Jane Street Episode Unsettled Some Institutional Investors

With markets now back near all-time highs, foreign institutional investors (FIIs) remain cautious about valuations—particularly in the mid and smallcap segments—and about regulatory uncertainty, especially in the wake of the Jane Street matter, says Jignesh Desai, chief executive officer for institutional equities at Centrum Broking, in an email interview with Puneet Wadhwa. Edited excerpts:

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What are the three biggest risks to the Indian equity markets over the next six months?

While Indian markets have entered the second half of the year with cautious optimism, I believe there's room for a fresh high over the next six months. That said, the first risk stems from global macroeconomic developments. We expect the US Federal Reserve (Fed) to begin cutting interest rates by September. However, any spike in inflation could delay this, strengthening the US dollar and triggering capital outflows from emerging markets (EMs). Trade policy uncertainty, particularly around US-India tariffs, is a concern; any hike beyond 15 per cent could be poorly received.

The second risk is around earnings growth. Mid and smallcap stocks are currently pricing in nearly 25 per cent year-on-year earnings growth. Markets remain highly reactive to any earnings miss. Despite this, the recent correction has been modest, suggesting that investors are still optimistic about the quarters ahead.

Lastly, the regulatory overhang following the Jane Street episode has unsettled some institutional investors. That said, the Securities and Exchange Board of India's (Sebi's) quick response and recent clarification on escrow deposits have helped ease those nerves.

What are the other worrying points for FIIs?