<p>Sanjay Bhandarkar wrote to your columnist after his piece on the falling rupee (May 2026) and his note made your columnist pause for reflection. Mr Bhandarkar’s argument, in essence, was that foreign investors may not be rejecting India as much as rejecting the India that is visible to them. The headline index, he suggested, is full of yesterday’s champions. The more interesting India may lie elsewhere. That is a useful distinction. The Nifty (and Sensex) is dominated by large banks, IT services companies, FMCG firms, energy companies and other mature businesses. Many are outstanding companies, but they are no longer undiscovered stories. Their growth is steady rather than dramatic and their valuations have assumed a degree of accomplishment that recent earnings have struggled to justify. For a foreign investor comparing India with other markets, particularly in a world excited by artificial intelligence and semiconductor supply chains, this creates a problem. India looks expensive and the most visible listed India does not always look new. </p><p>But beneath the index, something else is happening. Mid and small cap companies are now where the domestic growth story is being repriced. This is not true of every company and certainly not of every fancied stock. There is plenty of froth in this space and many businesses have run ahead of fundamentals. But the broader theme is real. Capital goods, defence, electronics, railways, power equipment, industrial services, auto components, logistics, renewable energy and select domestic financials are all part of a newer investment cycle. These are businesses connected to infrastructure creation and supply chain relocation. They are not large enough to dominate the headline index, but they may constitute the next leg of India’s growth. The defence sector is a good example. For years, it was spoken of in flaky terms but it is now becoming a commercial story. Defence exports have risen, private sector participation has expanded and several listed companies have built meaningful order books. The same is true, in different ways, of capital goods. power, transmission, railways, ports, data centres, renewables and manufacturing all require equipment, engineering and project execution. The companies that benefit are often mid-sized rather than mega-cap.</p><p>This also changes how one should think about the rupee. A weaker rupee is not, by itself, good news. It raises the cost of imported energy, capital equipment and intermediate goods. It can worsen inflation and damage sentiment. But a correction in the real effective exchange rate can improve competitiveness for companies that export, substitute imports or become part of global supply chains. For a software services giant, the currency benefit is familiar but no longer transformative. For a defence component maker, an engineering exporter or a speciality manufacturer, it may be more meaningful. This is where Mr Bhandarkar’s point about foreign investors becomes interesting. Foreign institutions prefer liquidity, scale and the comfort of known names. The large Indian companies offer those things, but they do not always offer enough growth relative to valuation. The smaller companies may offer the growth, but they often lack liquidity and the ability to absorb large foreign flows. That explains the paradox. Foreigners may sell the secondary market but still show interest in IPOs, where they can get meaningful exposure to new companies in size. </p><p>In other words, India may be going through an index problem rather than only an India problem. The benchmark indices are not wrong. They simply reflect what has already become large. They do not fully capture what is becoming important. Every generation of markets has this lag. Yesterday’s disruptors become today’s defensives. Today’s smaller challengers become tomorrow’s index constituents. Over time, the index changes, but it changes slowly. That does not mean buying mid and small caps blindly. It means reading the market differently. </p>
<p>Sanjay Bhandarkar wrote to your columnist after his piece on the falling rupee (May 2026) and his note made your columnist pause for reflection. Mr Bhandarkar’s argument, in essence, was that foreign investors may not be rejecting India as much as rejecting the India that is visible to them. The headline index, he suggested, is full of yesterday’s champions. The more interesting India may lie elsewhere. That is a useful distinction. The Nifty (and Sensex) is dominated by large banks, IT services companies, FMCG firms, energy companies and other mature businesses. Many are outstanding companies, but they are no longer undiscovered stories. Their growth is steady rather than dramatic and their valuations have assumed a degree of accomplishment that recent earnings have struggled to justify. For a foreign investor comparing India with other markets, particularly in a world excited by artificial intelligence and semiconductor supply chains, this creates a problem. India looks expensive and the most visible listed India does not always look new. </p><p>But beneath the index, something else is happening. Mid and small cap companies are now where the domestic growth story is being repriced. This is not true of every company and certainly not of every fancied stock. There is plenty of froth in this space and many businesses have run ahead of fundamentals. But the broader theme is real. Capital goods, defence, electronics, railways, power equipment, industrial services, auto components, logistics, renewable energy and select domestic financials are all part of a newer investment cycle. These are businesses connected to infrastructure creation and supply chain relocation. They are not large enough to dominate the headline index, but they may constitute the next leg of India’s growth. The defence sector is a good example. For years, it was spoken of in flaky terms but it is now becoming a commercial story. Defence exports have risen, private sector participation has expanded and several listed companies have built meaningful order books. The same is true, in different ways, of capital goods. power, transmission, railways, ports, data centres, renewables and manufacturing all require equipment, engineering and project execution. The companies that benefit are often mid-sized rather than mega-cap.</p><p>This also changes how one should think about the rupee. A weaker rupee is not, by itself, good news. It raises the cost of imported energy, capital equipment and intermediate goods. It can worsen inflation and damage sentiment. But a correction in the real effective exchange rate can improve competitiveness for companies that export, substitute imports or become part of global supply chains. For a software services giant, the currency benefit is familiar but no longer transformative. For a defence component maker, an engineering exporter or a speciality manufacturer, it may be more meaningful. This is where Mr Bhandarkar’s point about foreign investors becomes interesting. Foreign institutions prefer liquidity, scale and the comfort of known names. The large Indian companies offer those things, but they do not always offer enough growth relative to valuation. The smaller companies may offer the growth, but they often lack liquidity and the ability to absorb large foreign flows. That explains the paradox. Foreigners may sell the secondary market but still show interest in IPOs, where they can get meaningful exposure to new companies in size. </p><p>In other words, India may be going through an index problem rather than only an India problem. The benchmark indices are not wrong. They simply reflect what has already become large. They do not fully capture what is becoming important. Every generation of markets has this lag. Yesterday’s disruptors become today’s defensives. Today’s smaller challengers become tomorrow’s index constituents. Over time, the index changes, but it changes slowly. That does not mean buying mid and small caps blindly. It means reading the market differently. </p>
