Foreign flows into India have improved since mid-June, but high valuations, hawkish monetary policy, and deficient monsoon rainfall remain constraints

Overview

This is a weekly Indian equity strategy report focusing on market performance, monetary and foreign-exchange policy, foreign flows, monsoon progress, earnings revisions, valuations, and regional allocation. The report maintains a Marketweight allocation to India and sets a June 2027 NIFTY target of 26,500; the key change is the return of foreign inflows since mid-June, although high valuations, a hawkish rate path, and deficient rainfall remain important considerations.

Core views

In terms of market performance, the NIFTY had previously declined for seven consecutive trading days before recovering over the final two trading days, with the report describing the full-week performance as flat. The market table as of August 21, 2026 shows the NIFTY at 24,252, with a weekly return of -0.5%, a monthly return of +0.3%, and a year-to-date return of -7.2%. Sector performance diverged: the report states that metals led with an increase of approximately 1%, while IT and consumer staples declined by 2% to 3%; in the NSE sector index table, metals rose 2% for the week, while IT and FMCG fell 3% and 2%, respectively. Brent crude rose to nearly US$95 per barrel during the same period, while the report title also highlights rising bond yields as a source of market pressure. Earnings and valuations have yet to show broad-based improvement. Market-wide earnings forecasts were broadly unchanged for the week, with metals and mining receiving a modest upgrade of approximately 0.1%, while pharmaceuticals were downgraded by 0.3%. Broader monitoring indicates that earnings sentiment has turned moderately positive and that earnings downgrades during the latest reporting season are stabilizing. MSCI India trades at a 12-month forward P/E of 20.3x and a long-term P/B of 3.2x, with its forward P/E approximately 87% above MXAPJ, indicating that India continues to command a significant valuation premium relative to Asia Pacific ex-Japan. Monetary policy signals have become more restrictive than before. The tone of the Reserve Bank of India's Monetary Policy Committee meeting minutes was more hawkish than the governor's policy statement. Goldman Sachs economists continue to expect cumulative rate hikes of 50 basis points, comprising 25-basis-point increases in December 2026 and February 2027. Meanwhile, the RBI brought forward the deadline for the FCNR(B) swap arrangement for new deposits from September 30, 2026 to August 31. The report believes this may reflect the central bank's assessment that balance-of-payments pressures have eased, while Goldman Sachs economists estimate net FCNR(B) inflows of approximately US$40 billion. Foreign flows are the central change highlighted in this report. Foreign institutional investors had purchased approximately US$300 million of Indian equities on a net basis during the week to date, although year-to-date net outflows in 2026 still totaled approximately US$24 billion. Since mid-June, Indian equities have received cumulative foreign inflows of approximately US$6 billion, marking a clear reversal from net outflows of approximately US$29 billion in the first half of 2026. India has also received the largest foreign inflows among major emerging markets in the second half of 2026 to date. The inflection first appeared in the secondary market, while primary-market inflows also increased. Consumer discretionary and financials have received the largest foreign inflows since mid-June. Fund positioning data further show that although foreign capital has begun to return, allocations remain low. In June 2026, Asian funds increased their allocations to China and India the most. Nevertheless, India remains one of the more substantially underweight markets among global emerging-market funds. Indian exposure among global active mutual funds relative to benchmarks is near a 20-year low, and funds with emerging-market, Asian, and global mandates are collectively underweight India. The report therefore evaluates the recent recovery in flows alongside the longer-term low-positioning environment rather than concluding from a single week of inflows that allocations have already normalized. Domestic flows were more mixed than foreign flows. Monthly inflows into Indian domestic equity funds declined 15% month over month to US$2.6 billion in July. Small- and mid-cap funds continued to receive strong inflows, while large-cap and value-style funds experienced outflows. Systematic investment plan inflows remained stable, increasing 1% month over month to US$3.3 billion. Goldman Sachs estimates that domestic fund cash levels rose from US$12 billion in June to US$14 billion in July. This estimate is based on a sample of approximately 200 equity funds with aggregate assets under management of approximately US$250 billion and extrapolated using the approximately US$400 billion in total assets under management of domestic equity mutual funds. Monsoon data provide another key indicator for agriculture and rural demand. From June 1 to August 20, 2026, India's cumulative monsoon rainfall was 13% below normal, with approximately 40% of the country's area experiencing deficient rainfall. Reservoir storage was also 3% below normal. The area planted with summer crops was slightly below the corresponding level of recent years. Meanwhile, growth in agricultural tractor sales recovered in July after reaching a one-year low in June, indicating that rural activity indicators have not weakened uniformly. In terms of allocation and forecasts, Goldman Sachs maintains India at Marketweight. The report forecasts NIFTY earnings-per-share growth of 10% in 2026 and 13% in 2027 and expects the index to reach 26,500 by June 2027; the MSCI India consensus forecasts shown in the table are 12% and 20%, respectively. At the sector level, banks, energy (refining and exploration and production), utilities, technology, media and telecommunications, and defense are Overweight. Diversified financials, autos, non-defense industrials, consumer staples, consumer retail, apparel and services, real estate, and durables are Marketweight. Information technology, pharmaceuticals, metals and mining, chemicals and other materials, cement, and refined-product marketing companies are Underweight. The macroeconomic forecasts provide the backdrop for these interest-rate and earnings views. Goldman Sachs expects India's real GDP growth to slow from 7.5% in 2025 to 6.9% in 2026 before recovering to 7.4% in 2027. Average CPI inflation is forecast to rise from 2.2% in 2025 to 4.4% in 2026 and 4.7% in 2027. The current-account balance as a share of GDP is forecast at -0.5%, -1.1%, and -1.0%, respectively; year-end repo rates at 5.25%, 5.50%, and 5.75%; and fiscal balances as a share of GDP at -4.5%, -4.7%, and -4.6%.

