Foreign Institutional investors (FIIs) are expected to continue selling as the Indian equity markets still appear somewhat expensive, according to Kotak Institutional Equities.

Pratik Gupta, CEO and Co-head at Kotak Institutional Equities, said that Nifty 50 remains somewhat expensive at a price to earnings multiple of 19 times based on March 2026 earnings estimates, which is significantly higher than historical averages.

“This is especially high considering earnings CAGR of 14 per cent in FY26 and FY27, with downside risks to such estimates. Hence, we don’t expect meaningful upside to the Nifty in the short term,” Gupta said.

However, most foreign investors remain optimistic about India’s medium-term (next three-five years) growth outlook, he said. They are looking to increase their exposure to Indian stocks, but are currently running into a duopoly of high valuations, and a liquidity crunch as emerging market (EM) funds face redemptions.

Money flows into the US

“Money is flowing back to the US, partly due to a strong dollar and Trump’s policies. Even if India was attractive, they don’t have money to invest because capital is flowing back to the US,” Gupta said.

Higher capital gains tax has also been biting the FIIs, Gupta said, as they have little returns left with the rupee depreciating, bond yields rising, taxes, surcharges and fund manager fees. A weaker US dollar, increase in government and private capital expenditure and an end to the ongoing corporate earnings slowdown could bring back flows into EM funds, he said.

However, the slump in earnings back home is expected to continue in the March and June quarters as well – with earnings growth for FY26 projected at 14.5 per cent. Even though the second half is seen better, the brokerage house expects the market to remain range bound till the end of the year.

Compared to large-cap stocks, he is more cautious on the small- and mid-caps as valuations are still expensive in most cases after recent corrections.

Given the caution on these spaces, domestic inflows from local mutual funds and others have also seen to have been directed away from small- and mid-cap or thematic funds, he said. Domestic investors are increasingly favouring large-cap or balanced debt-equity funds.

Among sectors, Kotak Institutional Equities prefers large private banks, non-banking financial companies, life insurance companies, hotels, real estate and the tourism industry. The broker remains cautious on consumer staples, discretionary, oil and gas, and chemicals sectors.