Indian equity markets, which have seen a significant downturn in 2026, are poised for a robust recovery by fiscal year 2027 (FY27), according to Shridatta Bhandwaldar, Chief Investment Officer — Equities at Canara Robeco Mutual Fund. This rebound is largely dependent on a cessation of the ongoing conflict in West Asia and a subsequent resurgence in corporate earnings.
Foreign Investor Exodus and Market Pressure
As of June 11, 2026, foreign institutional investors (FIIs) have withdrawn a staggering $30.5 billion from India's equity market this year. This figure significantly overshadows the $18.9 billion pulled out during the entire 2025 calendar year. The BSE Sensex has tumbled 12% year-to-date, while the Nifty 50 has fallen over 10%, reflecting the intense selling pressure.
Bhandwaldar attributes this massive FII sell-off to a combination of lacklustre corporate earnings and elevated valuations in the Indian market. He noted that FIIs operate on a global canvas, naturally diverting capital to regions offering superior earnings growth, such as technology markets, or undervalued commodity markets experiencing recovery.
Geopolitical Tensions and Earnings Impact
The protracted conflict in West Asia has been a major contributing factor to market volatility. Concerns over high oil prices and potential supply chain disruptions have cast a shadow over India's economic outlook, directly impacting corporate earnings, particularly expected for the April-June and potentially July-September quarters. However, Bhandwaldar remains optimistic that a resolution to the conflict would pave the way for a recovery.
Outlook for FY27: Double-Digit Growth Anticipated
Should the geopolitical tensions subside, Bhandwaldar forecasts a healthy double-digit earnings growth returning in FY27 or on a rolling four-quarter basis. He highlights that the cyclical downturn in corporate earnings observed through FY25 and parts of FY26 had begun to reverse, aided by government spending and consumption boosts, before the West Asia conflict escalated.
Sector-Specific Insights
- Large Caps: Following the recent market correction, large-cap stocks are no longer considered expensive, trading at their ten-year average valuations.
- Mid and Small Caps: These segments may still retain high valuations.
- Preferred Sectors: Canara Robeco is bullish on large private sector lenders and remains overweight on pharmaceuticals, healthcare, and telecom. They also hold a positive view on consumer discretionary, particularly automobiles, though caution is advised if the war persists.
Domestic Resilience Amidst Volatility
While FIIs have been net sellers, domestic investors, especially retail participants, have demonstrated resilience. Systematic Investment Plan (SIP) contributions reached Rs 30,954 crore in May 2026, indicating sustained retail interest. Although inflows into equity mutual funds saw a month-on-month decline of 40% in May to Rs 22,907 crore, they were still 20% higher year-on-year.
Bhandwaldar acknowledges that short-term market fluctuations can test investor patience, but he cautions against drawing conclusions from single-month data. He emphasizes that equity is not a linear asset class and should always be viewed with a long-term horizon. For many investors, equity remains the most tax-efficient and incrementally beneficial asset allocation over time.