From the CIO’s Desk – India Quarterly Q2 2026

India spent the first half of 2026 as the market the world forgot, a strong economy left behind while capital chased a narrow band of AI winners. The second quarter began to close that gap, yet the deeper questions only sharpened. This edition sits with the one that matters most: not whether AI dents the IT sector, which it will, but what it means for India’s hiring cycle, and through it for the consumption engine beneath the whole market. Fresh from channel checks across the country, we set out why we read India’s underperformance as an opportunity rather than a warning, and how the portfolio is positioned for it.

Market Review

The MSCI India Index was up 10.20% (in USD terms¹) over Q2 2026, driven by signs of de-escalation in the Middle East conflict and a sharp fall in oil prices, alongside resilient domestic growth, which together outweighed continued foreign outflows. Sector-wise, Real Estate and Industrials led the performance over Q2, while IT and Energy were the worst-performing sectors.

Foreign portfolio investors (FPIs) remained net sellers of Indian equities across the quarter, withdrawing approximately USD 15 billion, which brought cumulative first-half 2026 equity outflows to around USD 29 billion, already well in excess of the USD 18.9 billion withdrawn in all of 2025 and the heaviest on record.² The June figure (-USD 5.2 billion) masked an inflection, however, with FPIs turning net buyers in the second half of the month for the first time since late February.³ As in prior quarters, domestic institutional investors absorbed the bulk of the selling. Notably, as the global AI-driven rally wobbled, Indian equities behaved as a relative safe haven – the Nifty 50 outperformed the MSCI Emerging Markets Index in June by the widest margin since November, and the India VIX fell for a third consecutive month to its lowest level since February.⁴

The quarter’s gains were front-loaded in April (+9.17%) after a US-Iran ceasefire offered the first meaningful de-escalation of the conflict. In May, the index gave back a modest 0.58% even as the oil backdrop improved sharply, but June added 1.53%, with Financials, Real Estate, and Health Care leading. However, IT fell sharply in June after Accenture, a global bellwether consulting and IT services firm, cut its full-year revenue guidance mid-month, crystallizing concerns around AI-driven disruption to traditional services businesses and dragging index heavyweights to multi-year lows.

On the macro front, the quarter’s standout was the release of full-year FY26 GDP, which surprised to the upside at 7.7%, up from 7.1% in FY25 and comfortably retaining India’s position as the fastest-growing major economy.⁵ Growth was led by manufacturing, which expanded 10.7% over the year, alongside sustained strength in services, while Q4 FY26 growth of 7.8% pointed to continued momentum into the fiscal year-end.⁶

Activity indicators stayed in expansion but softened toward quarter-end. Manufacturing PMI eased to a 3-month low of 54.5 in June (vs 55.0 in May), while services PMI slipped to 57.3, its weakest reading since January 2025.⁷ Headline consumer price index (CPI) inflation rose to 3.93% y/y in May, from 3.48% in April, a fifth consecutive monthly increase and the highest print in the rebased 2024 series, though it remained below the RBI’s 4% target. Food inflation accelerated to 4.78%, and a first round of fuel price hikes in four years lifted transport costs.⁸ The Reserve Bank of India held the repo rate at 5.25% at its June review, maintaining the neutral stance held since late 2025.

Portfolio Commentary & Outlook

India was one of the region’s notable underperformers in the first half of 2026, held back by persistent foreign selling and a soft rupee even as domestic growth held firm. We regard that underperformance as an opportunity rather than a warning. The first half rewarded an exceptionally narrow set of AI-related winners, and a period of consolidation in those leaders is precisely what should allow leadership to broaden into the parts of the market we find most compelling. The wider regional rotation and the broader debate on the pace of AI adoption are covered in our Asia commentary; here we focus on the two questions that matter most for India, and where we have come out.

AI and the Repricing of India’s IT Sector

As noted in the Market Review, Indian IT was the quarter’s clear laggard, selling off sharply as the market extended its “shoot first, ask questions later” approach to AI disruption of the offshore services model. The trigger was a modest guidance cut from Accenture, a global consulting bellwether, but the underlying fear is structural: that agentic AI and cheap, off-the-shelf models will erode demand for traditional, labor-arbitrage IT services.

We continue to believe the wholesale repricing overstates the near-term reality. Enterprise adoption of frontier models takes time; there is a process that cannot be shortcut, spanning evaluation, security and compliance review, and integration. Enterprises are also increasingly reluctant to route their most valuable proprietary data through large external models at the cost of their own competitive edge, which argues for a slower and more selective diffusion than the sell-off implies, and for a continued role for the services firms that help clients build and run AI on private and proprietary infrastructure. In that sense, much of the correction in IT has reflected positioning and sentiment rather than a step-change in fundamentals.

We do not, however, dismiss the structural pressure, and our recent channel checks give it substance. On the road across India in early July, a consistent message emerged from the global capability centers (GCCs) and technology firms we met: management teams are being set productivity targets of around 30% to 40% over the next two years. Some of that will come through process improvement and some through underlying business growth, but a meaningful part will come through headcount rationalization. In the near term, cost discipline from these headcount cuts should protect margins even as revenue growth slows, which is modestly supportive for the listed IT names. But the more important implications are for the wider economy, to which we turn next.

