CY2025 proved to be a mixed year for Indian equity markets. Large-cap stocks rose about 9%, mid-caps gained 4%, while small-caps declined by 9%. Performance varied sharply across market caps, sectors, and individual stocks. Autos, banks, and metals delivered relatively strong returns, whereas IT underperformed.
The auto sector benefited from a large and unexpected GST cut, which supported both earnings growth and valuations. Financials performed well on the back of attractive valuations, strong balance sheets, and stable credit quality. Domestic consumption also improved, aided by GST reductions, income-tax cuts, and lower interest rates.
However, several challenges held markets back in 2025. Earnings growth remained muted at 6–8% for FY2025–26, accompanied by multiple downgrades. The Indian rupee depreciated sharply by around 6%, driven by a worsening trade balance following the U.S. imposition of steep tariffs. Foreign portfolio investors remained cautious, with net outflows of $17.7 billion as India’s earnings momentum slowed compared to other markets. Corporate earnings weakened further, while trade deficits widened between June and December 2025, pushing India’s current account deficit toward an estimated 1.5% of GDP by FY2027.
US–India Tariff Resolution: A Potential Turning Point
FII outflows in 2025 exceeded those seen during the 2008 global financial crisis. History suggests that sentiment can reverse quickly—once economic conditions stabilized in 2009, India saw strong equity inflows the following year. In our view, any evident progress toward a US–India tariff agreement could trigger meaningful FII inflows, support a re-rating of Indian equities, and strengthen the rupee.
Oil Prices: Limited Risk for India
Venezuela is currently producing about 900,000 barrels of oil per day, with Chevron accounting for roughly one-third of that output. While Venezuelan crude is heavier, it remains attractive to refiners in the U.S., China, and India. That said, uncertainty remains around whether non-U.S. companies will be allowed to purchase this oil.
Global oil demand remains weak, with prices below $60 per barrel—a level that discourages fresh investment. At the same time, global supply is expected to rise, limiting the market’s ability to absorb additional output. As a result, U.S. actions in Venezuela are unlikely to materially alter oil prices, which are expected to remain near current levels. Consequently, the impact on India’s oil import bill should be minimal.
CY2026: A US-India Tariff Agreement Is Vital
CY2026 is expected to be more favorable, supported by an improving macro environment, assuming a positive India–U.S. tariff deal. Such an outcome could help the rupee recover and improve investor sentiment. Financials are likely to drive 45–50% of incremental earnings growth between FY26 and FY28, with metals, energy, consumption, and IT also contributing. Assuming a favorable tariff resolution, earnings are expected to grow 15–17% in FY2027. Valuations remain reasonable at around 20x earnings, with India’s premium to other emerging markets below long-term averages. Delays in a tariff agreement, however, could still weigh on markets.
Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions.
