Stewart McAndie: Welcome, everyone. I'm Stewart McAndie, a member of the Ashmore UK client team. Thank you for joining today's Ashmore webinar titled: India, The Uncorrelated Allocation. Today, we're joined by Ben Underhill, an associate in Ashmore’s Macro Research team and Rashi Talwar Bhatia, who is CEO of Ashmore India, based in Mumbai and Lead Portfolio Manager for our India equity strategy, for a discussion of the key themes in the Indian equity market, and how Ashmore is positioned to take advantage of them. 

India is one of the few large equity markets without meaningful exposure to the artificial intelligence (AI) complex, and that diversification is increasingly the draw alongside valuations that are beginning to look attractive again, and the team are going to be discussing that. Any questions we do not answer live we'll follow up post the webinar. I'll start by handing over to Ben to set the scene. Over to you, Ben.

Ben Underhill: Hi, everyone. Thanks for dialling in. And again, special thanks to Rashi for braving the time difference and joining us for this update on India and Indian equities in particular.

Rashi Talwar Bhatia: Hi, Ben, thank you so much.

Ben Underhill: Hi, Rashi. Good to see you virtually. So, after what really was a five-year bull market and Indian equities peaked back in September 2024, the Indian equity market didn't participate in the broad emerging market (EM) outperformance we saw in 2025, and Indian equities have continued to tread water year to date in 2026, flat in local currency terms, but down in dollar terms. 

Over the period, unsurprisingly, perhaps we've seen sustained outflows from the Indian equity market by foreign investors. But in the last two to three months, inflows to Indian equities have begun to pick up again. So, Rashi, just to set the scene from your perspective, what have been the key reasons behind the Indian equity market underperformance of the last two years, and what's behind the tentative re-engagement we're seeing now by international investors in the market?

Rashi Talwar Bhatia: Yes, Ben, you said it really well, that we had five years of outperformance, ending at some point in September 2024, where we really saw the Indian market break away from the EM pack and give back significant outperformance, especially over the large Korean and Taiwanese markets, which are a large part of the EM market. Valuations had really become expensive. India was trading at 23 times one-year forward earnings for the large indices, which is about one standard deviation, actually one-and-a-half standard deviations above 10-year averages. Not only had valuations become expensive, but even expectations of growth were starting to exceed what was visibly deliverable by the Indian economy. And I think that by itself is the perfect recipe for things not going very well in the near future ahead. 

To add to it, India really does not have much to show in terms of the whole AI trade or the AI theme that seems to be playing out globally, or has played out globally over the last two years. And therefore, that essentially also led to a lot of money moving out of India, which was an expensive market and was starting to disappoint marginally on growth to markets like Korea and Taiwan, which were benefiting from the whole global AI trade as well. 

So just like you said, we saw a tremendous amount of outflow. We saw about $18.8bn last year, and in the first half of this year, we've seen another $30bn outflow. So, essentially, it was a rebalancing of sorts within EM, obviously, markets which had done not much and were trading at cheaper valuations, benefiting from a more expensive market, and the readjustment of growth expectations when it came to India, which led to this underperformance that we've seen so far.

Ben Underhill: For sure, but what feels like has been a relative weakness for India over the last 18 months as you've laid out, which is underexposure to the AI sector, somewhat ironically, I think, is now starting to look like its strength. As you say, in an investment climate where exposure to AI is really rising across global equity indices, investors now really need to be thinking about ways to diversify away from the theme into different, less correlated growth drivers. And India equities, to me, look like a great opportunity to do just that. 

So, continuing that line of thought, do you see the AI diversification theme as essential for a revival of Indian equity performance? Or should we just, dare I say it, forget about AI for a second and just focus on India's domestic earnings growth story as it is, which to me, looks as robust as ever really.

