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Informist, Wednesday, Dec. 31, 2025

By Anjana Therese Antony

MUMBAI – The Indian equity market is bidding farewell to a year of muted gains but investors are hopeful 2026 will bring in better returns. Experts, however, hold different views on the quantum of gains next year. Some broking firms expect the Nifty 50 to rise 11-15% in 2026, more than the 10% rise in 2025 and the previous year, but slower than the 20% growth in 2023. However, another set of participants are betting on a mid-to-high single digit rise for the next year. While the bulls are keeping their fingers crossed for better earnings growth, persistent domestic inflows and a likely US-India trade deal; the bears are anticipating continued muted corporate financial growth, further foreign outflows, and no major pick-up in private capital expenditure. 

"...it (market performance) is all dependent on how much earnings can happen...it is going to be a fairly modest kind of return even next year," said Dhananjay Sinha, co-head of equity research at Systematix Group. The average earnings growth of Nifty 50 companies in the last one-and-a-half years is about 6% and it will be around 6-8% next year too, he said. "It (earnings) may better a bit, but it may be single-digit growth." 

The domestic market also underperformed most other global peers. While the benchmark index rose in low double digits this year, the US market rose in high teens, and many Asian and European peers rose 25-30%. "India is ending 2025 with its worst relative performance vs. EM (emerging markets) since 1994...India's hawkish post-COVID macro setup is now unwinding," Morgan Stanley said in its outlook report for 2026. 

What could become a major risk for investors will be the delay in US-India trade deal and the 50% US tariff on India staying for longer. While India is expected to negotiate and bring down tariffs to around 20-25%, it will still be a drag for the economy and businesses, analysts said. Also, the capital expenditure of private players is likely to remain muted due to trade conflicts and uncertainties, though that of the government is expected to gain further momentum, experts said. 

However, one of the major reliefs for investors is the ease in valuation in the later part of 2025, which opened the door for a better entry point for investors. The Nifty 50 is currently trading at 20.5 times the one-year forward price to earnings, which is around its long-period average of 20-21 and also better than the 22-23 times the EPS recorded in early October. ICICI Direct Research expects the Nifty 50 EPS to grow at a 15% compound annual growth rate over FY26 to FY28, led by telecom, banking, financial services, and insurance, and capital goods space. 

It took more than 14 months for the domestic market to cross its lifetime high, primarily because returns were limited due to US tariff jitters, depreciation in the rupee, muted earnings growth, high inflation, and slow economic growth, among others. While the fog has cleared a bit, there isn't enough visibility for foreign investors to bet on the Indian stock market, at least not till there are clear signs of a pick-up in earnings growth. Foreign portfolio investors offloaded almost $18 billion worth of stocks so far in 2025, which is nearly 24 times the $755 million equities sold a year ago, according to data from the National Securities Depository. 

Investors are betting on the financials, consumer goods, and manufacturing sectors for the next year. For banks and financial services companies, analysts believe that strong asset quality, reviving credit growth, and improving return ratios will support their earnings growth. The government's goods and services tax cuts are likely to support consumer-facing sectors such as consumer discretionary and automobile companies. 

INTEREST RATES

The government's measures to drive consumption through income tax relief, interest rate reduction, and GST cuts, among others, are expected to aid the consumption trend. The sharp ease in inflation and the pick-up in the country's growth, too, have helped equity investors heave a sigh of relief this year. The country's inflation fell to its record low of 0.25% in October from 7.6% in 2020 and also remained well below the RBI's target of 2%. The apex bank reduced rates by a total of 125 bps this year to 5.25%. 

However, a few experts believe that more measures are needed to push demand in the medium-to-long term. "...monetary policy is not the right tool to really stimulate growth because some of these things are structural in nature," Sinha of Systematix said. It is not necessary that interest rate cuts will translate to economic growth until the household income rises, he said. 

What the RBI can now do is allow the rupee to depreciate, which will help neutralise the impact of higher tariffs or the competitiveness compared with China or other countries, he said. Sinha expects the rupee to cross the 100-per-dollar mark in the next 12 months. The rupee fell over 6% in 2025 to its all-time low of 91.08 against the dollar in December.

Given India's macroeconomic stability, the RBI has ample room to ease not only policy rates but also liquidity conditions, Bajaj Alternate Investment Management said in its report. Investors are also closely monitoring the developments with respect to global central banks, especially the US and the possible change in the US Federal Reserve chairperson. 

"Kevin Hassett, Director of the National Economic Council, has been dubbed as the front-runner for the post of Federal Reserve chair. Hassett has endorsed Trump's policies and advocated for lower interest rates," Bajaj Alternate said. The market currently expects the US Fed to cut rates twice in 2026, whereas the dot plot projects only one rate cut that year, it said. 

The 12-month targets for the benchmark indices given by market participants are:

End 

US$1 = INR 89.87

Edited by Akul Nishant Akhoury

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