From the CIO’s Desk – India Insights July 2026

This month’s commentary moves between two time horizons. The near term has been encouraging: a strong quarter for earnings and domestic activity, and a welcome rotation back into Indian equities as global capital reconsidered its concentration in AI hardware. But our focus is squarely on the medium term, where the tougher questions are: whether earnings hold once base effects fade, how IT services disruption spills into urban consumption, and whether India’s balance of payments can absorb a less favorable capital flow environment. Given this backdrop, we explain our portfolio positioning and tilt toward strong execution, domestic demand, and structural export share gainers. Enjoy!

Market Review

The MSCI India Index returned 1.78% (in USD terms¹) in July, driven by a return of foreign buying alongside resilient domestic demand. By sector, IT was the standout by a wide margin, followed by Real Estate and Consumer Discretionary, while Industrials and Utilities were the principal laggards. Foreign portfolio investors (FPIs) turned net buyers of Indian equities for the first time since February, purchasing approximately USD 2.1 billion in July and snapping a four-month selling streak.² Even so, FPIs remained net sellers for the calendar year to date, with cumulative 2026 outflows of roughly USD 27 billion.³

The defining development of the month was a sharp reversal in the year’s dominant market narrative. A global selloff in AI and semiconductor stocks prompted a rotation of capital toward Indian software services firms, businesses with little direct exposure to AI hardware. Indian IT, the weakest-performing sector for much of 2026, consequently posted its strongest monthly performance in roughly six years. The move was reinforced by a resilient June-quarter (Q1 FY27) earnings season, with steady deal wins and margins across the larger IT names, and by the US Federal Reserve’s decision to hold rates at its late-July meeting. Working in the opposite direction, a renewed escalation in the US-Iran conflict pushed Brent crude more than 20% higher over the month, reversing much of June’s decline and keeping energy costs and inflation firmly in focus.⁴

On the macro front, headline consumer price index (CPI) inflation accelerated to 4.38% y/y in June, up from 3.93% in May, the highest reading since December 2024 and above the 4% midpoint of the Reserve Bank of India’s target band, as the earlier energy shock fed through to fuel and firmer food prices.⁵ Business activity cooled in July, with the manufacturing PMI easing to 53.5 (vs 54.2 in June), while the services PMI fell more sharply to 53.3 from 57.4, its softest reading since early 2022, on slower domestic demand and stronger competition.⁶ Consumption held firm, with gross Goods and Services Tax (GST) collections rising 15.4% y/y to INR 2.11 trillion (~USD 22 billion), the fastest pace of growth in 14 months.⁷ On the trade front, the India-UK Comprehensive Economic and Trade Agreement (CETA) took effect on July 15, eliminating tariffs on approximately 99% of Indian exports to the United Kingdom.⁸

Portfolio Commentary & Outlook

A Lesson in Volatility

India sat on the wrong side of the technology trade for most of the year, but July’s rebound in software services offered the first evidence that leadership is beginning to broaden.

The focus for this month centered on the wave of global tech earnings and on what the market’s violent swings continue to teach us about how to be positioned. The pattern of the first half of the year was, in a word, indiscriminate: technology was bid up while almost everything else was sold, with little regard for the underlying businesses. India sat squarely on the wrong side of that trade, one of the weakest markets in the region even as its domestic fundamentals held firm. What has changed over recent weeks is that the market has begun to recognize a distinction we have drawn for some time, namely that the larger prize may lie less with the companies building the AI than with the companies using it to strengthen their own franchises.

July offered the first evidence of that shift reaching India, as a global selloff in AI and semiconductor stocks sent capital hunting for alternatives and Indian software services, the year’s most unloved sector, staged their sharpest monthly rebound in years. The rebound is welcome. But a single strong month, or even a single strong quarter, is not what shapes our thinking. This has been a fairly strong quarter for India, both in terms of earnings and domestic activity, and precisely for that reason the more useful lens is the medium term, where the questions are more consequential than the headline returns suggest.

Jobs: The Question Beneath the Cycle

A leaked exam paper triggered protests that were really about the scarcity of secure, well-paid work, and job creation remains the variable that matters most over our horizon.