Rashi Talwar Bhatia: I think you're absolutely right. Why India underperformed the last two years is exactly what gives it the strength to outperform over the next couple of years going forward is the fact that India's story is India-centric, right? And that's more than what we can say for many of the other emerging market countries out there. When you look at India, 60% of gross domestic product (GDP) is actually private consumption. I mean, not surprisingly, we're a population of 1.4 billion. We are the largest country by number of people, 600 million below the age of 25. So, the demographic dividend is in the right shape for benefiting from it: domestic consumption in terms of two-wheelers, cars, women in the workforce, or increasing number of women in the workforce. Therefore, trends on beauty, skincare products, all of that is moving in the right direction. I think that continues to be India's story and continues to be why you invest in India. 

There are times when you become overvalued and expectations start running ahead of themselves and then that course-corrects. I think the reason why, having seen the kind of outflows in India, the market is actually flat, is that the growth story continues. We will still continue to deliver GDP in the range of 7%, and I think we will still be one of the fastest-growing countries by far. So that continues to be the attractive point for India. Like you rightly said, we remain uncorrelated to the global AI story, for sure. I think markets all have some correlation to some degree. You can never be perfectly uncorrelated, but I think we never benefited from the AI boom, so we can't hurt when it goes a little south, can we? So, I think, yes.

Ben Underhill: Oh, for sure, and India represents now a chance for investors perhaps to collectively get our heads out of the cloud in terms of AI returns, and ground ourselves in a classic EM demographically-driven growth story, which very much persists. Of course, the one area where Indian equities do have significant AI exposure is negative AI exposure via the software sector. We've seen software companies struggle, not necessarily in terms of earnings, but in terms of valuation and sentiment, all year. Not just in India, but also globally, including in the US. I mean, long semiconductors/short software has been an infamous trade this year. But in India, particularly after a significant de-rating in valuations in the software sector, how are we thinking about positioning in and around the sector? Is there a chance of a turnaround soon?

Rashi Talwar Bhatia: Ben, it's a great question, and I think everybody looks at the whole tech sector and paints it with the same brush. I think that's not the way to look at it. There is a deflationary impact on revenue which has come through because of AI. It is very clear that coding has become far more efficient, and productivity has improved by what is 20%, 25% to 30%, in that ballpark for a lot of the tech companies, because coding has become far easier. You still need people there to go through the code, check the errors, all that, but there is a benefit. 

Now, this benefit is being passed on to the customers, or let me put it, customers are asking for this benefit to be passed on to them. So, revenues are witnessing that level of deflation as we go along. Now, the point is there are some companies that started this process of passing the benefit of the AI productivity or using AI as in their coding to the customers nearly two years ago, right, one-and-a-half to two years ago. And some of them just started about six to eight months ago. Now, the normal typical order cycle lasts for about three years for these companies. 

If we look at it that way, some tech companies that are about 50% done with this journey – of passing through the deflationary benefit that they're seeing on their cost as revenue to the customer – some are just starting this process, right? Also, the ones that started giving these productivity gains to customers earlier won more orders. Therefore, while there was some loss of revenue, they gained some, and we literally ended up seeing some amount of flattish revenues, and slightly lower margins, so to speak. The question is to pick the right company that is two-thirds through this journey, has another third to go, and at the same time has gathered more momentum in getting better orders when they were starting this journey earlier on, and are working with a much leaner base of employees so they're not needing to retrench or rework or retrain so many of their people. 

Now, that's the whole idea of how we've made our allocation in the tech sector. We don't own any of the top four big names out there in India. We actually own some of the smaller names, the mid-cap names, as they would be called, because we believe they were leaner, they were nimbler, they started this process earlier, and therefore are working out of it faster and sooner and getting traction better. 

And I think the idea also is that valuations are heavily impacted. So, when these companies start coming out of this process, and valuations even just return to average, there is a lot of money to be made. So, like always, the pendulum swings, and right now in the tech sector, the pendulum has swung to the other extreme where everybody feels that the business will get completely disrupted. That's not the view. There is a benefit to it, but you still have to be able to adapt to the new change and are better to try and pick those that have making the better... You know, adapting better to this change.

Ben Underhill: Yes, so stay selective, but opportunities are arising. I mean, it sounds like – as AI disrupts and will continue to disrupt industries to varying degrees, creating both winners and losers –  it sounds like the argument for active management, particularly in a country like India, is perhaps more potent than ever.