The Question That Matters: India’s Hiring Cycle

For India, the question that matters is less the quarter-to-quarter fortunes of the IT index and more what the AI transition means for employment, and through it, for urban consumption. The signal from our channel checks is worth flagging. It is not only IT that has turned cautious: across the non-banking financial companies and banks we met, hiring intentions were notably subdued, with few firms looking to add materially to headcount.

Set against that, the current growth picture remains strong. This quarter’s corporate numbers were robust, with consumer staples a standout, reporting high-single-digit volume growth and mid-double-digit value growth, a healthy signal for underlying demand. The tension we are watching is therefore one of timing. Today’s growth is solid, but the question is what happens roughly twelve months out, when some of the firms that have hired aggressively in India over recent years, the GCCs and technology employers in particular, begin to retrench. India’s young, adaptable workforce and entrepreneurial culture leave it relatively well placed to navigate this transition, as we have written before, but a turn in white-collar hiring is a genuine medium-term risk to the consumption cycle, and one we would rather position ahead of than react to.

Where We See Opportunity: Our Positioning for H2 2026

The disconnect between India’s robust real economy and a market left behind by a narrow AI rally is, in our view, the opportunity, and the nuanced pockets of value sit precisely in the parts of the market the AI trade has overlooked. Consistent with the caution on the hiring cycle above, our portfolio is tilted toward exporters and defensives, complemented by select consumer and internet opportunities. We continue to favor disciplined, well-capitalized operators over subsidy-driven land grabs. The broader, cross-market case for these consumption and internet franchises, which we believe are trading at crisis prices even as their earnings compound, is set out in our recent Asia Consumption paper.

Consumer Discretionary spans two legs. The first is precision-manufacturing exporters, led by Sansera Engineering, an auto-components and precision-engineering business diversifying into aerospace and defense, alongside Sona BLW Precision Forgings, an EV-driveline components specialist. Both are direct beneficiaries of the China +1 supply-chain diversification and India’s new trade agreements. The second leg is the consumer internet and domestic-consumption franchises we have long owned: Le Travenues (Ixigo) in online travel, FSN E-Commerce (Nykaa) in beauty and personal care, and Eternal (Zomato) in food delivery and quick commerce, complemented by select consumer-electronics retail and branded hospitality names geared to the aspirational, tier-2 and tier-3 consumer where penetration is still low.

Industrials is our clearest expression of India’s capital-expenditure and electrification cycle. India’s power demand is rising structurally as manufacturing, data centers, and electrification build out, and years of underinvestment in generation and grid capacity now have to be met with a sustained, multi-year spend, much of which flows to a relatively concentrated set of equipment makers and contractors with the order books to match. This is where we are anchored, in businesses geared to power generation, transmission, and grid infrastructure, whose visibility extends well into the coming years. Hitachi Energy India, in grid and transmission equipment, is a good example: a direct beneficiary of the grid buildout with a long runway of committed orders. We complement this core with the specialty-plastics exporter Shaily Engineering Plastics, which extends our precision-manufacturing-exporter theme into the sector, geared to global healthcare and consumer supply chains rather than the domestic capex cycle.

Healthcare remains our core defensive allocation. Demand is resilient and largely uncorrelated with the AI anxieties weighing on the metros, while rising penetration, still low by global standards across both hospital capacity and formal pharmaceutical consumption, provides a long structural growth runway. We favor operators that pair that defensiveness with genuine compounding, reinvesting strong cash flows into capacity rather than relying on stale brand premiums. Narayana Hrudayalaya captures this well: its low-cost, high-efficiency hospital model is now scaling beyond India, funded by its own cash generation. Our broader healthcare exposure spans hospitals and pharmaceuticals, forming the defensive spine of the exporter-and-defensive tilt set out above.

Financials is held with a quality bias rather than at index-like breadth. We concentrate in the highest-quality private-sector lenders, where we see the setup for a multi-quarter earnings recovery: cumulative RBI rate cuts are transmitting through to cheaper funding, asset quality is holding firm, and credit growth is improving off a subdued base. We prefer franchises with the deposit strength and underwriting discipline to compound through that cycle rather than the weaker lenders most exposed if credit costs turn. ICICI Bank, our single-largest position across the whole Portfolio, is the clearest expression of this: a leading private bank combining scale, funding advantages, and consistent execution. The remainder of the book spans small-finance banking and life insurance, extending the same quality bias across the sector.

Overall, we enter the second half optimistically. The narrow, AI-led market of the first half is precisely the environment we expect to give way to broader leadership. India’s underperformance has left a strong economy trading at a discount to its own history, and we are positioned accordingly. Our philosophy carries us through periods like this. We buy great businesses run by strong executors; we insist on quality and valuation discipline over momentum; and we are patient where conviction is high, knowing that our best outcomes have compounded over years rather than quarters.