The month’s defining domestic story had little to do with markets. A leaked exam paper forced the cancellation and re-sit of the national medical entrance examination, sat by more than 2 million students, and the anger that followed spilled well beyond the exam itself.⁹ Youth-led protests ran through June and July across Delhi, Mumbai, and Bengaluru and ultimately cost the education minister his post. What began as a demand for a fair examination became a broader protest about the scarcity of secure, well-paid work, with graduate unemployment among the young running close to 40% among 15- to 25-year olds and ~20% among 25- to 29-year olds, and a generation that has invested years in education finding too few opportunities on the other side.¹⁰

We dwell on this because it sits at the center of India’s medium-term investment case. This is an economy with an enormous, aspirational population seeking upward mobility, and its stability rests on whether the opportunities to achieve it are genuinely created. Job creation, more than any single quarter’s earnings, is the variable that matters most over our horizon. Where a large population is left waiting, restlessness can harden into unrest, and that backdrop would color how we judge the durability of everything else.

Earnings and the IT Services Risk

We would caution against extrapolating a single strong quarter: IT services disruption is real and already underway, and the risk that matters most is its spillover into urban consumption.

The nearer-term question is whether earnings can sustain their recent strength. We would caution against extrapolating a single robust quarter: a soft base and the lagged benefit of last year’s rate cuts have flattered reported growth, and the durability of the numbers from here is the real test.

The sector we are watching most closely is IT services, where July’s sharp rebound masks a disruption that is, in our assessment, real and already underway. The bounce was driven by global flows rotating out of AI hardware rather than by any resolution of the pressures the sector faces. In conversations with senior management across the larger services companies, price concessions on the order of 25-30% and headcount reductions are increasingly treated as a given. We expect this pain to play out over the next four to six quarters.

What concerns us most is not the sector’s own earnings but the spillover into urban consumption. IT services have long underpinned India’s urban middle-class income base, and as the sector slows and retrenches, the question is how that feeds through to urban demand. This quarter was robust, but the next three to four are the real test.

This also shapes how we approach valuations in the space. With deflation working through services pricing, we think these names oscillate within a fairly defined band – cheap enough to buy in the high single digits of earnings and worth selling in the low-to-mid teens. Our discipline is to buy near the bottom of that range and sell near the top, not to chase a re-rating driven by flows. Cognizant, the only IT services position we own, was bought on that basis, at 6 to 7x earnings and while heavily shorted in the market; an in-line quarter was enough to send it nearly 40% higher from its lows, a reminder of how much bad news these names can already carry.¹¹

The Real Constraint: Balance of Payments

Our single largest medium-term concern for India is external: a shrinking cushion from IT services exports and capital inflows leaves less room for error on the balance of payments.

Stepping back, our single largest medium-term concern for India is external. We think India’s growth will increasingly be constrained by its balance of payments. For much of the past decade, current account deficits were comfortably financed by capital inflows, but we are less confident that holds from here. On the portfolio side, foreign investors may prove net negative rather than net positive, and private equity is likely to be a seller. On the trade side, we expect the value of IT services exports to decline by 15- 20% over the next 2-3 years, while the rapid growth of global capability centers (GCC), which added a substantial foreign-exchange buffer over the past several years, looks likely to plateau or fade. Set against a still-present current account deficit, that combination leaves less room for error. Higher crude, which resurfaced as a risk in July, feeds directly into the same vulnerability, since energy remains India’s largest import.

Portfolio Positioning

Tighter liquidity favors companies with real execution and strong balance sheets, and our positioning is concentrated in the parts of the market least exposed to the external and disruption risks we’ve described.

We regard the current tightness in liquidity as healthy rather than threatening. When money is no longer free, discipline returns: freebies and discounts fade, market share can no longer be bought cheaply, and the advantage shifts to companies with real execution and strong balance sheets. Market share won in a hard market tends to stay won. Those are the conditions we want to be investing in, and the businesses we want to own are the ones compounding through them.

Against that backdrop, our positioning is deliberately concentrated in parts of the market whose fortunes rest on execution and structural domestic demand rather than on the global technology cycle. Markets are forward-looking, so the discipline is to sell into strength and buy into weakness, and to own share gainers rather than businesses that depend on a shortage persisting.

Our largest thematic exposure is to non-IT exporters, i.e. the manufacturing export story, where India is winning share as global supply chains diversify. Healthcare is a further significant allocation, spanning both hospital operators and pharmaceutical manufacturers, where demand is durable, and pricing power is real. Large-cap financials carry a comparable weight, our preferred way to participate in domestic growth with balance-sheet strength to compound through a tighter liquidity environment. The remainder sits largely in a small group of consumer internet platforms we have owned for 4-5 years, the clearest domestic adopters of AI, whose scale and proprietary data should allow them to widen their lead as they put that data to work.

