India’s Next Market Phase

Summary

Podcast Summary: Thoughts on the Market – India’s Next Market Phase

Host: Morgan Stanley
Speakers: Chetan Aya (Chief Asia Economist), Ridham Desai (Head of India Research, Chief India Equity Strategist)
Date: June 12, 2026

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Episode Overview

This episode delves into the major themes and insights from Morgan Stanley’s recent India Investment Forum in Mumbai. Chetan Aya and Ridham Desai analyze the evolving outlook for India’s markets, compare India’s macroeconomic position with its global peers, and discuss pivotal policy measures impacting capital flows. They also highlight the sectors set to drive India’s next phase of corporate earnings and capital expenditure (capex), offering nuanced perspectives tailored for both domestic and international investors.

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Key Discussion Points & Insights

1. Shifts in Investor Sentiment

• [00:53] Ridham Desai: Noted divergence between domestic and foreign investor outlooks.

  • Domestic investors bullish, seeking new stock opportunities.

  • Foreign investors remain cautious due to comparative global growth rates.

    Quote: “Domestic investors look that they are bullish and foreign investors continue to stay rather cautious on the Indian markets.” – Ridham Desai [00:53]

2. India’s Macro Position in a Global Context

• [01:42] Chetan Aya: Indian macro data signals strong local growth, but relative growth versus global peers is now less striking.

  • Bank credit growth at 17.7% YoY; car sales up 27% in May.

  • In Q1, India’s earnings growth at 13% vs. Korea’s 170%, Taiwan’s 48%, Japan’s 33%, and US’s 27%.

  • Global investors are focused on short-term, higher growth elsewhere.

    Quote: “When India is reporting 13% growth, it's becoming a challenge for investors to look for opportunities in India relative to other markets.” – Chetan Aya [02:28]

3. Reconciling Stable Valuations with Slower Relative Growth

• [03:12] Ridham Desai: India trading at historically low relative valuation multiples.

  • Cites the importance of long-term (terminal) growth for equities.

  • Suggests India remains a strong opportunity for long-term investors despite near-term relative disadvantage.

    Quote: “Equities is a quintessential long duration asset class. In the long run, what matters is terminal growth. I don't really think India's terminal growth has moved much.” – Ridham Desai [03:54]

4. Policy Measures to Attract Capital

• [04:28] Policy Announcements:

  • Removal of withholding tax on debt investors.
  • Increased incentives for banks to take up dollar borrowing.

• Ridham Desai [04:53]:

  • These policy moves expected to boost debt flows, but equity flows remain dependent on global growth dynamics or a new IPO cycle.

  • Debt markets to see the most immediate benefit; impact on equity markets will likely be muted unless broader conditions shift.

    Quote: “The removal of taxation on debt investors will make a difference. The provision for hedging to external commercial borrowings as well as to foreign currency deposits will make a difference. It should boost flows into India over the next 12 months.” – Ridham Desai [05:00]

5. Long-Term Capital & Competitiveness

• [06:15] Chetan Aya:

  • Short-term capital inflows are useful to stabilize currency and address balance of payments issues.

  • Calls for more action to improve the global competitiveness of Indian manufacturing.

  • Notes AI’s possible impact on services exports, creating urgency for manufacturing-led export growth.

    Quote: “From the long term perspective we think that the government needs to boost competitiveness of the Indian manufacturing sector because in the context in which AI could affect India's services exports, there is a need to augment more export receipts from the manufacturing sector.” – Chetan Aya [06:40]

6. The Capex Supercycle & Sectoral Leadership

• [07:26] Chetan Aya:

  • Asia, including India, is experiencing a supercycle in capex, centered on four sectors:

    • AI/digital infrastructure
    • Energy
    • Defense
    • Industrial onshoring

  • India is active in all four but lags North Asia in capital goods exports.

  • The capex cycle expected to boost domestic productivity and long-term growth.

7. Sectoral Investment Opportunities

• [09:07] Ridham Desai:

  • Financials: Banks have strong balance sheets; interest margins likely at bottom; credit growth accelerating.

  • Industrials & Energy: Strong capital spend opportunities in semiconductors, fertilizers, data centers, aerospace—but valuations can be expensive.

  • Consumer Sector: Most investor attention at the forum, driven by India’s vast and diverse population.

    Quote: “Financials and industrials are clearly great opportunities in the context of this capex recovery that India is likely to see in the coming five years.” – Ridham Desai [10:17]

8. The Indian Consumer as a Growth Lever

• [10:38] Ridham Desai:

  • Highlights vast market segmented across 150 distinctive cohorts.

  • Consumption market growing at 10–15% nominal; accounts for a significant portion of global GDP growth.

  • Suggests consumer sector is a near-inescapable opportunity for global firms.

    Quote: “From a structural perspective, the Indian consumer is quite clearly the best place to be. In fact, I would say that it's the leverage that India enjoys over the rest of the world.” – Ridham Desai [10:39]

9. Wildcard Sector: IT Services

• IT currently facing AI-related disruption, but could become an “interesting area” for investors once clarity emerges.

