Bernstein stated in its October 19 report that sharp market growth over one or two days, which could trigger a reduction in the Long-Term Capital Gains Tax (LTCG), is likely to be used for asset selling. Furthermore, the broker lowered its target for the Nifty 50 index from 26,000 to 25,000.
This reduction was driven by the deteriorating macroeconomic situation, persistent pressure from crude oil prices and supply chain issues, as well as the lack of a significant increase in corporate earnings expectations.
Bernstein analysts emphasized that the reduction in the long-term capital gains tax alone is insufficient to ensure a sustained inflow of funds from Foreign Institutional Investors (FIIs). According to their estimates, the revised Nifty target implies a potential growth of about 8.1 percent from the current level. However, the broker warned that a further 4–5 percent rise would push Indian stocks out of the comfortable valuation zone, bringing them closer to recent averages of around 18.2 times future earnings.
Forecast Update and Influencing Factors
In the October 19 report, analysts led by Venugopal Harre, Managing Director at Bernstein, factored in a valuation multiple of 18 times earnings for the 2027–2028 fiscal year (FY28), which they estimate will grow by 9 percent compared to FY27. The analysts noted: 'Closer to the end of March, we priced in expectations of conflict resolution within a few weeks and lowered the P/E to 18.5x with a target of 26,000. Since the conflict continued almost all year, and long-term crude supply issues are probable, we have further lowered our target to 25,000.'
Tax Incentives and FII Flows
Bernstein believes that lowering the long-term capital gains tax would be desirable for an economy facing a capital shortage, but it cannot independently generate a stable inflow of funds from FIIs. The recovery of the growth and earnings cycle in India remains critically important. Harre added that 'sharp market growth over 1–2 days, which triggers a reduction, can be used to sell positions.'
Previously, Finance Minister Nirmala Sitharaman had stated that the government was prepared to consider proposals to abolish the LTCG tax during consultations before the upcoming budget meeting. Additionally, Bernstein sees limited opportunities for India to gain significant benefit from a temporary pause in Artificial Intelligence (AI) trading. In the broker's view, Indian stocks currently offer neither the return profile nor the investment opportunities that would attract global capital to AI-related projects.
Macroeconomic Hurdles
Bernstein noted that the macroeconomic environment in India is worsening, and last month's sharp market correction reflects these difficulties. The broker sees limited scope for government support, and the benefit from Goods and Services Tax (GST) is likely to weaken as base effects set in and prices rise. Additional risks include weaker monsoons and significantly lower reservoir levels ahead of next year.
Harre also pointed out that 'returns are strengthening, while crude oil and commodity prices remain a problem. The geopolitical situation is also unfavorable, with limited visibility on the US trade deal and persistent risks related to Russian oil supplies, despite exemptions. Against this backdrop, the rapid macroeconomic growth of the previous quarter is unlikely to repeat.'
Earnings Outlook
Earnings forecasts are also not optimistic. Bernstein reported that consensus earnings forecasts for FY27 saw only a marginal increase of 0.2 percent over the last three months, while several sectors continue to face rating downgrades. Margins remain a key short-term risk. Although companies raising prices to cover increased raw material costs may protect profitability, this could come at the expense of reduced demand and growth, according to the broker.
Given the surge in crude oil prices to $110, limited reserves, and constant supply chain pressure, challenges are exacerbated. Bernstein also predicts limited potential for further rupee strengthening, estimating that the currency can only rise another 3–4 percent, with more than half of that growth already realized. The impact of currency fluctuations will vary across sectors: a weakening rupee may support rupee-denominated profits for export-oriented industries such as IT, healthcare, and automotive, but simultaneously increase production costs for import-dependent businesses.