The portfolio is built around India’s domestic and manufacturing engines – the areas least exposed to the external and disruption risks set out above. Our job is to remain patient for dislocations that let us add to conviction at better prices.

Tidbits from the Ground

Here, we capture some on-the-ground observations from our India team – notes and signals that serve as practical barometers for demand, sentiment, and trends.

A Changing Tide in Quick Commerce

Zepto has paused its IPO plans. The company is now reportedly raising just INR 10 billion (~USD 105 million) against an originally planned INR 80 billion (~USD 840 million).¹² This matters because Zepto has been the most aggressive operator on pricing, with estimates suggesting its prices sit 7-8% below Blinkit’s (Eternal’s quick commerce platform), with no platform fee, and free delivery on orders above INR 99 (~USD 1).¹³ A materially smaller capital raise changes the math on how long that posture can be sustained.

The biggest pushback we hear is that the current aggression is unsustainable. Zepto is seeing strong same-store growth, with materially higher orders per store than Blinkit, but its cost per order remains broadly comparable. That combination suggests the growth is being bought rather than earned, and a thinner war chest makes it harder to keep buying.

Swiggy, by contrast, has prioritized profitability even at the expense of growth. Blinkit has arguably delivered the strongest outcome of the three: improving profitability without sacrificing growth, staying aggressive on store additions and geographic expansion, and largely avoiding a price-led strategy in favor of strengthening product assortment.

We think quick commerce remains early in its penetration curve in India, with a long runway ahead. Convenience-led consumer behavior tends to be sticky: once customers adopt a faster way to shop, they rarely revert. As adoption broadens, the category should continue to expand. With Zepto’s reduced ability to burn capital, Blinkit stands to benefit on both fronts – faster growth and further improvement in unit economics.

AI Data Centers: India’s Next Infrastructure Supercycle?

For years, India’s data center industry was viewed as a straightforward beneficiary of cloud adoption, digital payments, and data localization. AI has changed that narrative. What was once a digital infrastructure story is rapidly becoming one of the country’s most significant industrial infrastructure opportunities. Operational capacity has expanded roughly 4-5 times, from around 375 MW in 2020 to 1.5-1.8 GW today.¹⁴ More importantly, industry estimates point to over 4.5 GW of announced and planned capacity over the next five years, which is several times the existing operational base and a clear signal that the industry is entering an entirely new phase.¹⁵

India is emerging as one of Asia’s most attractive destinations for AI infrastructure, not because it’s the cheapest place to build, but because it offers a compelling combination of policy support, domestic demand, and scalability. The government’s proposed tax holiday until 2047 for eligible foreign cloud service providers gives an unusually long policy runway. Coupled with one of the world’s fastest-growing AI and cloud markets, ample land for multi-hundred-megawatt campuses, a mature engineering ecosystem and deep electrical manufacturing capabilities, India offers a platform that few other markets can match for hyperscalers looking to deploy AI infrastructure at scale.

The announced investment pipeline already reflects these structural advantages, and the opportunity extends far beyond data center developers. Every 1 GW of capacity requires approximately USD 6.5-7 billion of infrastructure investment.¹⁶ If the announced 4.5 GW pipeline materializes, it implies roughly USD 30-32 billion of domestic infrastructure spending before the value of AI chips, servers and networking equipment is included.¹⁷ That investment will flow across the broader industrial ecosystem, including transformers, switchgear, UPS systems, generators, cooling equipment, liquid-cooling technologies, electrical panels, EPC contractors, renewable energy developers, and grid infrastructure providers. In many ways, AI data centers represent one of India’s largest emerging industrial capex cycles rather than simply another technology theme.

The investment opportunity will ultimately be determined by execution rather than capital availability. As we’ve seen in other regions globally, reliable power is likely to become the defining bottleneck. Cooling is emerging as an equally strategic consideration, as higher AI rack densities, rising temperatures and water stress accelerate the shift toward liquid cooling and more water-efficient thermal management systems.

The market today largely values data centers as digital infrastructure, but we think that framing is incomplete. AI is creating one of India’s largest industrial investment cycles, where the most durable value creation is likely to accrue not only to data center operators but to the companies supplying the enabling infrastructure. India already possesses three of the four ingredients required to become Asia’s AI infrastructure hub: policy support, a rapidly expanding demand base, and the ability to build at scale. The missing piece is infrastructure readiness. The companies that solve those bottlenecks are likely to capture the greatest share of value over the coming decade.