A cut in long-term capital gains (LTCG) tax is unlikely to revive foreign inflows into Indian equities on its own, Bernstein has said. The brokerage also sees limited benefit for India from any near-term pause in the global artificial intelligence (AI) trade.
Bernstein said a recovery in India’s growth and earnings cycle remains critical. Without that, tax relief may support sentiment only briefly.
“A sharp 1–2 day market rally that a cut would trigger may actually be used to offload positions,” said managing director at Bernstein.
Why tax relief may not be enough
Bernstein said an LTCG cut would be desirable for a capital-starved economy. It could also improve after-tax returns for long-term investors.
But the brokerage does not expect it to trigger sustained foreign institutional investor (FII) inflows by itself. Foreign flows into India have historically depended more on growth, earnings momentum and currency stability than on tax rates alone.
Investors waiting to reduce exposure may use any post-announcement rally to sell. Bernstein therefore sees an LTCG cut as a sentiment positive, not a durable market catalyst.
Limited upside from AI unwind
Bernstein also sees limited scope for India to gain materially from a pause in the global AI trade. Indian equities currently offer neither the return profile nor the scale of investment opportunities attracting global capital into AI-linked assets.
India’s AI adoption is still at an early stage. That limits the immediate risk to white-collar employment and services exports. But it also means Indian markets are not direct beneficiaries of the global AI investment cycle.
Global AI capital has largely gone into semiconductor manufacturing, chip design, hyperscale data centres and power infrastructure. India has limited direct participation in these areas.
Indian IT companies are beginning to use AI tools in their offerings. However, Bernstein said this shift remains early. Clients are also seeking efficiency gains, which has added pricing pressure.
What matters more
For Bernstein, the primary drivers for Indian equities remain domestic growth, corporate earnings and India’s relative attractiveness. A supportive tax change or relief from an AI unwind cannot substitute for these factors.
The brokerage said India’s macroeconomic backdrop is deteriorating. It cited persistent crude oil and supply-chain pressures, weaker monsoons, lower reservoir levels, firming yields and geopolitical uncertainty.
Earnings upgrades have also been limited. Bernstein said consensus FY27 earnings estimates rose just 0.2 per cent over the past three months. Several sectors continue to face downgrades.
Nifty target cut
Against this backdrop, Bernstein cut its December 2026 target for the Nifty 50 to 25,000 from 26,000. The revised target implies upside of about 8.1 per cent from current levels.
The brokerage’s target is based on 18 times FY28 earnings. It assumes FY28 earnings grow 9 per cent over FY27.
Bernstein cautioned that a further 4 to 5 per cent rally would take Indian equities out of their current valuation comfort zone. That would bring valuations closer to the recent average of about 18.2 times forward earnings.
