Should you still invest in India?

ELI5/TLDR

Everyone has decided India is a write-off and the AI-soaked rest of the world is the only place to put money. Deepak Shenoy’s argument is that this exact mood — rupee falling, foreigners fleeing, nothing to invest in — has shown up roughly every few years, and each time the gloom peaked just as the actual numbers were quietly turning up. He thinks the data is already turning now (earnings, capex, credit), but the price hasn’t caught up yet, so invest in phases over a four-to-five-year horizon rather than betting on a bottom. Keep a slice abroad for diversification, but don’t yank most of your money out at a weak rupee.

The Full Story

The bear case, stated honestly

Shenoy starts by building the case against his own conclusion, and it is a good one. The rupee touched 97. India imports crude (no domestic oil to speak of) and gold ($72bn of gold last year, from a country that produces none), both of which drain dollars and pull the rupee down further. Foreign portfolio investors have pulled out more than 2.5 lakh crore over roughly eighteen months — more than they put in over the prior two or three years.

The narrative knot tightens from there: India “has no AI,” and worse, AI threatens its biggest export, IT services. Foreign capital prefers Taiwan and Korea (chips), China (rare earths), and the US (where all the innovation supposedly is). Add adverse taxation for foreigners, pollution, infrastructure gaps, a government that spends on subsidies rather than capex, and even FDI reversing as foreign-backed startups list and their backers cash out.

The way it sounds is that you should take all your money out of India.

His co-host Shray’s challenge is fair: none of this is wrong, so why are we recording an optimistic episode?

Why the gloom inspires him

The answer is pattern recognition, earned over decades. Shenoy walks through the graveyard of “India is finished” moments — 2002, early 2009, 2013, 2016, 2020, 2022 — and the punchline is the same each time: the narrative was worst exactly when the underlying data had started improving.

If everybody says India is bad, that’s when my trigger thing says okay, we’re getting somewhere here.

The clearest example is 2002. Post-9/11, post-Enron, post-IT-bust, India looked miserable. Bharti Airtel IPO’d into that gloom. Then the market rose 75% the next year, because the real economy — IT growing 30-40% a year, banks recovering — was fine. The news cycle stayed bearish into late 2003 while the market climbed. His framing for this is the old line about a market “climbing a wall of worry.”

2013 is his personal turning point: the taper tantrum sent the rupee from ~57 to 68 (a ~20% fall), overnight rates were jacked toward 12%, even liquid funds lost money. Rajan’s FCNR deposit scheme — offering hedged dollar returns of ~6.5% when the US paid 0.25% — pulled in $20-30bn and stabilized things. (Shenoy notes that exact trick won’t work today: US rates are no longer near zero, and India’s economy is far bigger.) The market bottomed and turned in December 2013, and he didn’t disbelieve it that time.

He also gets candid about the symmetry. In August 2024 he held a NASDAQ-100 position that had lagged everything in India, and out of “guilt/shame” quietly exited a “terrible four-five year experiment.” That was peak pessimism on global exposure — and now the table has flipped to “NASDAQ or nothing, and we are the nothing.”

What the data is doing now

The macro reversals he points to:

Crude: down from ~120 to under $90. The Iran-Israel-US “Hormuz” supply blockage looks like it’s de-escalating, partly because surging US bond yields (30-year at 5.2%) made the war too expensive to sustain. India is also pushing to de-link from imported crude over a 3-year horizon — domestic exploration (subsidized so $60 oil still gets drilled), coal, EV batteries, PLI-funded storage.
Gold: India holds ~30,000 tons but imports ~800 tons/year (~14 lakh crore). He argues a few percent of that hoard could be recycled internally, and that ETF/digital-gold holdings (imported and stored idle) could be allowed to be lent out.
Earnings: the median profit growth on the Nifty 500 is around 17%. Both hosts find that almost implausibly high. Some base effect, but the March quarter is showing “amazing signs.”
Capex and credit: the headline. Industrial capex effectively died between 2014 and 2025. The cause was the bankruptcy code (IBC) — it ended the old game where industrialists borrowed, defaulted, settled, and got the rest written off. Once Bhushan Steel actually lost its company through bankruptcy, even healthy borrowers stopped doing capex for fear of being lumped in with defaulters. Bank credit growth to industry fell from 15% (2013) to zero/negative, and has now climbed back to 16% as of March 2026. Personal credit, throttled by the RBI in 2024, is also back near 16%.

All of these things have changed the nature of capex completely.

On AI and foreign flows

Shenoy thinks both anti-India AI assumptions are wrong. “India has no AI” is, at worst, a 2-out-of-10, not a zero — and every technology destroys some jobs while creating many more (typewriters to computers, STD booths to mobile phones). The fear of IT and FMCG getting gutted is, in his read, second-order overreaction. The next generation of AI-native companies will partly be built in India.

On FDI, he explains the mechanical reason for the outflow: VC fund structure forces managers to return capital to investors when portfolio companies (Swiggy, Zomato, et al.) list — they can’t redeploy like a mutual fund. That money comes back, but with a lag. High US fixed-income yields have also pulled pension money out of risky emerging-market bets and into US Treasuries. He expects this to reverse over time, especially if AI-infrastructure spending abroad slows.

