The US dollar has plunged to more than three year low and a prolonged phase of its weakness is setting the stage for a potential rally in Emerging Markets, including the Indian stock market. A softening dollar, easing oil prices, and India’s robust domestic fundamentals can support further gains in the benchmark Nifty 50 during the second half of 2025, analysts said.
The US Dollar Index (DXY) has declined 10% year-to-date (YTD) and currently stands around 96.70 — its lowest in over three years. Elara Capital expects the DXY to remain in the 95–99 range over the next two quarters, with an average of 100 for CY25, sharply lower than the 105 projected earlier this year. This signals a supportive global liquidity environment for risk assets, especially emerging markets.
Weak Dollar Index Supportive for India
“Historically, a falling DXY has amplified India’s equity outperformance,” Elara Capital economist Garima Kapoor and strategist Saharsh Kuma said in a report.
In each of the eight calendar years since 2000 where the DXY fell more than 5%, the Nifty 50 delivered positive returns, with a median gain of 34%. While the Nifty is up 7.5% YTD in 2025, Elara sees potential for an additional 8–10% upside if past patterns hold.
“DXY softness served as an amplifier — not the origin — of India’s equity story. That is precisely what makes 2025 notable: India’s internal growth levers are already active, and global risk appetite is once again turning supportive,” the report stated.
The Nifty’s performance typically strengthens when the dollar weakens and the correlation between the two turns negative. That is the case this year, with a –0.9 correlation observed. The report stresses that this inverse relationship reflects more than just currency dynamics — It’s a signal of easing global financial conditions and renewed appetite for risk.
What makes the current cycle unique is the simultaneous moderation in crude oil prices. This twin tailwind — weak USD and soft oil — has historically benefitted India more than other emerging markets. Onshore fundamentals are also aligning: India’s inflation is under control, real rates remain positive, and the RBI has begun easing policy with a 50 bps rate cut and 100 bps CRR reduction.
India’s macro stability, light FII positioning, and earnings-led premium valuation further strengthen the case for equity upside.
“This is not a melt-up narrative. It is a measured rotation story, rooted in liquidity, validated by positioning, and underpinned by history,” Elara said, adding that mid and small-cap stocks may also participate as broader market sentiment improves.
In essence, as the dollar stays soft, the Nifty 50 could be poised to catch up — offering a compelling risk-reward for investors looking at India within a global portfolio context.
Preferred Stocks
In this context, Elara believes selective high beta positioning is both tactically justified and strategically sound. Its preference is for large-cap names with average bull beta above 1.1x and midcaps above 1.3x, balancing participation with risk discipline.
Stocks such as REC, Power Finance Corporation, Trent, and DLF, offer strong risk-reward in the large-cap space. Among midcaps, HUDCO, Godrej Properties, Oberoi Realty, Prestige Estates, and Indian Hotels combine consistent bull beta exposure with earnings visibility and macro alignment, said the brokerage firm.
These stocks fit well with its key themes of financial inclusion, real estate upcycle, and domestic discretionary recovery.
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.