Analysis framework

The report first reviews the weekly price performance of the NIFTY and its sectors, then combines the RBI meeting minutes and FCNR(B) measures to assess the interest-rate and balance-of-payments environment. It subsequently identifies an inflection in foreign flows by examining foreign institutional investor flows on a monthly and year-to-date basis, primary- and secondary-market flows, and global fund positioning relative to benchmarks. The report also uses rainfall, reservoir levels, crop planting, and tractor sales to track the monsoon and rural activity, while integrating earnings revisions, forward valuations, domestic fund flows, and macroeconomic forecasts into its index target and sector-allocation conclusions.

Methodology notes

• Valuation MethodologyP/E and PEG Valuation

  Comparison of 12-month forward P/E and regional valuation premiums

  The report measures valuation using the P/E ratio based on MSCI India's expected earnings over the next 12 months and compares the 20.3x P/E with MXAPJ, deriving a relative premium of approximately 87% to illustrate the Indian market's current pricing level.

• Event-Driven Strategy and Behavioral FinanceFund Flow/Positioning Analysis

  Foreign flow and benchmark-relative positioning analysis

  The report simultaneously examines net foreign purchases and sales, primary- and secondary-market flows, sector flows, and the extremely underweight positioning of global funds relative to benchmarks to distinguish the recent inflection in flows from longer-term positioning levels.

• Quantitative/Factor/Portfolio TheoryStyle factor analysis

  Long-short style monitoring for Indian equities

  The report constructs equal-weighted long-short portfolios using the highest and lowest quartiles for each style metric among MSCI India stocks and uses the return spread to monitor the relative performance of different investment styles.

• Quantitative/Factor/Portfolio Theory

  Sample-based extrapolation of domestic equity fund cash levels

  Goldman Sachs estimates cash allocations using a sample of approximately 200 equity funds with aggregate assets under management of approximately US$250 billion, then extrapolates the overall cash level based on the approximately US$400 billion total size of domestic equity mutual funds.

• Macroeconomic framework

  Macroeconomic variable path forecasting

  The report jointly forecasts real GDP, CPI, the current account, the repo rate, and the fiscal balance, using the projected paths of these variables from 2026 to 2027 as the macroeconomic backdrop for its earnings, interest-rate, and allocation views on Indian equities.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Indian Equity Market (NIFTY)

  The report maintains a Marketweight allocation and expects the NIFTY to reach 26,500 by June 2027.

  Strengths

  Foreign investors have recorded net inflows of approximately US$6 billion since mid-June; India has received the largest foreign inflows among major emerging markets in the second half of 2026 to date.

  Weaknesses

  Foreign investors have still recorded net outflows of approximately US$24 billion year to date, the NIFTY is down 7.2% year to date, and global active funds remain broadly underweight India.

  Comparison

  India has received more foreign inflows than other major emerging markets in the second half of 2026 to date.

  Risks

  Rising bond yields and oil prices, a hawkish RBI policy stance, and deficient monsoon rainfall.

• MSCI India

  The report uses this index to assess Indian market earnings, valuations, and sector allocation.

  Strengths

  Earnings sentiment has turned moderately positive, and earnings downgrades during the latest reporting season are stabilizing.

