India equity market outlook: 2025 in review and 2026 path ahead

Please find below our latest thoughts on India:

• Looking across global equity market performance in 2025, India stands out as a relative laggard.
• Indeed, India’s underperformance relative to broader emerging markets in 2025 represents the largest lag witnessed in the last 15 years. MSCI India is up around 3% year-to-date in USD terms vs. the MSCI Emerging Market’s 30% gain.¹
• The Indian rupee has also weakened sharply, sliding from ₹83.4 per USD in January to around ₹90–91 per USD by mid-December, reflecting persistent foreign equity outflows.² In EUR terms, the divergence is even larger.
• Multiple triggers have led to India’s recent unwind. These include tighter monetary and fiscal conditions aimed at restoring macroeconomic stability, volatile US-India trade relations, and a surprise border conflict.
• What’s more, as global investors channelled their enthusiasm into “hot” AI supply chain stocks, India was largely overlooked.
• In fact, technology stocks in India have been the worst-performing domestic sector this year, with India’s IT services-related businesses taking a backseat to tech hardware and manufacturing names in markets like the US, Taiwan, Korea, and China.
• Another traditional growth sector, consumer discretionary, has faced margin pressures and urban spending sluggishness. Categories like retail, travel and leisure, and jewellery have been particularly hard hit.
• All the above culminated in a broad-based earnings slowdown, with Indian corporate earnings growth averaging ~6% over the past four quarters versus an historical double-digit average growth trend.³
• While the challenges are real and some are yet to be resolved, nonetheless, signs of recovery are visible – reflecting a mix of government policy initiatives, market reforms, and diplomatic accords. In response, earnings expectations are beginning to improve.
• For example, the impasse around US sanctions and India’s continued imports of Russian oil seems to be moving toward resolution. At the same time, ongoing bilateral engagement between India and the US suggests that tariff moderation is forthcoming, albeit at a slower pace than expected.

• On the domestic front, the Reserve Bank of India has cut policy rates by 1.25%, injected liquidity, reduced banks’ cash reserve ratios, and lowered risk weights in capital adequacy rules – all important steps to ease financial conditions.
• Furthermore, the inflation backdrop looks benign. Headline inflation is below 1%, and core inflation has stabilised around 3-4%. This environment supports real income growth, affordability, and enhanced purchasing power for Indian consumers.⁴
• With corporate earnings close to an inflection point, we expect the consumer and financial sectors to lead the recovery. This aligns with our long-term view on accelerating consumption and deepening financial penetration among India’s growing middle class.
•  As per-capita income rises from ~USD 4,000 toward ~USD 8,000, Indian spending patterns are expected to shift from essentials such as housing and food toward experiences, premium products, and services over goods.
• In addition, structural drivers remain in place in the form of digitalisation and supply-chain shifts, particularly in the electronics manufacturing and industrial value chains.
• As the AI focus shifts from providers to its applications for end users, India stands to benefit from further productivity gains across sectors, much like the Digital India era delivered in the past decade through accelerated internet penetration, broader financial inclusion, and enhanced public infrastructure.
• Looking ahead, we see a more optimistic outlook heading into 2026. Fundamentally, we believe that India remains on a strong long-term growth path.
• Stock returns are ultimately a reflection of earnings growth, and our confidence in an improved earnings picture underpins this view. Easing US trade tensions should also help to boost sentiment.

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