  Quote: “IT services I think could be the dark horse. It's a sector right now which is disrupted...but I think as the dust settles on this it may emerge as one of the most interesting areas.” – Ridham Desai [11:46]

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Notable Quotes & Memorable Moments

• On Valuations: “This is the lowest relative multiple that India has traded at.” – Ridham Desai [03:12]
• On Policy Impact: “These measures may not help the equity flows because the equity flows I think are going to depend on the relative growth situation.” – Ridham Desai [05:19]
• On Consumer Opportunity: “Depending on what product or service you're offering...India could be between 10 and 100% of your revenue growth.” – Ridham Desai [11:12]

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Timestamps of Important Segments

• [00:53] Divergence in domestic vs. foreign investor sentiment
• [01:42] India’s macro outlook and relative global growth
• [03:12] Reconciling stable valuations with growth deceleration
• [04:28] Policy announcements to boost capital inflow
• [06:15] Long-term capital attraction and sector competitiveness
• [07:26] Capex cycle drivers: Four key sectors
• [09:07] Sectoral investment insights: Financials, industrials, energy
• [10:38] The significance of India’s consumer sector
• [11:46] IT services as a potential future opportunity

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Conclusion

The episode offers a nuanced, data-driven examination of India’s current investment landscape. Despite near-term concerns about relative growth, both speakers see compelling long-term opportunities, particularly for patient capital. They advise investors to focus on financials, industrials, and consumption-driven sectors, while keeping an eye on policy shifts and the evolving role of IT services. The episode is forward-looking and constructive, suggesting that India’s next market phase—while challenging—could be rewarding for well-positioned investors.

Transcript

[A]

Welcome to Thoughts on the Market. I'm Chetan Aya, Morgan Stanley's chief Asia Economist.

[B]

And I'm Ridham Desai, Morgan Stanley's head of India Research and chief India Equity strategist.

[A]

Today, the biggest takeaways from our India Investment Forum in Mumbai from the shifting outlook for India's markets and flows to the sectors driving the next phase of corporate earnings and capex. It's Friday, June 12th at 7pm in

[B]

Hong Kong and 4.30pm in Mumbai.

[A]

Ruth Morgan Stanley's India Investment Forum took place in Mumbai last week and I was there with you. These events are a great opportunity to speak with investors who come across from the globe to attend. Now that we have had a few days to process the conversations, what stood out to you? What was the biggest shift in investor sentiment that you picked on?

[B]

So Chetan, I think it's been the case of a continuing story about India. Domestic investors look that they are bullish and foreign investors continue to stay rather cautious on the Indian markets. We could see that in the overall attendance. In contrast, I think domestic investors were looking for the next stock that they wanted to buy. They were seeking opportunities and there was a lot of interest in meeting companies. Before we get into markets, let me turn back to you from a macro side. India's growth story remains strong, but relative growth appears to be cooling. This is in contrast to markets like Japan, Taiwan, Korea and the U.S. how should investors think about India's macro positioning in that context?

[A]

So Riddhim, when I look at the macro data in India, they're all indicating a meaningful upside in the growth trend. So I'll just cite two key cyclically sensitive macro data points. One is the banking system credit growth and number two is the auto sales, particularly the passenger vehicle sales. So bank credit growth is growing as of the last biweekly data point that we got, it's growing at 17.7% year on year and car sales are growing at 27% in the month of May. But as you were mentioning earlier, the relative growth opportunity is a challenge for India and to just share the numbers on the earnings growth for the first quarter that we saw across the region. We saw Korea's earnings growth at 170%. We saw Taiwan's earnings growth at 48% year on year, Japan at 33%. The US has seen a growth of about 27% year on year. So in that context, when India is reporting 13% growth, it's becoming a challenge for investors to look for opportunities in India relative to other markets. That is that they are more focused on the other markets than India. So let me come back to you Riddam, staying with the investment implications. India projects stable valuations and strong corporate earnings, but its relative growth advantage has narrowed. How should investors reconcile this contradiction?

[B]

If I go back 35 years, as long as we have the MSCI index series and as far as I have been in this industry, this is the lowest relative multiple that India has traded at. And indeed growth last year was weak. But if you see QoQ, we have started to accelerate. The broad market earnings growth trajectory has shown a doubling in the quarter ended March over the quarter ended December. But it underscores the point you made about the relative growth complex. It's clearly not in India's favor and a lot of the capital in the world is short term oriented and it cares for what growth is going to come in the next quarter or two and that's the state of the market right now. However, what I would say is that equities is a quintessential long duration asset class. In the long run, what matters is terminal growth. I don't really think India's terminal growth has moved much. It remains far superior to a lot of other countries around the world and therefore I think this does present itself as a great opportunity for a long term investor. While the markets are digesting this relative growth disadvantage that India seems to have over the next, say three or four quarters and Rudham.

[A]

Another theme from the forum was policy action to attract capital. Policymakers announced a number of measures right as our conference ended and they aimed to withdraw withholding tax on debt investors also providing banks with an incentive to take up more dollar borrowing. How central are these measures to sustaining foreign inflows into Indian markets?

