India is unlikely to replicate the broad-based equity outperformance witnessed during the 2002-11 weak dollar cycle, with future gains expected to be more selective and fundamentally driven, according to a report by Equirus Securities.
The brokerage said India enters the current phase of dollar weakness from a significantly stronger starting position, marked by higher valuations, elevated foreign ownership and stronger market performance over the past decade.
“India’s opportunity is totally different from 2000s,” the report said, noting that the country now carries overweight investor positioning and above-average valuations, unlike the early 2000s when it was relatively under-owned by global investors.
According to Equirus, India has underperformed parts of the broader emerging market (EM) universe during the current dollar downcycle despite strong domestic fundamentals. The report noted that the Nifty has gained around 50 per cent compared with nearly 100 per cent gains in the MSCI EM index since the dollar peaked in September 2022.
“India’s next leg of outperformance is likely to be more selective and fundamentally driven than broad-based rerating witnessed over previous decade,” the report said.
The brokerage expects global capital flows in the current weak-dollar cycle to remain tilted towards beneficiaries of artificial intelligence (AI), electrification, manufacturing relocation and industrial capital expenditure, rather than producing a broad commodity-led supercycle similar to the 2000s.
As a result, Equirus believes India may continue to lag broader emerging markets in the near term.
“With momentum firmly behind AI-linked beneficiaries & commodity plays, we expect relative underperformance of India to EM continues with gains concentrated in select sectors like banking, Industrial, etc.,” the report said.
The report added that domestic factors could continue supporting Indian equities in the near term. Measures by the Reserve Bank of India to support the rupee, lower crude oil prices and strong domestic investor inflows are expected to lend support to markets through the festive season.
However, Equirus cautioned that a large pipeline of upcoming initial public offerings, including marquee issues such as NSE and Jio, could absorb market liquidity and moderate the pace of gains after Diwali.
On the global front, the brokerage said the current weakening of the US dollar differs from the 2002-11 period, as leadership is being driven more by AI infrastructure, power, manufacturing and industrial themes than by China’s commodity-intensive growth cycle.
The report maintained that India’s returns in the present cycle will depend more on earnings growth than valuation rerating, reflecting the country’s already premium positioning among emerging markets.