Crude oil is the key to bringing FII money back to Dalal Street: Equirus AMC’s Ashutosh Tiwari

Foreign investors may return to Indian equities only if crude oil prices cool, according to Ashutosh Tiwari, managing director and chief investment officer—public equities at Equirus Asset Management. While valuations have corrected and earnings growth is expected to improve, rising oil prices have emerged as the key trigger behind renewed FII selling and remain the biggest hurdle to a sharper market re-rating.

Edited excerpts from a chat:

Indian equities have corrected despite resilient economic growth amid FII outflows. What can we do to bring dollars back to Dalal Street?


Since the Iran war began, FII flows into India have shown a strong correlation with crude oil prices. During March-May, when crude remained elevated above $90, FII selling intensified. As crude corrected from June following interim relief in the conflict and prospects of $80 oil, FIIs turned buyers and India saw healthy inflows. However, the renewed spike in crude over the past two months has once again coincided with intensified FII selling.

In our view, a sustained decline in crude oil prices is the most important trigger for bringing FII money back to India. Most other variables are already supportive. Valuations have corrected meaningfully, with NIFTY 50 trading at around 19x trailing earnings and ~17x forward earnings, among the lowest levels of the past decade outside the COVID period. At the same time, nominal GDP growth, which moderated from 11% in FY24 to 9% in FY26, is expected to improve in FY27; 1QFY27 nominal GDP growth was 10.1% YoY. An improvement in nominal growth should also support aggregate corporate earnings. Thus, if crude prices moderate, India could once again become significantly more attractive to global investors.

What is your market outlook for the next 12–18 months, and which assumptions on earnings, interest rates and foreign flows are most critical to that view?

Yields, earnings and valuations are the key factors driving market returns over the longer term. Over the past 25 years, bond yields have largely remained below 5%, and for extended periods below 3%, conditioning investors to view low interest rates as normal. However, history suggests that a structurally higher interest-rate environment is entirely possible.

After nearly two years of muted returns, valuations have become attractive, with the NIFTY 50 at around 19x trailing P/E. Structurally higher bond yields may prevent a return to the previous peak multiples of 25–27x. Our estimates suggest that every 100-bps increase in bond yields can compress valuations by around 6–7%. Nevertheless, we believe a re-rating towards 23–25x over the next two years is achievable, offering meaningful upside alongside earnings growth. We expect healthy FY27 earnings growth across most sectors, barring IT and select sectors materially affected by higher fuel costs if crude remains elevated.

The missing catalyst is FII liquidity. Valuations and earnings make the market attractive, but a sharp rally and significant P/E re-rating will likely require sustained foreign inflows. In the absence of FII flows, returns should remain predominantly earnings led.

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Large-caps have regained their relative appeal after the sharp outperformance of mid- and small-caps. Where do you currently see the best risk-reward across the market-cap spectrum?

Large-cap valuations have moderated significantly after nearly two years of relatively flat market performance, improving their risk-reward profile. Large caps should also be key beneficiaries of any revival in FII flows, given their higher foreign ownership and superior liquidity. Within the broader market, we prefer small-caps over mid-caps. India’s manufacturing opportunity, driven by import substitution, localization and growing export potential, is creating several attractive opportunities that are best captured through select small-cap companies. Overall, we currently find large caps the most attractive, followed by small caps, with mid-caps relatively less compelling.

Auto stocks have been one of the biggest outperformers in the last one year amid GST rate cut. Now as the base effect catches up, we have seen some profit booking. How bullish is the outlook for the next one year?

Over 2020–25, BS-VI transition and multiple safety regulations materially increased the cost of vehicle ownership, weighing particularly on value-sensitive segments such as two-wheelers and entry-level cars. This led consumers to defer purchases and extend replacement cycles. The GST rate cut last year improved affordability and triggered a meaningful recovery in demand. While the favorable base effect will now fade and growth rates are likely to moderate, affordability remains better than pre-GST-cut levels. More importantly, the elongated replacement cycle should continue to support underlying demand.

However, we see two near-term headwinds. First, elevated crude prices are pushing up the cost of several key raw materials, potentially increasing vehicle costs and pressuring margins. Second, the deficient monsoon this year could weigh on rural incomes and demand in 2HFY27. Overall, we remain cautiously optimistic on the sector. Replacement demand provides structural support, but near-term cost inflation and weaker rural demand could moderate growth.

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Which sectors are likely to surprise the market in the Q2 earnings season and why?
Higher commodity prices should support strong earnings growth for metals and mining companies, potentially placing them among the better-performing sectors this quarter. Consumer durables, retail and manufacturing companies are also expected to report healthy revenue and profit growth. Among others, Autos, NBFC and Telecom companies are also expected to report double digit profit growth. Select chemical companies could surprise positively, particularly those using crude derivatives as inputs, as they may benefit from older, lower-cost inventories. Overall, Q2 is expected to be a healthy earnings quarter, with small caps potentially delivering the strongest earnings growth.

How cheap are bank stocks at this stage and does the growth outlook present a compelling buy opportunity?
Over the last two years, valuations across the banking and financial services sector have corrected significantly, making the sector attractive at this juncture. However, we do not expect BFSI valuations to return to historical peaks. Rising competitive intensity, declining CASA ratios amid greater financial prudence among customers are likely to keep NIMs structurally lower than in the past.

Banking and financial services currently constitute ~35% of the NIFTY 50 and ~31% of the NIFTY 500. If the evolution of US and Chinese indices over the past two decades is any indication, the weight of financials in Indian indices could decline significantly over the next 5–10 years as newer sectors and business models gain scale.

IT stocks have shown some buying interest in the last few days. Do you think the winding up of AI trade is the only way that Indian IT can see a relief rally in the next 1 year?
The recent rally in IT stocks appears to be primarily driven by an anti-AI trade and short covering. However, the structural challenges from AI remain, and we do not expect them to materially change over the next 1–2 years. AI is inherently deflationary for traditional IT services, which is likely to keep pricing and earnings growth under pressure. We can draw some parallels with 2016–18, when concerns around cloud adoption weighed on IT growth expectations and sector valuations fell to around 15–17x trailing P/E. Valuations today are again in a similar range. However, we believe AI could be more disruptive and deflationary than cloud was, limiting the scope for a sharp re-rating.

Therefore, while IT stocks can see periodic relief rallies, including from an unwind of the AI trade, a sustained re-rating will ultimately require greater visibility on earnings growth. We expect earnings growth for the sector to remain relatively subdued over the next two years.