By Craig Mellow

Investors still see India as the country of the future, with its massive young population and expanding middle class powering 6%-plus annual economic growth indefinitely. The present doesn't look so hot, though.

"Between high valuations and a growth slowdown, it's super difficult to put money to work here," says Venkat Pasupuleti, a partner at Dalton Investments.

The iShares MSCI India exchange-traded fund has slumped 7% from a peak in September. That's bad enough to get lapped by China, which has soared by 30% over the same time frame. But it isn't bad enough to make India a great buy again.

The average forward price/earnings ratio for Indian stocks remains around 21, compared with a 20-year average of 17, notes Peeyush Mittal, an India-focused portfolio manager at Matthews Asia.

One reason is that the denominator -- corporate earnings expectations -- is shrinking. Analysts' profit estimates have fallen 9% over the past six months marketwide, says Vishnu Gopal, an equity analyst at T. Rowe Price.

That reflects Prime Minister Narendra Modi's government curbing its massive infrastructure spending program with an eye to reducing budget deficits. "Expectations for budgetary capex growth are down to 10% a year from the high-teens," Mittal says.

The Reserve Bank of India, or RBI, hiked its key interest rate from 4% to 6.5% from 2022 to 2024, only starting to ease this January.

"Fiscal policy is tightening, and real interest rates are at a 15-year high," notes Arthur Budaghyan, chief emerging markets strategist at BCA Research. "No wonder the economy is slowing down."

What isn't slowing down is Indian retail investors' enthusiasm for stocks, fueled by new 401(k)-style automatic payroll contributions. Regulators' recent charges that U.S. trader Jane Street has been manipulating highly leveraged derivatives markets has yet to cool the public's ardor, which is inflating valuations, Pasupuleti says. "You have 70 million to 80 million new investors who have no idea what a bear market is," he observes.

With more than 5,000 names on offer, stockpickers can still find winners in India. Banks, which make up 30% of the market, trade relatively cheaply and should benefit as central bank easing boosts animal spirits. The RBI has cut to 5.5% so far. "We have a healthy overweight in the financials," says Daniel Graña, an emerging markets portfolio manager at Janus Henderson. "Penetration is still low, and you're seeing an increasing sophistication of products."

Less loved are the IT outsourcers that account for some 10% of Indian market cap. Shares in industry powerhouses Infosys and Tata Consultancy Services have sunk double-digits this year as corporate customers delay tech spending and the artificial-intelligence threat looms. "IT services has been one of our favorites, but they're going through a really challenging phase," Dalton's Pasupuleti says.

Graña is also high on telecom leader Bharti Airtel, despite a 22% run already this year. "This is an indirect way of playing the new economy," he explains. "Data usage is exploding."

Pasupuleti's top idiosyncratic pick is One 97 Communications, parent of "fallen fintech angel" Paytm. Its shares have nearly tripled over the past 14 months after cratering 80% after its initial public offering. "We're seeing a return to profitability there," he notes.

Everyone agrees that India and its stock market have a bright future, eventually. It may take some crash and burn for domestic investors to deliver prices that global fund managers like, though. "We're looking for more capitulation in the retail frenzy," BCA's Budaghyan says.

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July 18, 2025 21:31 ET (01:31 GMT)

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