Goldman Sees Foreign Investors Driving India Stock Market Recovery

Goldman Sachs believes foreign investors could become the key catalyst for India's next stock market rally after months of heavy selling left global funds significantly underweight on Indian equities. Improving macroeconomic conditions, stabilizing markets, and easing external risks are expected to support renewed foreign inflows during the second half of 2026.

The brokerage noted that overseas investors sold nearly $30 billion worth of Indian stocks in just three-and-a-half months during the first half of the year. India was widely used as a funding market as geopolitical tensions, elevated oil prices, and weakness in the Indian rupee weighed on investor sentiment. However, since mid-June, foreign investors have returned as modest net buyers, with financial stocks attracting the bulk of inflows, indicating that the worst of the outflow cycle may have passed.

Goldman highlighted several factors supporting a more positive outlook, including lower crude oil prices, a stabilizing rupee, resilient domestic economic growth, and improving expectations for second-quarter corporate earnings. The investment bank maintained its June 2027 Nifty target of 26,500, implying roughly 10% upside from current levels after the benchmark index corrected around 9% during the first half of the year.

Indian equities had lagged many Asian peers earlier in 2026 as investors shifted toward lower-valued markets such as China and South Korea. Japan also continued attracting capital due to corporate governance reforms, while Taiwan benefited from sustained demand linked to artificial intelligence and semiconductor growth. India's relatively premium valuations made it more vulnerable during the regional risk-off environment.

Despite lingering concerns over high valuations and the possibility of additional earnings downgrades, Goldman expects improving domestic demand to encourage investors to price in a recovery before corporate earnings fully rebound.

The bank favors value stocks, large-cap companies, and domestically focused sectors, particularly banks, which experienced approximately $12 billion in foreign selling over the past four months. Goldman also sees opportunities in utilities, energy refiners, tourism, and defense, while remaining cautious on export-oriented businesses and richly valued mid-cap stocks.