Indian equities are attracting foreign inflows amid a nascent earnings recovery, but the outlook for the country’s influential IT sector remains clouded by uncertainty surrounding the impact of artificial intelligence. While corporate India prepares for a potentially stronger fiscal year 2027, driven by nominal GDP growth and a weakening rupee, the shadow of AI-driven disruption is tempering optimism, particularly regarding valuations.
According to Manish Gunwani, of Bandhan AMC, FY27 holds the promise of improved corporate earnings. “From a top-down perspective, FY27 should be better on earnings because of two-three things. One is that the nominal GDP will pick up partly because inflation will go up. So, we kind of bottomed out nominal GDP at 8-9%. It will be 10-11% going forward. And corporate earnings obviously have a decent correlation to nominal GDP,” Gunwani stated in a recent interview. He anticipates that rupee depreciation will further bolster earnings for key sectors, including pharmaceuticals, information technology, refining, and oil and gas.
The rupee’s decline against the dollar and other Asian currencies presents a clear benefit to export-oriented businesses. Companies in these sectors will find their dollar earnings translating into more rupees, boosting profitability. Gunwani highlighted that this effect should be “pretty broad-based,” benefiting companies involved in exporting, import substitution, and dollar-based pricing.
However, Gunwani cautioned that current market dynamics are being more heavily influenced by global anxieties surrounding AI than by underlying earnings performance. “If you see, It’s not that earnings have been knocked off in the past two-three weeks, but the terminal value of a lot of businesses is under question. So, to my mind at least in the near term, that is a bigger question rather than earnings honesty,” he explained. This suggests that investors are less focused on current profitability and more concerned about the long-term implications of AI on business models and growth prospects.
The IT sector, a cornerstone of the Indian economy and a major driver of export revenue, is at the epicenter of this uncertainty. While no IT services companies have yet reported contract cancellations directly attributable to AI, the potential for disruption is significant. Nilesh Shah, Managing Director of Kotak AMC, recently noted that it is “too early to say which way the IT sector will get impacted by AI,” but acknowledged the potential for a prolonged transition rather than a sudden collapse.
Gunwani expressed particular concern regarding traditional IT services, specifically in areas like business process outsourcing (BPO), application development, and infrastructure services. He acknowledged that some companies will likely navigate the disruption more successfully than others, but cautioned that identifying these winners is “very difficult” given the scale and complexity of the changes underway. The question, he posed, is whether the market can effectively differentiate between companies adjusted for their valuations.
Despite the concerns surrounding the IT sector, Gunwani remains optimistic about the overall outlook for foreign investment flows into India. He pointed to the recent depreciation of the rupee as a positive factor, noting that it has been the worst-performing major currency in the last six months. He also highlighted the continued strength of India’s services sector, including global capability centers (GCCs), which suggests that the current account is not under significant stress.
“I am a bit more optimistic right now on foreign flows,” Gunwani said. “One is the rupee has taken a fair amount of beating… Even if IT services is disrupted, if you see the monthly data on services which includes GCC and all other things, that still seems quite strong. So, it is not like our current account is under stress.”
Gunwani believes that recent volatility in gold and silver prices could help stabilize the capital account, alongside potential shifts in global dollar flows. He anticipates improvements in foreign investment across debt, equity, and foreign direct investment (FDI).
The interplay between these factors – a strengthening domestic economy, a depreciating rupee, and the looming threat of AI disruption – creates a complex landscape for investors. While the earnings revival offers a positive signal, the uncertainty surrounding the IT sector and its impact on India’s overall economic growth remains a key concern. The ability to navigate this complexity, balancing short-term uncertainty with medium-term opportunity, will be crucial for investors in the coming months.
Gunwani concluded that the prospects for attracting foreign flows are “much-much better at this point of time,” but the market’s trajectory will depend on how effectively it can grapple with the sectoral impacts of AI and assess the long-term earnings potential of Indian companies.