  Weaknesses

  Overall weekly earnings revisions were flat, while the pharmaceutical sector was downgraded by 0.3%.

  Comparison

  Its 12-month forward P/E is 20.3x, representing a premium of approximately 87% to MXAPJ.

  Risks

  The high regional valuation premium may make the market more sensitive to changes in earnings and fund flows.

Key data

• NIFTY Level and Performance24,252 points; 1 week -0.5%, 1 month +0.3%, year to date -7.2%As of August 21, 2026; the report describes weekly performance as broadly flat
• NIFTY Target26,500 pointsGoldman Sachs expects this level to be reached by June 2027
• Brent CrudeNearly US$95/barrelRose during the reporting period
• MSCI India Valuation12-month forward P/E of 20.3x; long-term P/B of 3.2xForward P/E represents a premium of approximately 87% to MXAPJ
• Weekly Earnings RevisionsBroadly flat overall; metals and mining +0.1%, pharmaceuticals -0.3%Metals and mining received a modest upgrade, while pharmaceuticals were downgraded
• RBI Rate-Hike ForecastCumulative 50 basis pointsExpected increases of 25 basis points each in December 2026 and February 2027
• FCNR(B) ArrangementDeadline of August 31, 2026; estimated net inflows of approximately US$40 billionThe deadline was brought forward from the originally scheduled September 30, 2026
• Foreign Institutional Investor FlowsWeek to date +US$300 million; year to date -US$24 billionNet buying continued during the week, but cumulative full-year flows remained negative
• Inflection in Foreign FlowsSince mid-June +US$6 billion; first half of 2026 approximately -US$29 billionSecondary-market flows turned positive, while primary-market inflows increased
• Cumulative Monsoon Rainfall13% below normalFrom June 1 to August 20, 2026, approximately 40% of India experienced deficient rainfall
• Reservoir Storage3% below normalTracked alongside the monsoon rainfall deficit
• Monthly Domestic Equity Fund InflowsUS$2.6 billion in July 2026, down 15% month over monthSmall- and mid-cap funds received strong inflows, while large-cap and value funds experienced outflows
• Systematic Investment Plan InflowsUS$3.3 billion, up 1% month over monthInflows remained stable
• Domestic Fund Cash LevelsUS$14 billion in July 2026, compared with US$12 billion in JuneEstimated using a sample of approximately 200 funds
• NIFTY Earnings Growth Forecast2026: 10%; 2027: 13%Index earnings forecasts in Goldman Sachs' allocation table
• Real GDP Growth Forecast2024: 7.2%; 2025: 7.5%; 2026: 6.9%; 2027: 7.4%Goldman Sachs calendar-year year-over-year forecasts
• Average CPI Inflation Forecast2024: 5.0%; 2025: 2.2%; 2026: 4.4%; 2027: 4.7%Goldman Sachs calendar-year year-over-year forecasts
• Year-End Repo Rate Forecast2024: 6.50%; 2025: 5.25%; 2026: 5.50%; 2027: 5.75%Consistent with the report's forecast of two 25-basis-point rate hikes

Impact & implications

The report considers the return of foreign inflows since mid-June an important change in the Indian market's liquidity backdrop, with consumer discretionary and financials receiving the most pronounced inflows. However, global active funds remain broadly underweight India, indicating that improving near-term flows coexist with low longer-term positioning. Meanwhile, India's significant valuation premium, hawkish interest-rate path, and deficient monsoon rainfall remain constraints. Goldman Sachs therefore continues to rate India Marketweight rather than Overweight.

Risks

• Rising bond yields and Brent crude near US$95 per barrel create macroeconomic pressure for the Indian market.
• The RBI meeting minutes were hawkish, and Goldman Sachs expects cumulative rate hikes of 50 basis points in December 2026 and February 2027.
• Cumulative monsoon rainfall was 13% below normal, approximately 40% of India experienced deficient rainfall, and reservoir storage was also 3% below normal.

What to watch

• Monitor whether the return of foreign inflows since mid-June can continue, as well as changes in inflows into consumer discretionary and financials.
• Watch whether the RBI raises rates by 25 basis points in both December 2026 and February 2027 as expected.
• Monitor fund flows and balance-of-payments developments after the FCNR(B) arrangement closes on August 31, 2026.
• Continue monitoring monsoon rainfall, reservoir storage, summer crop planting, and agricultural tractor sales.
• Track earnings revisions, domestic fund inflows, cash levels, and India's valuation premium relative to MXAPJ.