Summary
India went through a difficult equity market phase in 2025, marked by underperformance versus global peers, sustained FPI outflows, and currency weakness. However, improving valuations, stabilizing INR, falling global cost of capital, and resilient domestic growth indicators provide grounds for cautious optimism as we enter 2026. While near-term sentiment remains sensitive to global trade developments, especially with the US, the medium-term outlook is supported by earnings growth, lower crude prices, and easing monetary conditions. The environment appears conducive for selective alpha generation rather than broad-based beta
Global Economy
Global markets have remained buoyant while India lagged in 2025, partly due to sustained foreign portfolio outflows and currency depreciation. However, cost of capital in developed markets is beginning to fall as western central banks cut rates, improving global liquidity conditions. The US remains a key allocator of global capital, and absence of a clear trade deal with India has weighed on sentiment. A positive resolution on trade could potentially reverse this, supported by a strengthening INR and renewed capital flows.
Domestic Economy
Despite global headwinds, India’s macro fundamentals have remained resilient. GDP growth in Q2 FY26 stood at 8.2%, led by services and manufacturing, prompting institutions like RBI and ADB to raise full-year FY26 growth projections above 7%. The economy has managed higher US tariffs reasonably well, aided by diversification of export markets and preferential trade agreements with regions such as the EU, UK, and others. INR depreciation, while initially negative for sentiment, has supported export competitiveness and margins in value-added sectors such as textiles, electronics, and seafood.
Lower crude oil prices remain a key positive, with every $1 decline estimated to save India roughly $1.3 billion. This supports fiscal stability, inflation control, and consumption. Inflation remains benign, giving RBI room to ease further.
Earnings Growth and Valuations
Earnings growth has held up better than market performance. Large-cap earnings have grown around 10%, leading to a corresponding valuation correction as markets remained range-bound. High-growth segments witnessed sharper valuation corrections, in some cases exceeding 30%. Overall, Indian equities have seen a meaningful valuation reset—estimated at nearly 35% relative to global peers—improving both absolute and relative attractiveness.
Flows and Liquidity
2025 witnessed sustained FPI outflows, but the pace has moderated, with recent days seeing net buying as the INR stabilizes at new levels. Domestic mutual fund flows have remained positive, though below peak levels seen in late 2024, reflecting subdued sentiment rather than macro stress. Market positioning appears light, and volumes remain low, suggesting potential for sharper participation once sentiment improves.
Primary market supply has been elevated, with fundraising levels among the highest as a percentage of market cap. While this may continue in the near term, issuance intensity is expected to follow cyclical peaks and troughs, with the next peak likely a few months away
Risks
- Absence of a favorable US trade deal impacting investor sentiment
- Continued volatility in INR and global capital flows
- Heavy primary market supply pressuring secondary markets
- Short-term volatility due to high-beta nature of growth investing
Opportunities
Improved valuations, falling global and domestic interest rates, stable inflation, and resilient earnings growth create an environment conducive for selective stock picking. High-growth sectors with sustained earnings visibility remain key focus areas. Portfolio positioning favors participation across multiple growth themes while maintaining limited exposure to rate-sensitive banking segments, preferring select NBFCs instead. Long-term investing continues to be guided by earnings growth rather than short-term macro noise.
Closing View
While 2025 was challenging for Indian equities, tough periods historically increase the probability of stronger subsequent phases. Entering 2026, improved valuations, easing monetary conditions, lower crude prices, and steady domestic growth offer reasons for cautious optimism. With markets expected to track earnings over the long term, the current environment appears better suited for alpha-driven strategies rather than broad market exposure.
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