Jefferies on Indian stock market as a ‘reverse AI trade’; view on rupee, earnings

Jefferies, in its Asia Maxima note, described India as a “reverse AI trade.” The brokerage said the key cyclical question for the stock market is whether last year’s credit and monetary easing, combined with GST rate cuts effective from September 22, 2025, will translate into a growth pickup in the coming quarters. For now, the most visible sign of an upturn is the rise in credit growth.

Jefferies expects MSCI India EPS growth to rise to 13-14 per cent in the fiscal year beginning April 1, 2026, up from 8-9 per cent in the current fiscal year. Without such a pickup, the brokerage said Indian equity valuations could remain vulnerable.

Jefferies said the Nifty trades at 20.4 times one-year forward earnings, while the Nifty midcap index trades at 28.5 times, reflecting higher forecast earnings growth of 11 per cent for FY26 and 22 per cent for FY27.

Indian stock market posted its weakest relative performance in 30 years in 2025 among Asian and emerging markets. MSCI India rose 4.3 per cent in dollar terms on a total return basis, compared with gains of 30.2 per cent in MSCI AC Asia Pacific ex-Japan and 34.4 per cent in MSCI Emerging Markets.

Jefferies noted that this reflected a cyclical slowdown, with earnings growth estimated at 8–9 per cent in FY26, alongside a 4.7 per cent depreciation of the rupee against the dollar, which breached the psychologically important 90 level in December.

That said, “from the standpoint of the global emerging market asset class, India has become the reverse AI trade, which is another way of saying it should outperform if the AI trade suddenly unwinds, which would be a negative for Taiwan, Korea and China (in that order) in terms of the emerging market equity asset class. These three countries currently account for 61.5 per cent of the MSCI Emerging Markets Index, while India accounts for 15.3 per cent,” it said.

Jefferies said the rupee has likely bottomed. The current account deficit this fiscal year is forecast at 0.6 per cent of GDP, near a 20-year low, while foreign exchange reserves stood at $697 billion as of December 26– equivalent to 11 months of imports. A potential risk is the continuation of 50 per cent tariffs from the US, which could widen the trade deficit, already up 11.3 per cent year on year to a record $282 billion in the first 11 months of 2025.

On foreign investment, Jefferies said gross FDI remains healthy despite lower net inflows due to private equity exits and rising outbound direct investment. Gross FDI inflows rose 13 per cent year on year to $81 billion in FY25 and 15 per cent year on year to $58 billion in April–October 2025. Net FDI fell from $10 billion in FY24 to $1 billion in FY25 before recovering to $6 billion in April–October 2025. Outbound direct investment rose 69 per cent year on year to $28 billion in FY25 and 46 per cent year on year to $20 billion in April-October 2025. Jefferies also noted record foreign net selling of Indian equities of $18.8 billion in 2025.

Despite underperformance in relative terms, Jefferies said absolute performance was supported by domestic flows. The Nifty rose 10.5 per cent in local currency terms in 2025, aided by net inflows of Rs 4.1 lakh crore ($47 billion) into Indian equity mutual funds in the first 11 months. Including other domestic institutional and retail flows, total domestic inflows averaged $7.4 billion a month – largely offsetting new equity supply of $6.8 billion over the preceding six months.

Jefferies highlighted that credit and monetary easing, combined with GST cuts, could drive growth in coming quarters, with credit growth rising from 9 per cent year on year in May to 12 per cent in mid-December. Without this pickup, valuations could remain under pressure.

The brokerage said the IT services sector remains a relative vulnerability, with listed companies’ revenue growth slowing to 4 per cent in FY25 and 1.6 per cent year on year in 2QFY26, contributing to a de-rating. The BSE IT Index trades at 23.7 times one-year forward earnings, down from 31 times in mid-December 2024. Jefferies noted that India-based multinational global capability centers are increasingly driving the services sector, with GCC exports growing in importance relative to traditional IT services, within gross services exports of $405 billion in the four quarters to 3QCY25.

On monetary policy, Jefferies said the RBI has turned dovish since Sanjay Malhotra became governor in December 2024. The policy repo rate has been cut by 125 basis points since February to 5.25 per cent – including a 25-basis-point cut on December 5– with inflation well below the target range of 2-6 per cent. CPI inflation fell to a 26-year low of 0.25 per cent in October and 0.71 per cent in November, implying real rates of around 4.5 per cent and justifying monetary easing.

One area where valuation looks attractive is the listed property sector. Pre-sales for the seven developers covered by Jefferies grew 17 per cent in FY25 and are on track for 25 per cent growth in FY26, while combined net debt for these developers is expected to fall from Rs 52,000 crore in FY19 to Rs 3,300 crore by the end of this fiscal year.