demand, GST reductions and lower commodity prices. Information technology services are likely to remain softer.

Largecaps are preferred due to their relatively lower valuations. Earnings may behave similar growth trajectory in large caps as well as broader markets.

Domestic institutions have continued absorbing foreign selling. Has this structural liquidity reduced the market’s downside risk, or is it merely postponing valuation correction? What would bring FIIs back decisively?
Robust DII inflows have made the market less fragile in the short term, but they do not eliminate the risk of a valuation correction. This year the market has fallen roughly 10 % amid FII outflows, much of which is valuation led correction. Nevertheless, heightened domestic flows have helped support the market during periods of sharp selling and have shortened the correction phase as evident in the March‑April-26 and May-25. Although FIIs returned in July, a decisive comeback will likely depend on a blend of macro‑economic easing (lower U.S. rates and a weaker dollar), valuation convergence (India’s P/E narrowing relative to peers), sustained earnings resilience, and a global risk‑on environment that restores the attractiveness of broader EM equities.

How would you allocate fresh money across largecaps, midcaps and smallcaps today? Where is the earnings-to-valuation trade-off most favourable?
We prefer large caps over mid and small caps; this is primarily a valuations driven call. We also like some sectors in small and mid caps due to their sector specific opportunity. In large caps, Private-sector banks remain attractive because of strong earnings prospects, healthier balance sheets, low non-performing assets, and comfortable valuations. Telecommunications is another preferred sector, supported by pricing power, possible tariff increases, lower capital expenditure and stronger free-cash-flow generation. Consumer staples also look attractive as growth improves and commodity costs stabilise. Selected consumer-internet companies may offer opportunities.

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How should investors approach Indian IT amid weak hiring, AI-led disruption and potential productivity gains? Is the sector becoming a contrarian opportunity, or could its traditional revenue and employment model face a prolonged reset?
The key question is how the industry’s structure evolves three to five years from now. Artificial intelligence has created uncertainty around business models. Recruitment has slowed, affecting both technology and consumption. Softness in hiring may be reflecting post-pandemic overhiring, but AI could also reduce the number and type of employees required. Even so, AI implementation may create opportunities for Indian IT companies. Large enterprises will need service providers to integrate AI into existing systems, redesign workflows and manage applications. The market may be pricing in a structural decline that proves too pessimistic. Tough valuations amid high pessimism could open up upside, if concerns ease.