The Indian equity markets have delivered an impressive rally since April 7th, with the broader market posting a return of 13.3% over the past one and a half months. The uptrend was initially driven by the U.S. pausing retaliatory tariffs and further supported by a ceasefire agreement that eased tensions between India and Pakistan.FIIs cautiously re-entered Indian market in mid-April after a hiatus of 6–7 months. However, the net inflows are modest, reflecting the need for a more stable global environment to attract further investments. The passage of the reciprocal tariff reduced global trade war risks, which encouraged FII sentiment. Yet, the primary beneficiaries of this development appear to be other Asian economies like China, Japan and Taiwan drawing more active FII participation away from India.
Looking ahead, FIIs are expected to closely monitor developments in the U.S. fiscal landscape. A key event is the Senate’s upcoming discussion on the mega-budget approved by the House of Representatives. This budget includes tax cuts and new spending plans projected to increase U.S. government debt by $3 trillion over the decade, pushing the debt-to-GDP ratio to an estimated 124% currently forecast at 100% in 2024. Tax cuts are estimated to widen the annual fiscal. The bond market has reacted with concern, as evidenced by the U.S. 10-year Treasury yield spiking above 4.5% amid heavy bond selling. This comes on the heels of Moody’s downgrade of the U.S. credit rating from its top tier, raising alarms over the refinancing of nearly $14 trillion of federal debt, estimated to mature soon, at higher interest rates. These fiscal concerns may trigger a pullback in U.S. markets, potentially enhancing the attractiveness of emerging markets, including Japanese bonds and Asian equities. A possible moderation in the U.S. budget bill by the Senate will be key to alleviating market uncertainty.
Meanwhile, India’s recent rally, driven by better-than-expected March quarter results, now requires new catalysts to sustain the momentum. The Q4FY25 earnings season delivered a 10% YoY EPS growth, a good surprise but short to justify the current 20.5x one-year forward P/E valuation. More robust fundamentals are needed to support further gains.
In the near term, IT and Pharma stocks are expected to underperform amid a muted outlook driven by the U.S. credit downgrade, regulatory overhang from “Most-Favoured-Nation” policy for prescription drugs and weak Q4 results from sector leaders. The lack of fresh positive triggers and ongoing uncertainty around U.S. fiscal stability have prompted investors to book profits and adopt a cautious stance. This has led to broad-based selling, especially as clarity on the India-U.S. trade agreement remains elusive. Retail investors, having been the strong net buyers from October to February, are now in profit-booking mode.
Looking to the medium term, there is optimism that Q1 FY26 will show improvement, supported by the low base of FY25 (sub-5% EPS growth), direct tax cuts, easing inflation, interest rate reductions, a favourable monsoon, and increased government spending. With a softer inflation outlook and the INR/USD exchange rate appreciating below ₹85.5, the RBI is expected to maintain a growth-oriented policy stance. However, a clearer picture of Q1 FY26 results performance, like can we grow back to the +15% growth rate, will only emerge by the end of June.
The author, Vinod Nair is Head of Research at Geojit Financial Services.
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 investment decisions.
