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Talking Heads – The AI angle to Indian equities

Daniel Morris: Hello and welcome to the BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads brings you insights and analysis on the topics that really matter to investors. In this episode, we’ll be discussing Indian equities. I’m Daniel Morris, Chief Market Strategist, and I’m joined today by Jayesh Gandhi, Head of Indian Equities. Welcome, Jayesh, and thanks for joining me. 

Jayesh Gandhi: Happy to be here.  

DM: We think about how emerging market equities broadly have performed over the last year. So far this year, it’s been a pretty good story. If we step back and look at the drivers of that performance, AI, artificial intelligence, is big part of it. In that sense, there are a lot of similarities with how the US market performed last year. We then look at Indian equities: they underperformed the rest of emerging markets. What are the factors behind that? 

JG: There were multiple reasons. Indian equities entered 2025 on high valuations just when economic growth and earnings momentum was slowing. And by middle of last year, we had a healthy correction, particularly in the small and midcap stocks. The biggest setback came because of geopolitics when the US imposed punitive tariffs on Indian imports totalling up to 50%. This came as a huge surprise as India was thought to be favourably placed to benefit from the reallocation of global supply chains and an increase in exports. This became the predominant reason for the selloff.  

Due to these tariffs and decline in imports and exports, we had a significant depreciation in the Indian rupee. This came at a time when the US dollar itself was weak and other Asian currencies were actually appreciating against the dollar. So, you had a situation for foreign investors where they were hit not only by the equity market, but also the currency.  

During 2025, the predominant global team was artificial intelligence, and India doesn’t have a large semiconductor sector. Countries like South Korea, Taiwan, China did exceptionally well and got capital at the expense of India.  

DM That’s a good recap of what happened in 2025. We’re not that far into 2026. So much has happened. If we look ahead, do you anticipate 2026 will be better for Indian equities? And importantly, what do you see as the key catalyst? 

JG: We do expect 2026 to be significantly better. For one, Indian policymakers have adopted a clear ‘whatever it takes’ approach to keeping the Indian growth engine intact. Policymakers started with a huge tax cut, followed by significant sales tax exemptions. Monetary policy was also favourable, cutting interest rates by over 100 basis points during the year and more cuts are likely to follow. There is significant easing in terms of lending rates as well as the availability of finance to boost corporate capital spending. The ongoing government initiative on boosting investment in high technology sectors, particularly semiconductors and renewable energy, has led to a significant improvement in investment flows in the sector.  

The result of all these policy initiative has been that the corporate profit growth in India has turned positive and Indian corporates are now expected to deliver double-digit mid-teens earnings growth for the next few years. The high profit growth definitely supports valuations.  

The final, but not the least, the key monitorable would be the trade deals with the two largest blocs globally: the EU and the US. If the news flow is to be believed, India is in the final stages of closing free trade agreements with both the blocs. This would be significantly positive for Indian equities and the Indian economy. Similarly, relations with China have improved significantly in the last three months and this is important considering that India is dependent on China for technologies such as EVs or renewable energy.  

There’s a supportive policy from the government to ensure that economic growth has remained intact,  leading to significantly better profit growth for Indian equities. If the geopolitics were to change, 2026 could be the year where we could see a significant turnaround in Indian equities.  

DM: Everything you laid out in supports for Indian equities for this year certainly is encouraging. However, we recognise how important AI is as a factor for markets. Is it too late for Indian equities? Have they missed the AI rally? And importantly, what about the outlook for AI in India? 

JG: India is a software powerhouse, and it is important to note that in terms of AI adoption, India is pretty much up there. India, for example, has the highest number of active users of LLM platforms across the globe. The large young population, which is tech savvy, and the availability of mobile data services and access to AI models and platforms at a cheap price is leading to large-scale adoption of AI across the country. We are seeing widespread use of AI tools and development of new digital models across enterprise, corporates. The government is implementing AI tools and platforms on its public digital infrastructure to boost governance and ease of doing business.  

What is encouraging is that the high use of data and AI services is leading to capital spending in the area of energy grid stability and renewable energy. It is also leading to huge investment in datacentres. 

On top of these AI tools, the Indian semiconductor industry has been fairly successful in boosting manufacturing and investment in electronics for self-sufficiency and to ensure that there’s availability of these technologies within the country. Government policies, incentives and international partnerships will ensure that India remains a hub for technology development, especially on the software services and productivity side.  

DM: That’s a really critical distinction. Ultimately, what’s going be potentially transformative is its use across the non-tech parts of the economy. And if India is at the forefront of that adoption, that does set up significant potential for growth. If I can summarise some of the other key points that you shared with us. You highlighted that 2025 was challenging because Indian equity started the year with high valuations. We had the surprise about tariffs and rupee depreciation, but [the market is] now better placed for better returns in 2026: support from domestic retail investors, from the government, monetary policy and adoption of AI. Well, Jayesh, thank you very much for joining me.  

JG: My pleasure and thank you for having me.  

DM That’s it for this week’s episode of Talking Heads. If you would like more information about our capabilities and Indian equities, please reach out to your BNP Paribas Asset Management contact or check out Viewpoint, our website for investment insights at viewpoint.bnpparibas-am.com. We recommend subscribing to Talking Heads on your favourite podcast channel such as YouTube or Spotify. You’ll receive your podcast episodes every week. If you like Talking Heads, leave us a positive review and a nice rating. You’ve been listening to the BNP Paribas Asset Management Talking Heads podcast with me, Daniel Morris, and Jayesh Gandhi, Head of Indian Equities. Please do join me next week. Until then, take care.