Rashi Talwar Bhatia: From your mouth to God's ears.

Ben Underhill: Let's move on and address energy prices. India's dependence on energy imports is well known, and given its geography, particularly energy imports from the Gulf, Rashi, you actually flagged this as a key risk in our last webinar in February, one which obviously materialised very soon after. Since the Iran War started, we've had this expectation, and I think many market participants have, that we'd reach some kind of resolution before the US midterm elections at least. However, the chances of that are now looking slimmer, given recent rhetoric and escalation from both sides. But how has India been coping with the higher energy prices over the last sort of six months and indeed really shortages in crude oil and some refined products, and how does all of this impact the domestic macro conditions?

Rashi Talwar Bhatia: Yes, you're absolutely right. India is probably the largest country by its size that does not control its own sources of energy. That tends to be India’s Achilles’ heel. Now, in February when we recorded our last webinar, we had energy prices that were really low prior to this war. And then, suddenly the war skyrocketed oil to $130 per barrel. Actually, oil prices nearly doubled, from $65 to $130. India became everybody's favourite whipping boy for exactly that reason: “Oh, at 130, India hurts the most.” 

But yes, I think one needs to focus on what is the impact to GDP in a long-term basis and how does India get affected? You and I can speculate, and we can debate where the oil price will settle, when this war is over. But let me pick where we are right now, say $100, right, just for convenience sake. It's topical that we hit that three-digit number right now. The fact of the matter is that if we look at a $100 oil price, it has about a 2.1% impact to Indian GDP. If we look at where India’s GDP was just prior to the breakout of this war, it was humming along at about 8%. We had a significant amount of fiscal and monetary stimulus through the course of calendar year 2025. Things were looking good in the first quarter 2026. In March, let's say, we were just at that run rate of about 8%. So, if oil remains at $100 consistently per year, it will likely shave off about 2.1% of GDP for India. 

Now, keep in mind, unlike many countries in the west, oil prices in India are regulated. So, when they were at $65, we were paying much more. When they reach $130, we are paying much less. We don't see the same variation that people in the west do. The sticker price doesn't move around as much for us at the retail shop. So that, essentially, is a fiscal support provided by the Indian government when oil prices are really high, and it's a fiscal tax which they take when the oil prices are low. And with oil at $100, the kind of fiscal support that we're getting equals to about 1.2% of GDP as well. So, if you do the math by taking the hit at 2.1%, adding back the support that we're getting, we are back into the 7% zip code range for India if oil remains at about $100, right? That is lower than the current run rate we're moving at. 

We've all seen the recent GDP print that has come through, but oil hasn't been at 100% flat for a while, it's been volatile, and therefore it's been coming in below that. But let's assume the $100 number for purposes of this exercise. We would still come in at about a 7% GDP number for India, which is not too bad. Now, if you make a point to me that oil is going to be $130 and stay there for long, I will tell you, yes, India will see a larger contraction to its GDP growth. But as of today, my point is that when we see serious flareups, like we're seeing one right now with the Houthis and the attacks and skirmishes in the Strait of Hormuz, then we see this number. And when things settle down, it drops pretty dramatically. So, my contention would be that we should average out a number lower than this and it should settle down lower than this. But even if we're sitting at this number, that's the math we're looking at. So, my point to you is, yes, oil is a problem. At $100, it's manageable. If it gets to $130, it will hurt us more. But at this point of time, it's not something that is breaking our back.

Ben Underhill: I think it's true for India, as it is for the whole world, and a point we've been making throughout the crisis is that $100 oil in 2026 is not the same as $100 oil in 2022, and it's certainly not the same as $100 oil in 2010–2011. You need to be thinking about it in real terms. It's a risk that we'll all be monitoring very closely, and we'll see how it plays out from here. But it does sound like India, more than really any other emerging market, has got such a strong growth buffer really to propel earnings through even external shocks like higher energy prices. 

