Opportunities improving for Indian large- and small-caps: experts

Investors, who entered Indian equities since mid-2024, seem to have lost both patience and index returns since then, with the Nifty 50 index giving returns of -2.36% in the last two years. Retail investors who chased themes in mid- and small-caps lost month and their investments in the Nifty IT index fell 26% and the Nifty PSE index down 14.3% in the two-year period.

Over the past two years, foreign funds have turned net sellers of Indian equities for - Rs 2.98 lakh crore in CY2025 and -Rs 3.55 crore as of July 29, 2026. while domestic institutional investors have offset the sell off with purchases of Rs 7.72 lakh crore in 2025 and Rs 4.96 lakh crore in 2026, as of July 29, 2026. DII ownership in the Nifty 50 has risen to a record 24.9% by March 2026, while FII ownership has dropped to a 12-quarter low of 22.8%. In July 2026, FIIs have been net buyers of Indian stock worth Rs 34,873 crore, as of July 29.

The break-out of the West Asia war in February and its re-escalation of attacks since July 7 has added to fresh concerns for the markets due to rising crude oil prices, inflationary pressures and rupee depreciation.

Vinod Nair, head of research at Geojit Financial Services said large-cap and small –cap investment opportunities are growing as valuations are attractive. The risk is coming down. “There is a gap down in crude prices which we have been seeing since this week.  The gap down is far more negative now and it might be telling us that this time the resolution between the United States and Iran will be better than before,” Nair told Fortune India.

Headwinds transitioning into tailwinds

But despite all of these pressures, market experts believe that India headwinds are transitioning into tailwinds. “Crude coming off, the dollar softening, US yields retreating, risk appetite gradually returning to emerging markets. As that environment takes shape, India will receive its share of the resulting emerging market allocation,” says Abhay Laijawala, managing director CIO, Lighthouse Canton.

“As that environment takes shape, India will receive its share of the resulting EM allocation. But there is a more interesting and more durable version of that story, and it has nothing to do with macro. It has to do with where the earnings are. When global capital allocators look seriously at India with fresh eyes as they will, because at 8% GDP growth (our expectation in 2H) against 3.3% in the US and 4% in China, India is not a market that serious capital can ignore indefinitely,” Laijawala told Fortune India.

“India is not a market that serious capital can ignore indefinitely. They will find that the companies generating the most compelling, most visible, and most structurally anchored earnings growth are not in the Nifty or MSCI India. They are in the mid cap segment,” Laijawala says, and outside the indices.

They are decade-long structural reconfigurations of the Indian economy, each backed by policy, capital, and global supply chain logic that is irreversible. The themes are defence indigenisation; AI infrastructure plus supply chain; China-Plus-One in Specialty Chemicals and manufacturing; trade deal dividend (beneficiaries of three simultaneous trade deals with US, EU and UK and Formalisation, credit democratisation and domestic consumption.

Prakash Bulusu, joint CEO at IIFL Capital says the markets have priced in a reasonable degree of geopolitical risk, but not a prolonged disruption. “However, investors are differentiating between short-term volatility and long-term fundamentals. The key variable remains oil—if crude stays elevated for an extended period, it could impact inflation expectations, corporate margins and foreign flows. As of now, India's structural growth story remains intact, and earnings continue to be the primary driver of market direction,” he told Fortune India.

And despite inflation breaching about the RBI’s targeted 4% inflation level, the central bank on August 5, is likely to keep interest rates unchanged at its monetary policy meeting. Geojit Financial Services’s Vinod Nair said “it is quite likely that there might not be rate action in 2026, but a rate cut in Q3FY27.”

With a large percentage of Q1FY27 corporate earnings out of the way, Bulusu says “domestic-facing businesses continue to outperform, supported by healthy consumption, government capex and resilient financial services.” He added that while export-oriented sectors are witnessing some global headwinds, overall corporate commentary remains constructive. We expect FY27 earnings growth to broaden further, making fundamentals rather than liquidity the key driver of equity returns over the next 12 months.

Geojit’s Nair said Q1FY27 earnings expectations were muted due to the impact of crude oil but numbers have emerged marginally better than expected, led by strong volume growth domestically. “But going ahead into Q2FY27, the expansion in the EBITDA margin is not strong enough, so there could be some pressure on margins. Q2FY27 might come under pressure due to crude, but data will improve in Q3 and Q4,” Nair told Fortune India.

Mid-cap capital goods, defence stocks seen positive

The Nifty Midcap 100 has risen 19.3% from a low of 52,650 levels during the period when the West Asia war intensified. And despite mid-caps ruling at a premium to large-caps, IIFL Capital’s Bulusu said: “We are constructive on mid-cap companies in capital goods, industrial manufacturing, defence, financial services and select healthcare businesses. These sectors are benefiting from structural drivers such as India's manufacturing push, rising private capex, infrastructure investments, formalisation of the economy and increasing domestic demand.”

Laijawala of Lighthouse says new investors need to be shown past precedents. In 2018, the Nifty Midcap index fell about 10-12% and the Smallcap index fell much more – almost 22-26%. “Investors who started SIPs that year saw negative statements for well over a year. Those who stayed invested had, by 2023, generated returns of over 18-20% CAGR -returns that would never have been available to those who stopped and waited for certainty before re-entering,” Laijawala says.

The current correction mirrors 2018 in its cause - stretched valuations followed by tightening and FII outflows.  “The two years of subdued returns have not invalidated the thesis. They have set up the next chapter.  The fundamentals of the underlying businesses - the defence companies with order books stretching to 2030, the chemical manufacturers with global supply contracts, the capital goods companies executing on a decade of infrastructure spending have not deteriorated,” Laijawala says.

All the experts were confident about the structural strength of India’s investments, where household savings allocations into equities has risen to 12.5% in FY25 from just 2% of annual financial savings in FY12.