India outlook: Ready for recovery?

Indian equities had a challenging 2025, with the MSCI India Index returning 3.0% in US dollar terms vs. the broader emerging market region’s gain of 30.6%.^1,2 This underperformance was one of the widest relative gaps in several years. While India continues to be among the fastest-growing economies globally, its GDP growth has moderated from 8.0–9.0% to around 7.0%.

More importantly, India saw a material slowdown in earnings growth last year, which impacted sentiment significantly. The slowdown was driven by margin pressure on rising costs, delayed private sector capital expenditure, and global headwinds including trade and tariff risks.

This was exacerbated by a global rotation towards artificial intelligence (AI)-exposed markets. India, with its limited direct AI exposure, was left on the wrong side of the rotation. Foreign outflows spiked as a result, albeit this was offset by solid domestic buying.

Now well into 2026, the long‑term growth story remains intact, and the near‑term picture is improving. The earnings downgrade cycle appears to have bottomed as macro conditions turn more supportive. Valuations have reset meaningfully, with India’s premium over other emerging market (EM) peers at decade lows, while relative performance has lagged peers by the widest margin in decades. With earnings momentum poised to recover, the set‑up looks increasingly constructive over the medium term.

Macro and policy uncertainty has eased meaningfully

Firstly, the most visible improvement is on trade. Recent trade deals with the US and the European Union have reduced uncertainty around tariffs and market access, a big overhang in 2025.³

Moreover, the Reserve Bank of India (RBI) has likely concluded its rate-cutting cycle, holding its policy rate at 5.25% in February and shifting its focus towards ensuring adequate liquidity and effective transmission. This is supported by benign inflation and strong external buffers. Foreign exchange reserves stand at around $709.4 billion as of January 23 – providing comfortable import cover and room for the RBI to manage currency volatility, if needed.⁴ Fiscal policy has also been steady. The recent Union Budget was broadly neutral for equities, government capital expenditure (CapEx) continuing to grow broadly in line with nominal GDP.

Earnings downgrades appear to have reached a trough

There are signs that conditions are stabilizing on the corporate front. The recent reporting season broadly met expectations, with fewer negative results surprises sector wide. Across our holdings, aggregate operating margins have improved, return on equity remains robust and leverage is low. Earnings growth momentum remains strong.

More broadly, there is improvement in activity. Manufacturing output rose 8.1% year-on-year in December 2025, while overall industrial production increased 7.8%, the strongest reading since late 2023.²

As for consumption, with middle class relief delivered last year, demand remains uneven. The rural-urban demand gap persists, although Goods and Services Tax (GST) normalization pre-budget should help in narrowing the divide as GST collections continue to grow.

That said, the private CapEx cycle remains tentative. While pockets of improvement are evident, corporate investment intentions remain cautious, and it would be premature to characterize this as a broad-based private CapEx recovery. We would expect an earnings recovery to be more likely led by a stabilizing domestic cycle and benefits from public CapEx, rather than a sharp rise in private investment.

Valuations and flows primed for reset opportunity

After last year’s underperformance, Indian equities have de-rated relative to their own history, and their valuation premium vs. both EM and Asia has narrowed meaningfully to more reasonable levels.

Investor flows reflect this reset. Foreign investors sold $18.8 billion in 2025 – the largest annual outflow on record – while domestic investors provided a stabilizing offset with record inflows of around $90.3 billion.²

With China having rebounding strongly and AI-related trades now more crowded, relative opportunities across EM are becoming more balanced. In this context, India’s combination of more reasonable relative valuations, stabilizing earnings, and improving macro visibility has become increasingly more attractive for investors.

Endnotes

¹ MSCI India Index is an unmanaged index considered representative of Indian stocks. The index is computed using the gross return, which does not withhold taxes for non‐resident investors.
² JPMorgan India Equity Strategy, January 2026.
³ BofA Securities India Watch: India growth meter, February 2026.
⁴ "India's forex reserves rise to record high of $709.41 billion, central bank data shows." Reuters, January 2026. https://www.reuters.com/world/india/indias-forex-reserves-rise-record-high-70941-billion-central-bank-data-shows-2026-01-30/.

Important information

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.
Indexes are unmanaged and have been provided for illustrative purposes only.  No fees or expenses are reflected. You cannot invest directly in an index.

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