India's economic growth remains robust, with the Reserve Bank of India (RBI) projecting a 7.3% GDP growth rate for the fiscal year 2026. This positions India as the fastest-growing large economy globally. Despite this optimistic outlook, market volatility persists, driven by sentiment rather than fundamentals.
According to Suneet Kabra, co-founder and CEO of Equitree Capital, the current market fluctuations are largely sentiment-driven, disconnected from the underlying strength of corporate India. The volatility is exacerbated by global uncertainties, such as the US-Iran conflict and tariff changes. Although the US Supreme Court recently struck down the IEEPA tariffs, new tariffs imposed by former President Trump have maintained a climate of uncertainty.
Domestically, the third quarter of FY26 revealed some earnings pressures, particularly in sectors sensitive to working capital and commodities. However, the broader picture remains positive. The BSE 500 recorded a median EBITDA growth of 15% in Q3 FY26, with small caps achieving 17% growth and both mid and large caps at 16%. Over nine months, mid-caps have shown a 15% increase in operating profits, aligning closely with the BSE 500's 13% growth.
Rural demand recovery and festive consumption have provided additional support to the economy. As the market adjusts to uncertainties, Kabra believes patient investors could see wealth creation opportunities.
Impact of AI on Tech Sector
The rise of artificial intelligence (AI) is significantly impacting the tech sector, particularly traditional IT services. Managed services and application maintenance, which constitute a substantial portion of revenue for leading Indian IT firms, are experiencing pricing pressures due to AI advancements. This has led to a nearly 20% decline in the Nifty IT index year-to-date in FY26.
Despite these challenges, Kabra advises against writing off the sector entirely. Indian IT firms are deeply integrated into enterprise technology systems, and AI presents a $300–400 billion opportunity in enterprise AI integration. Retail investors are encouraged to focus on companies with a clear AI strategy and diversified revenue streams.
The narrative of India's growth remains strong, though markets are currently undergoing a valuation and expectation reset following a period of exceptional re-rating. The Economic Survey forecasts nominal GDP growth of 10% for FY27. However, uneven corporate earnings and global geopolitical tensions are creating a complex macro environment, affecting market sentiment.
Over a nine-month period, the BSE 500's median EBITDA growth was 13%, with mid-caps at 15% and small-caps at 13%. As geopolitical uncertainties ease and rural consumption recovers, earnings are expected to accelerate in FY27.
Foreign Investment Trends
Foreign institutional investors (FIIs) have been cautious, but recent developments may shift their stance. The RBI's rate-easing cycle, starting with a 25 basis point cut to a 6.25% repo rate, enhances the appeal of Indian assets. Additionally, anticipated Federal Reserve rate cuts are redirecting capital towards emerging markets, with India being a preferred destination due to its macroeconomic stability.
Monthly systematic investment plan (SIP) inflows exceeding ₹30,000 crore provide a buffer against FII outflows. In the near term, FII investments are expected to be selective, with a focus on financials, domestic consumption, and infrastructure-related sectors.
Public Sector Banks' Performance
Public sector banks (PSUs) in India have outperformed their private counterparts, reporting significant quarterly profits in Q3 FY26, with earnings growing 17.5% year-on-year. This growth surpasses that of private banks, which saw less than 12% growth.
PSU banks have significantly improved their asset quality, with the average gross non-performing asset (NPA) ratio dropping to around 2.27%, a remarkable improvement from five years ago. This transformation, coupled with valuation re-rating, has contributed to their strong performance.