So, of course, one channel where higher energy prices have been felt in India is via the currency, but the currency has also had some key support in recent months through the foreign currency deposit scheme, which provides a meaningful buffer for the Government of India and for the Reserve Bank of India (RBI). This should continue providing some support to the currency. But what's your read-through of FCNR(B) deposits for the Indian financial sector in general, and specifically for the banks?

Rashi Talwar Bhatia: Let me address this currency depreciation issue a little before and then get to the FCNR (B). So, we typically run a 300 to 400 basis point differential between the Indian ten-year yield and the US ten-year yield, right? So ideally, we should see a depreciation of the currency, all things being equal to that degree. The thing is that the Indian rupee does not depreciate regularly by that number every year. We see nothing for three or four years, and then we see a sudden catch-up, and it depreciates in a step-function, step down. That's how we've seen it pretty much all through. 

I keep telling investors, that when I joined Ashmore back in 2007, the Indian rupee was at 36, and today it's at 96. So, we've gone from 36 to 96, and the numbers that we present as our track record builds that in as a headwind. That's something that needs to be built in and needs to be factored in when making our assumptions, and it is. Now, whenever we've seen this sharp depreciation, and this is, I think, the third time, if I'm not wrong, the Indian Government comes up with the FCNR issue, and essentially allows non-resident Indians to invest in India at a fixed rate, giving some comfort on the US dollar. We see a lot of banks providing leverage because this is in government bonds, so there is a sovereign guarantee to it. The government has raised $127bn this time, and this is essentially the largest amount that we have ever raised through the FCNR issue ever. The Indian government closed this window of the FCNR deposit one month early because they got more than they'd really bargained for internally. It was thought that $60–$70bn would probably be gathered, but it came in at about $127bn. Dollar deposits that have come in provides a certain amount of comfort on the currency. And every time we've seen such an issue happen, we've seen the currency stabilise for 24 to 36 months, somewhere in that range typically, which is what I think was the purpose. But a lot of this has come through the private sector banks. They're the ones that have gone out and marketed this to non-resident Indians. And not just the private sector banks, even the State Bank of India (SBI), which is the largest public sector bank out there, has gathered deposits from non-resident Indians. Therefore, it has improved their deposit base and deposit ratios, and created more liquidity in the system. 

Obviously, in the short term, it puts a bit of a pressure of a few basis points on the margins, on the net interest margins (NIMs), because you've gathered so much in your deposit base, but it is accretive for the bank. Now, think about it from the way that the Indian economy is growing at about 7%–7.5%. Credit growth is in the 18% ballpark region, they've gathered a reasonable amount of deposits, and asset quality continues to be pristine. So as far as this is concerned, I think it provides the right mix for private sector banks, and also probably SBI, and valuations are at decade lows for this sector. So, if you ask me, we like to find areas where prices are dislocated, and this is clearly one where fundamentals are strong, prices are dislocated, and the opportunity is there.

Ben Underhill: Thanks so much, Rashi. I'm just going to summarise quickly and then open the field for some questions. I think this has been an incredibly valuable, wide-ranging, also detailed conversation. But to me, it sounds like the core structural cogs of Indian GDP and earnings growth are still very much turning, as it were, and independently really of the global AI capex boom. 

And at a time where equity portfolios, I think, all over the world are crying out for more exposure to non-AI-driven growth. India offers one of the more compelling ways to achieve this, and now especially at more attractive valuations once again. And of course, risks from energy prices deriving from the Iran War are still very much live in India, but again, globally. However, with the banking sector now very liquid and seeing good credit growth against robust consumption and investment, it looks like a good time for investors who perhaps have been less engaged with the Indian market over the past two years to reengage and reconsider their exposure to India's domestically-driven growth. And with that, Stewart, I'll pass back to you for whatever questions have come through.

Stewart McAndie: Thanks very much, both. We do have one specifically about market cap. Rashi, I know a couple of years ago, we had a number of webinars throughout this whole period. You were quite vocal about how expensive small and mid caps were, and that you, within your strategy, significantly rotated out of small and mid caps, and I think your median market cap in the portfolio has quadrupled. Is there any comment you can make in terms of the differential between large cap, mid cap, small cap, and any thoughts as to how you're positioned going forward?

