'Valuations already elevated, so large multiple expansion hard to justify'

Simultaneous fiscal and monetary tightening created a drag on the economy and markets, says Neelkanth Mishra, chief economist, Axis Bank and head of Global Research, Axis Capital.

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In an interview with Subrata Panda & Samie Modak in Mumbai, Mishra says as growth momentum becomes clearer, foreign investors, who went underweight India, may return. Edited excerpts:Why did Indian equity markets underperform global peers this year?

■ FY25 saw simultaneous fiscal and monetary tightening, Fiscal tightening amounted to about 130 basis points — 80 explicit and 50 implicit — while credit growth slowed sharply, together creating a drag of nearly 2 percentage points of GDP (gross domestic product). This broke growth momentum and led to sustained earnings downgrades over 12 months. India was the worst-performing major market in terms of earnings revisions, which explains why equity indices largely stagnated rather than declined.

How did earnings downgrades affect market performance?

■ Typically, 12-month forward earnings trend upward due to roll-forward effects. Over the past year, however, earnings cuts offset these gains, flattening the earnings curve. With no earnings growth, markets also failed to move meaningfully. This phase now appears to be ending, which could mark a turning point for equities.

Why were foreign outflows particularly sharp?

■ India underperformed while most global markets rallied, causing its weight in global indices to fall. This amplified outflows, especially from passive funds. Additionally, India was perceived— incorrectly — as an “All loser,” prompting some investors to underweight India and reallocate to AI beneficiaries such as China, Taiwan, and Korea. India also became a funding market for some investors during this phase.

What could trigger a reversal in foreign flows?