The first half of 2025 proved turbulent for Indian equities. Geopolitical tensions, fears of slowing global growth weighing on exports, and muted domestic consumption dampened investor sentiment. The MSCI India Index slumped to a new low of 2,574 in February but has since staged a gradual recovery, now trading at 3,006.
A key catalyst has been the Reserve Bank of India’s accommodative stance. With inflation easing, the central bank has delivered a surprise 100 basis point cut in the repo rate, alongside a reduction in the cash reserve ratio and other liquidity measures. More monetary policy easing could follow in the second half. A combination of lower borrowing costs, softer inflation, and improved liquidity could help revive consumer spending and support corporate earnings.
Still, downside risks persist. India’s share of global market capitalization slipped slightly to 4% in June, from 4.1% in May—though it remains above the long-term average and well above the 16-month low of 3.6% seen February.
Two near-term events would decide the trajectory of Indian stocks. First, the contours of the upcoming India-US trade deal will be crucial where an unfavourable outcome could mean an adverse impact on foreign portfolio flows.
Second, the June quarter (Q1FY26) earnings season will offer cues on the strength of recovery. Kotak Institutional Equities expects Q1FY26 aggregate net income of its coverage universe to increase 10.6% year-on-year, largely driven by a strong rebound in profits of oil marketing companies (OMCs).
Excluding OMCs, net income will see a modest 4.5% increase. Among sectors, consumer durables & apparels, electric utilities and IT services sectors are expected to see single-digit earnings growth. On the other hand, automobiles and components, banks (persisting pressure from NIM compression), consumer staples (margin pressure), gas utilities and transportation sectors would report weak earnings growth, said the Kotak report dated 6 July.
Valuations remain a concern. The MSCI India index is trading at a one-year forward price-to-earnings of 21x, showed Bloomberg data, higher than most Asian peers. So far this year, it has returned just 5%—underperforming the MSCI Asia ex-Japan and MSCI Emerging Markets indices, both of which have delivered double-digit gains.
“As we enter the second half of the year, the outlook (for global equities) appears optimistic yet measured. Geopolitical tensions have subsided, trade frictions are diminishing, and global economic activity—particularly in China—is showing signs of recovery,” said IDBI Capital Markets & Securities’ July strategy report.
Still, IDBI expects limited valuation expansion in Indian equities, noting that much of the good news is already priced in, projecting markets to remain range-bound in the near term.
