India could be the next big beneficiary as AI trade cools: Nilesh Shah on markets, flows and FY27 prospects

Nilesh Shah, MD of Kotak AMC, says India is on the cusp of a major market shift – one where global money could flow back into Indian equities as the AI-driven rally in global markets resumes and domestic profits revive.In an interview with ET Now, Shah said that India currently has limited or no representation in the AI ​​business, but this could prove to be an advantage if the theme goes global. “We have not participated in the global AI boom. But if that trend reverses, India could become a strong anti-AI allocator,” he said, adding that global investors could re-enter India if domestic profits rise in double digits.

The profit cycle may return soon

India has been in a cycle of downward earnings improvements for almost 15 months, with growth stuck in single digits. But the second quarter of FY25 marked a shift with a 2-3% increase in net profit, fueling broad market optimism.

Shah believes the real acceleration will happen in FY27: “Markets want consistency. FY27 has a better chance of delivering a meaningful earnings performance,” he said.

Will global uncertainty help India?

Shah highlighted three global triggers that could reshape capital flows:

1. Devaluation of the dollar

Trump’s policies and global uncertainty increase the risk of a dollar depreciation. A weaker dollar is already driving gold and commodity prices higher. “If even a fraction of the US$30 trillion of foreign assets disappears, India will be a major beneficiary,” he said.

2. Weakening of American institutions

Shah expressed concern about the Federal Reserve’s declining independence, saying institutional weakness could damage investor confidence and trigger reallocations to emerging markets.

3. Unjust US tariffs on India

The current 25% tariff on selected Indian export products remains a major sticking point despite exemptions for countries such as Poland.
“If these tariffs disappear, our growth could get an immediate boost,” Shah said.
If rates remain in place, the RBI may intervene with liquidity support and interest rate cuts.

India’s Domestic Strength: The Bigger Story

• Despite external uncertainty, India remains a structural growth story, driven by reforms:
• India is the fourth largest global economy and the fifth largest manufacturer.
• On an incremental basis, India contributes 8 to 9% to global GDP growth (18% in PPP terms).
• Reforms by RBI, SEBI, IRDAI, PFRDA and pre-Budget initiatives push for better ease of doing business and Atmanirbharta in strategic sectors.

The government’s next steps

Shah says the government:

• Continue implementing reforms to stimulate domestic demand.
• Put an end to Inspector Raj, which is hurting SMEs and even listed companies.
• Use India’s large domestic market to open new export access globally.
• Mitigate the impact of tariffs on sectors such as gemstones, jewelry, textiles and aquaculture.

What should investors do now?

Shah says there may be temporary corrections in India due to the global decline in AI, but local fundamentals will ultimately prevail.

“India remains a meaningful long-term strategy. Our ROE is strong, valuations have normalized and once earnings reach double digits, capital flows will return.”