Goldman Sachs Expects FII Return To Lift Banks, Domestic Themes In H2

Goldman Sachs expects the next phase of India's equity market recovery to be led by banks, large-cap stocks and domestic-facing sectors rather than the high-growth pockets that dominated earlier rallies, as foreign investors gradually return after record selling in the first half of 2026.

The global brokerage said in a report that overseas investors remain significantly underweight on Indian equities following unprecedented outflows earlier this year. However, a stabilising macroeconomic backdrop, improving valuations and easing global headwinds could encourage a gradual return of foreign capital.

Rather than calling for a broad-based bull market, Goldman expects a more selective recovery driven by stock selection and sector rotation.

Banks Top In Preference List

Goldman believes financials offer one of the most attractive opportunities in the current market.

According to the brokerage, banks are well positioned to benefit first if foreign institutional investor (FII) inflows strengthen, having already borne the brunt of heavy foreign selling earlier this year. It added that bank valuations have become more reasonable and that lenders are better placed than non-banking financial companies (NBFCs) due to stronger credit growth, healthier asset quality and improving liquidity conditions.

The brokerage also expects investors to rotate from growth stocks towards value-oriented companies while preferring large-cap stocks over midcaps, which it believes still trade at relatively expensive valuations.

Improving Macro Environment

Goldman noted that Indian equities had a difficult first half of 2026, with the Nifty declining about 9% and underperforming most regional peers.

However, it believes much of the valuation correction has already taken place. The brokerage cited lower commodity prices, a more stable rupee, resilient domestic growth and expectations of relatively better second-quarter corporate earnings as factors supporting a recovery.

While it expects the broader earnings downgrade cycle to continue because of the delayed impact of higher crude oil prices and earlier currency weakness, Goldman said certain sectors continue to offer healthy earnings prospects.

Domestic Themes Favoured

Sectorally, Goldman remains overweight on banks, energy refiners, technology, media and telecom (TMT), defence and utilities. It recently upgraded utilities to an overweight stance.

On the other hand, it is relatively cautious on exporters, downstream oil companies, metals and certain material stocks, while expecting domestic-oriented businesses to outperform if the rupee remains stable and bond inflows improve.

The brokerage also identified tourism as a recovery theme, saying easing cost pressures and resilient domestic travel demand could support earnings in the sector during the second half of the year.

Recovery Likely To Be More Selective

Goldman said foreign investors had used India as a funding market earlier this year, resulting in record equity outflows. Since mid-June, however, selling pressure has eased, with modest FII buying returning, led primarily by financial stocks.

According to the brokerage, this shift is significant because global investors remain underweight on India, leaving room for allocations to increase if confidence continues to improve.

Overall, Goldman expects the second half of 2026 to be characterised by a more nuanced recovery, with market leadership shifting towards reasonably valued, domestically focused large-cap companies rather than momentum-driven segments.