India's Next Stock Market Rally Could Be Driven by Foreign Capital, Goldman Sachs Says

Foreign investors could become the primary driver of the next rally in Indian equities, according to a new report from Goldman Sachs. The investment bank argues that after a period of record selling left global funds significantly underweight the market, improving macroeconomic conditions and lighter positioning have created room for fresh capital inflows.

A Reversal of Flows

In the first half of 2026, overseas investors sold approximately $30 billion worth of Indian equities over a three-and-a-half-month period, Goldman Sachs noted. During this time, India was used as a "funding market" as geopolitical tensions, rising oil prices, and currency weakness soured sentiment.

However, the trend has started to reverse. Since mid-June, foreign funds have returned as modest net buyers, with a notable interest in financial stocks. This shift suggests that the most intense phase of the selling cycle may have concluded, according to the bank's analysis.

Improved Economic Outlook

Goldman Sachs cited several factors contributing to a more constructive outlook for India in the second half of the year:

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• Easing crude oil prices from their war-driven highs.
• Stabilization of the Indian rupee.
• Resilient domestic economic growth.
• Improving expectations for second-quarter corporate earnings.

Based on these developments, the bank reiterated its June 2027 target for the Nifty 50 index of 26,500, which implies an upside of approximately 10% from current levels. The benchmark index had corrected by about 9% during the first half of the year.

Sector Rotation and Valuations

While India's premium valuations made it vulnerable to a regional risk-off trade earlier this year, domestic institutional investors helped cushion the market by absorbing foreign outflows. Looking ahead, Goldman Sachs anticipates a rotation into value stocks, large-cap companies, and domestically focused sectors.

The bank highlighted that banks stand to benefit most as foreign positioning normalizes, following outflows of roughly $12 billion from the financial sector over the past four months. It also expressed a favorable view on utilities, energy refiners, tourism, and defense, while remaining cautious on exporters and richly valued mid-cap stocks.