India's benchmark equity index may struggle to attract foreign institutional investor (FII) money as the Nifty 50 remains heavily skewed toward banking and information technology (IT) stocks, sectors facing slowing growth and structural disruption from artificial intelligence (AI), according to Manish Sonthalia, chief investment officer at Emkay Investment Managers. At current Nifty 50 valuations of 22-23x earnings, that may not be attractive enough for FIIs, he said, arguing that domestic institutional investors (DIIs) may have to continue supporting Indian markets in the near term.
The IT services business model is getting disrupted through AI, with dollar revenue growth expectations for IT companies falling from 8-10% earlier to low single digits, as reported by Mint. While rupee depreciation may still help companies report 7-8% top-line growth in rupee terms, high cost inflation is preventing margin expansion. The sector may, at best, act as a stabilizer rather than deliver strong growth returns, with any near-term rally likely to be a temporary "dead cat bounce" unless Indian IT firms significantly reinvent their business models and step up AI investments.
Banking system growth is likely to remain around 10-12%, according to Sonthalia's analysis. For a 10-12% index growth, paying 22x earnings roughly translates to 2 PEG (price/earnings-to-growth ratio), which may not be good enough for FIIs. The weight of IT stocks in the Nifty 50 has already fallen sharply from 12-13% earlier to around 6.5-7%, and this will come down further as FIIs hold their largest positions in banks and IT, while domestic mutual funds are already heavily invested in large private banks.
DIIs have pumped ₹3.5 trillion into equities as of May, equivalent to 40% of last year's inflows in just four months, as reported by Mint. Interest rates have been a key reason for market optimism, with fixed deposits currently offering post-tax returns of around 5% against 5% inflation, making equities attractive. However, if deposit rates rise to 8%, investors could shift from equity to zero-risk debt instruments. For FIIs, the dollar returns are not great with the rupee depreciating, and the rupee's fair value is estimated at 91-92 if the conflict eases by June-end.
Alternative asset managers are quietly building positions in SME-listed companies before they migrate to mainboard exchanges, betting that the removal of lot-size and market-making restrictions will unlock a sharp structural valuation re-rating. The Nifty SME Emerge index has risen 4.3% in the last three months while the benchmark Nifty 50 fell over 7%, as reported by Business Standard. New regulations mandate that migrating companies must be SME-listed for at least 3 years with operational revenue over ₹100 crore and positive operating profit in at least 2 of the last 3 fiscals. However, only three mainboard migrations have occurred in 2026 compared to 15 in 2025, with the new rules affecting transition numbers.