The advice

Two views — “India is doomed” and “everything but India” — and the truth is in between. India “manages to disappoint both the optimist and the pessimist at all times” (he attributes the line to Ruchir Sharma).

On going abroad: yes, keep 10-20% non-India for genuine diversification (you may need dollars for a kid’s foreign education), but do it as a systematic plan, not a lump sum at a weak rupee. His warning on currency: the rupee looks 10% undervalued on the REER measure (which he distrusts because its China-heavy trade weighting understates the rupee — India’s services trade with the US and lower-than-US inflation argue for appreciation). If you send money out at 95 and the rupee recovers to 85, you eat a ~10% currency loss on top of everything.

On deploying cash now: this is peak pessimism, but peak pessimism is not the bottom — it can last three or four months and narratives can still worsen. So invest in phases. His own trigger for real conviction is when the market makes a new all-time high while everyone insists it can’t last (it nearly hit one in January 2026 before the Iran war knocked it back). For instrument choice: go as broadly diversified as possible — flexi-cap within equities, multi-asset if you can’t decide across asset classes. Don’t try to pick large vs mid vs small; make it the fund manager’s problem.

Key Takeaways

The reliable contrarian signal Shenoy uses: when perma-bearish commentators start getting front-page headlines and TV airtime, that’s the trigger to go check the data — the narrative is worst near the turn.
“Peak pessimism” historically arrived while the real economy was already improving — 2002 (market +75% the next year), early 2009, Dec 2013, 2020, 2022.
Peak pessimism is a sentiment top, not necessarily a price bottom — it can persist 3-4 months. The two are not the same, which is why he advises phased investing.
India’s industrial capex was dead from ~2014 to 2025 largely because of the IBC bankruptcy code, which killed the old borrow-default-settle-writeoff game and made even good companies capex-shy.
Bank credit growth to industry: 15% (2013) → ~0%/negative for a decade → 16% (March 2026). Personal credit similarly back to ~16% after the RBI’s 2024 clampdown eased.
Median Nifty 500 profit growth is running ~17% (some base effect), considered very high versus history.
Rajan’s 2013 FCNR scheme worked because of the huge rate gap (India ~12% overnight vs US ~0.25%) and pulled in $20-30bn; the same trick wouldn’t work now because US rates aren’t near zero and India’s economy is larger.
FPI outflows: >2.5 lakh crore over ~18 months — larger than the inflows of the prior two-three years.
FDI is reversing partly for a mechanical reason: VC fund structure forces managers to return capital to LPs when portfolio companies list (they can’t redeploy like a mutual fund), creating a lagged outflow.
The rupee may be ~10% undervalued on REER, which Shenoy distrusts: its China-heavy merchandise-trade weighting understates the rupee, while India’s services trade with the US and below-US inflation argue for appreciation.
Currency double-whammy risk of investing abroad now: send rupees out at 95, and if the rupee recovers to 85 you lose ~10% in rupee terms even if the foreign asset is flat.
Crude was ~6-7% of GDP and far more painful in 2008 ($140 oil forced a 1pp rate hike); the dependence is structurally lower now, and India is de-linking via domestic exploration, coal, and EV/battery storage.
Petrol/diesel prices rose for the first time in ~5 years — feels like a 10% jolt, but spread over five years is ~2%/year, i.e. modest inflation.
Recommended portfolio posture: 10-20% non-India for diversification done systematically; within India, broadly diversified flexi-cap or multi-asset rather than picking the cap segment; horizon framed as 2026 → 2030.

Claude’s Take

This is a clean, honest version of the oldest move in macro punditry: “sentiment is terrible, therefore buy.” What saves it from being a platitude is that Shenoy does the work — he builds a genuinely strong bear case first, then points to specific, checkable data (the 16% credit growth number, the 17% Nifty 500 median, the crude reversal) rather than vibes. The historical pattern is real, and his framing that peak pessimism precedes the price bottom (not equals it) is more intellectually honest than most permabulls bother to be.

The caveats are the usual ones. “Climbing a wall of worry” is unfalsifiable in the moment — every bottom looks like this, but so does the start of every leg down, and survivorship bias means he remembers 2002 and 2013, not the times the gloom was correct and early. The “this time is different” objection gets waved away rather than engaged: AI genuinely is a structural threat to IT services, and “it’ll create 10x more jobs” is asserted, not demonstrated. The capex-revival story leans on government PLI and a nuclear “breakthrough” mentioned in passing with no detail. And there’s the conflict of interest — this is a fund manager whose PMS and mutual fund both sell exactly the conclusion he reaches, stated explicitly in the closing pitch.

Score 7. Substantive, data-anchored, and refreshingly willing to steelman the other side, which is rare in this genre. Docked for the unfalsifiable core, the hand-wave on AI’s real risk to IT, and the built-in sell-side incentive. Worth the listen as a sober counterweight to the “everything but India” consensus, not as a forecast to bet the house on.