Indian equities are set for recovery despite recent challenges. Political stability after state elections and expected fiscal support are boosting confidence. Overall, growth prospects are likely to improve in the forthcoming quarters. FY26 is expected to be better than FY25, driven by fiscal tailwinds, private capex revival, and easing credit conditions post-CRR cuts.

India’s valuation gap with emerging and global markets has narrowed, offering a margin of safety for investors. A favourable macroeconomic environment, strong domestic liquidity, and an improving earnings outlook position Indian equities for a resilient recovery.

However, inflation remains a concern, with elevated food prices posing risks. Market flows are heavily reliant on domestic investments. Foreign inflows, expected to return in FY26, particularly in financials and industrials, will be critical for market outperformance.

Valuations have normalized after the recent correction. Large caps, now near their five-year averages, offer defensive stability amid macro uncertainties, while mid and small caps remain attractive in selective sectors due to higher earnings growth potential. The Nifty 50’s current P/E is above its 10-year average, but India’s equity risk premium remains appealing compared to global peers.

FPI flows have been under pressure, with record outflows of $11.2 billion in October and around $2.56 billion in November due to high bond yields and dollar strength. However, India’s improving growth outlook, political stability, and government capex plans are setting the stage for FPI inflows to recover in 2025. FPIs are expected to favour financials, capital goods, and technology, driven by strong earnings visibility and sector-specific catalysts like export recovery.

The RBI is likely to ease interest rates from April if inflation stabilizes at 4–4.5% and credit growth sustains recovery. Recent steps like the CRR cut and a neutral policy stance, have eased liquidity constraints, supporting financial normalization. However, risks to food inflation and trade barriers may challenge the inflation target and impact the timing and pace of rate cuts.

The first half of FY25 saw subdued earnings growth due to tight fiscal and credit policies, weak urban consumption, extended monsoons, and margin pressures. While Q3 may remain weak due to soft festive demand and urban consumption, earnings momentum is expected to improve from Q4, supported by rural recovery, infrastructure spending, and industrial capacity utilization exceeding 75% in key sectors.

We remain optimistic about double-digit earnings growth over the next 2-3 years, driven by stable economic conditions, political stability, and structural growth in industrials, financials, and real estate. The recovery will depend on rural demand, government spending execution, and the resolution of external challenges.

CY24 was a year of adjustment for India’s broking industry due to regulatory changes aimed at improving market discipline and investor protection. SEBI’s stricter norms on F&O trading, including higher margins and tighter speculative controls, led to a 50 per cent YoY drop in derivative volumes. Revenue streams like DP income and slab rate subventions were also curtailed, impacting profitability and forcing brokers to adapt their business models. Despite challenges, market participation continues to grow, driven by the financialization of savings and increased equity adoption. Retail investors, now contributing 45 per cent of cash market turnover, remain key growth drivers, especially from tier 2 and tier 3 cities.

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