The Indian stock market, which has corrected sharply since late September 2024, appears poised for a recovery amid a favourable macroeconomic environment and a turning growth cycle, according to Morgan Stanley.
The benchmark indices — Sensex and Nifty 50 — remain over 2.5% below their record highs hit in September last year. This underperformance, relative to Asian and developed peers, has been attributed to a combination of growth slowdown and stretched valuations.
“That India does not offer explicit AI-related trades is another reason. The delay in the India-US trade deal has also contributed to volatility. And India’s low beta does not help in a global equity bull market,” said Ridham Desai and Nayant Parekh, equity strategists at Morgan Stanley.
However, they believe that the key factors behind India’s underperformance are now reversing, setting a stage for a positive growth surprise.
Growth Momentum Building
India’s growth cycle is expected to accelerate, supported by a combination of monetary and fiscal measures, including the RBI repo rate and CRR cuts, bank deregulation, liquidity infusion, front loading of capex and a near ₹1.5 lakh crore in GST rate cuts, skewed towards mass consumption.
“The thawing of relations with China and China’s anti-involution add to the mix. A likely India-US trade deal should further boost sentiment. Thus, India’s hawkish macro set-up post-Covid is now unwinding. Relative valuations have corrected and likely made a trough in October,” the report said.
Case for Market Re-Rating
The brokerage sees structural improvements such as lower oil intensity in GDP, rising export share, and fiscal consolidation reducing the savings imbalance, thereby allowing structurally lower real interest rates. With lower inflation volatility and improving macro stability, India could enter a phase of high growth with low volatility and falling rates, which typically supports higher equity valuations.
Sensex Target
Morgan Stanley’s base case (50% probability) has a Sensex target of 89,000 by June 2026, implying a trailing P/E of 23.5x, above its 25-year average. In its bull case, the brokerage has a Sensex target of 100,000, while its bear case pegs the index at 70,000.
Portfolio Strategy
Morgan Stanley prefers Domestic Cyclicals over Defensives and External-facing sectors. It recommends an overweight stance on Financials, Consumer Discretionary, and Industrials, and underweight on Energy, Materials, Utilities, and Healthcare, emphasizing that the market is transitioning to one driven more by macro trends than stock selection.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
