New Delhi [India], July 13 (ANI): Despite recent market volatility, foreign investor inflows into Indian stocks could recover because overseas investors are still holding fewer Indian equities than usual after months of heavy selling, according to a Goldman Sachs India Strategy report.

The report said global investors have significantly reduced their investments in Indian equities this year. If confidence in India's domestic economic recovery improves, it could lead to fresh foreign investment.

'Foreign selling is likely over, and sentiment should turn incrementally favourable on improved domestic outlook and ultra-light foreign positioning,' Goldman Sachs said in its India Strategy report titled 'Room To Recover'.

Explaining the basis for its view, the brokerage said, 'Global equity investors used India as a funding market through 1H 2026, selling a record ~US$30bn of Indian equities in a short span of 3.5 months. They have turned net buyers since mid-June, albeit modestly so, with $2bn inflows, largely in Financials.'

According to the report, overseas investors are still significantly underweight on Indian equities, leaving considerable room for allocations to increase.

'With large underweight positioning towards Indian equities, global funds have ample room to neutralize their exposure. While a continued earnings downgrade cycle and still less attractive growth-valuation mix relative to other markets will be key investor concerns, improving visibility on domestic recovery will act as a catalyst for investors to start pricing in the anticipated recovery in advance,' the report said.

Goldman Sachs said the improving domestic outlook, rather than external factors alone, is expected to support investor sentiment over the medium term.

The report noted that India's macro environment had improved in recent weeks due to resilient domestic growth and expectations of healthy corporate earnings despite a broader earnings slowdown.

'As we enter 2Q 2026 results season, analysts are estimating another healthy quarter with 12% yoy profit growth for MSCI India ex-commodities... reflecting India's domestic resilience. The dislocations between expected and actual oil-shock impacts on profits will yield tactical opportunities for investors to trade,' it said.

Goldman Sachs also retained a constructive view on Indian equities, saying recent market weakness has created room for a recovery.

'After a large equity drawdown in 1H, we see room to rebound from the lows,' the report said.

The brokerage added that it expects a shift in investor preference toward value stocks, large-cap companies and sectors that saw the heaviest foreign selling in the first half of the year as overseas flows gradually return. (ANI)