Rashi Talwar Bhatia: Yes, Stewart, great question. I will give you a bunch of numbers here, so just bear with me on that. The Indian market in, say, September 2024, and I have the exact multiples over here at this point of time, so we were trading at 21.6 times one-year forward earnings for the large caps. We're now at 18.1 times. So, this is, we're closer to the 10-year average multiple now, and this is for the large caps. The mid caps were trading at 34.2 times, and that's a two-standard-deviation above the average. And now they are at 28.1 times. So, they've corrected, but not back to a 10-year average. They're still at a 15% premium to the 10-year average. 

The small caps were trading at 24.1 times in September 2024, and are trading at 23.3 times right now. So, they are still extremely expensive, and they're trading at a 35% premium to the 10-year average. If you look at my portfolio versus where we were, say, in January this year, we have used this current correction to add selectively to some of the mid caps, which took a beating, and we felt either they got sold down because oil was high, or something else where we felt that they were getting mispriced by the correction. But we've still not found significant confidence to start adding to the small caps. We've added a few mid-cap names selectively, but we haven't gone in full hog. And that continues to be our investment discipline, that we look for good businesses that are getting priced where prices are dislocated. That can happen in the small cap, and when that happens in the small cap, we'll be there. It's just not right now.

Stewart McAndie: Thank you, and finally, I think there's a question about El Niño. Can you make a comment on that and the impact on your market?

Rashi Talwar Bhatia: You know, it's a really interesting one because the monsoons are so important for India, and rainfall is so important for India. We had a really dry June, and I think we were significantly below the long-term averages. We had a massive deficit for rainfall, but we had a really, really wet July, where it was a couple of days of being overflooded all over most of the country and was a surplus. And then August has been a bit slightly below, like 14–15% below. All in all, we, right now in September, ended the season about 13% below average. So, it doesn't look like a great number when you look at it overall. But the main thing to keep in mind is that July saw significant rainfall, and therefore the crop sowing that has happened during this season is down only by about 1.7%, right? 

Now, when it comes to rainfall, it's not just quantity, it's also timing, and it's also spatial. So, the spread across the country, India's a large country. The north and the west have seen abundant rainfall, and the north does a lot of the crop growing for the country, and the west has a large agri-belt as well. The south and the east have seen deficient rainfall. So, I think, like the tech sector, this is going to be another one where you can't paint everything with the same brush, and you have to look at areas which are going to benefit or not. I don't have a straight answer that it was good or bad. I think it has to be analysed, and it has to be looked at more carefully for which regions and areas. But so far, the crop sowing seems to be okay.

Stewart McAndie: Perfect. And just got one more question that’s come in. Do you know if the recent foreign equity inflows are coming from Indians living abroad or from foreign institutions?

Rashi Talwar Bhatia: Indians living abroad cannot be classified as foreign FII flows, right? There's a certain rule even when it comes to Indians living abroad. Okay, are we talking about non-resident Indians? Are we talking about Indians that are Indian origin? So again, big question.

Stewart McAndie: Or if you have any information or any more context on the flows that are coming from institutions.

Rashi Talwar Bhatia: Yes, the context is that it's more institutional money that has started to come through. So, you're seeing return of the foreign institutional investors because that's what we are typically seeing in terms of money coming through. And that was July and August, and you know, September is too early to say.

Stewart McAndie: Perfect, thank you, Rashi. That was very helpful. It certainly sounds like there was a bit of a stuttering inflow at the beginning of the year, and then it pulled back because of the oil price, and then it's beginning again. 

So great, thank you, Ben and Rashi, for your time. And to all attending, thank you for joining today's Ashmore webinar. If you have any questions, or would like any follow-up information, please contact your Ashmore representative. We'll be sending out a follow-up email with a webinar replay for your convenience. Feel free to share this with your colleagues that you think will find this valuable. This concludes today's webinar. Thank you.