The Indian equity market is hopeful about the potential reforms aimed at boosting domestic demand. The government’s commitment to sustaining economic momentum is expected to underpin market sentiment over the next one to three months. Along with the GST rate cuts, the government is expected to provide support to the sectors hit by the steep hike in tariffs. The full impact of these measures on consolidated fiscal policy in the short term has to be reviewed.
At the same time, renewed tariff tension continues to dominate the broader outlook. Nifty50 could not hold above the threshold level of 25,000 and is expected to trade within a range of 24,000 to 25,000 in the short term, reflecting a mixed bias.
If tariff tensions persist, India’s GDP growth could moderate by 50–100 basis points, with a consequent drag on earnings per share (EPS) growth in FY26 and FY27. The impact stems from the significant exposure of several listed manufacturers to the US market, which may result in weaker demand and price cuts, thereby weighing on profitability in the medium term. While the broader GDP effect may remain contained, the earlier projected growth line of 7–8% is likely to ease to around 6%. Key sectors likely to be directly affected include Textiles, Equipment Manufacturers, Metals, Auto Ancillaries, Seafood, Basmati and Jewellery, while IT and Pharma may experience sentimental pressure despite not being directly impacted by tariffs.
Despite this, market participants remain hopeful for a more favourable trade resolution in the future. Just about 1-2 months back, the market was expecting a good deal for India in anticipation of the strong long-term strategic relationship with the US, which has gone haywire post the Indo-Pak conflict and the personal agenda of Trump.
On a positive note, Domestic Institutional Investors (DIIs) and retail investors continue to support domestic equities, providing a cushion against external volatility. In contrast, Foreign Institutional Investors (FIIs) remain cautious about emerging markets, showing a preference for China over India. Although FIIs are active in the domestic primary market, their reluctance to invest in the secondary market is influenced by India’s sustained premium valuation relative to other emerging markets. This muted outlook from FIIs is expected to persist in the near term, but a weakening dollar, reduction in premiumisation and anticipated Fed rate cuts in CY25 and CY26 will reverse this sentiment over time.
Q1 Earnings Review
Q1 earnings expectations were muted, though sequential trends showed improvement, with earnings growth slightly exceeding expectations at around 10%. Mid- and small-cap stocks outperformed large caps, albeit overall growth remained below long-term averages.
Corporate earnings growth is projected to stay below historical norms, with FY26 EPS growth forecasted at 10%, challenging current valuations, which remain elevated at a forward P/E of 20x. This ongoing tariff tension between the US & India can impact capital flows. Nonetheless, India is expected to retain its premium valuation due to its long-term growth forecast of over 6% and robust domestic capital inflows.
Market Outlook
In the immediate future, the domestic market is likely to maintain a mixed bias, with consumption-driven and domestic growth-oriented sectors such as FMCG, Durables, Discretionary, Cement, and Infrastructure poised to perform well, supported by GST reductions, improved domestic demand, and increased government spending. A multi-cap and asset allocation strategy is expected to dominate, with a stock-selective approach prevailing.
A resolution of tariff disputes could act as a major catalyst, significantly improving sentiment, though the reciprocal 25% tariff is likely to persist in the short to medium term. Generally, the market still perceives that the tariff-related disruptions are temporary. However, the lack of strong interaction between the parties is increasing the uncertainty, adding confusion to the market.
(The author is Head of Research, Geojit Investments.)