[B]

I think the measures taken by policymakers are very important. Probably amongst the most important policy actions this year, the removal of taxation on debt investors will make a difference. The provision for hedging to external commercial borrowings as well as to foreign currency deposits will make a difference. It should boost flows into India over the next 12 months. That said, these measures may not help the equity flows because the equity flows I think are going to depend on the relative growth situation. Now there's only that much India can do to lift its growth. It may accelerate to the high teens. So growth elsewhere needs to decelerate for equity investors to return. Or India needs to see the start of a major IPO cycle because in primary issuances foreigners do come to buy and that may change the net picture on FBI flows in the equity markets. But as far as the debt markets are concerned, I think the measures taken last week are going to prove to be quite potent and India should see the benefits accruing over the next few weeks and months. Chetan, from your perspective, how important is the policy backdrop right now in determining whether India can keep attracting long term global capital despite more competitive returns elsewhere in the short run?

[A]

So ridhim, I think the key focus for the policymakers had been with these measures to boost short term capital inflows to stabilize the currency. There has been a balance of payment deficit. So from that perspective the short term capital inflow augmentation effort as you mentioned has been the correct move. But from the long term perspective we think that the government needs to boost competitiveness of the Indian manufacturing sector because in the context in which AI could affect India's services exports, there is a need to augment more export receipts from the manufacturing sector. At the same time, if they improve the competitiveness of the manufacturing sector, it will help India to attract more capital inflows from long term investors for the purpose of fdi. And the good news is that the government is on it. They are taking a number of measures to boost that competitiveness in the manufacturing but we think that there is more action needed and hopefully in the intention to improve the balance of payment dynamics and exports from manufacturing sector we will see more actions from the government in the coming months.

[B]

Chetan, you've also written extensively about the structural capital spending cycle in Asia and India. Can you walk us through the key details here, especially in the Indian context?

[A]

I think the key story that we are observing it's sort of more or less global but definitely very clearly seen in Asia that there seems to be a super cycle for capex as well as industrial activity. This capex cycle is effectively driven by spending in four key sectors and that is AI and AI related digital infrastructure, energy, defense and industrial onshoring related capex. Now as far as India is concerned we are seeing investments in all the four segments that I just mentioned. In fact it's seeing a significant amount of activity in the space of energy and similarly we are seeing a lot of policy measures I mentioned earlier in terms of boosting manufacturing competitiveness. But at the heart of it is government's effort to onshore industrial supply chain. So India's CAPEX has also inflected higher. Having said that, the difference between India and let's say North Asia, which is Korea, Taiwan, Japan and China is that they are also a big player in the export market for capital goods. When there is global capex Cycle up, upswing happening. Nevertheless, India will see the benefit of this capex cycle in terms of its own growth push as well as improvement in productivity. So Ridhun, how would you think about the sectoral opportunity within the Indian markets?

[B]

We see a lot of interest in some of these sectors which you mentioned. But actually I would like to start off with financials. I see the banks in a very sweet spot. Balance sheets are in pristine condition, the interest rate cycle has dropped, which means margins for the banks have also bottomed and credit growth is finally accelerating. If this capex cycle unfolds like the way you are describing it, I think financials will stand to gain the most. And interestingly, the valuations are quite good, both on an absolute as well as on a relative basis. Also, of course, investors can go directly into those sectors which are doing this. Capital, spend energy to start with, semiconductors, fertilizers, data centers and aerospace. The only thing to note here is that not everywhere are the valuations attractive enough because in some cases the market has recognized the coming growth cycle and has started to price that in. So we have to be careful about the valuations. But I think financials and industrials are clearly great opportunities in the context of this capex recovery that India is likely to see in the coming five years.

[A]

And additionally, the most requested companies at the Summit Riddham were consumer sector companies. What do you think investors are looking for at this sector over others?

[B]

So Chetan, I think from a structural perspective, the Indian consumer is quite clearly the best place to be. In fact, I would say that it's the leverage that India enjoys over the rest of the world. The 1.5 billion people in this country are split across say 150 cohorts of 10 million each. And each of these cohorts have got different consumption opportunities. So depending on what product or service you're offering to your consumers, there's a market in India and which in nominal terms is growing between 10 and 15%. As we know, last year India accounted for something around 17 or 18% of global GDP growth, which means depending again on what you are selling to your consumer, India could be between 10 and 100% of your revenue growth. So India's consumer is something that hardly anybody can avoid. So in summary, Chetan, when I look at it from an investment opportunity, financials, industrials and consumption, not necessarily in that particular order, are probably the best places for investors to look at. However, IT services I think could be the dark horse. It's a sector right now which is disrupted or potentially disrupted by AI and there's a lot of confusion there, but I think as the dust settles on this it may emerge as one of the most interesting areas for investors to look at. So there's a lot of stuff in India happening right now. I think growth is accelerating, valuations are looking quite interesting, in fact the best that they've been in many, many years. Trading performance suggests that investors are not positioned at all and if things start looking up then India could be a very good market in the coming 12 months.

[A]

Ridhm, thanks for taking the time to talk. Great speaking with you Chetan and thanks for listening. If you enjoy thoughts on the market, please leave us a review wherever you listen and share the podcast with a friend or a colleague today.

[C]

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