DhanGrow Capital » Indian Markets Set for a Comeback as Wall Street Turns Bullish

After one of the most challenging years for Indian financial markets in recent history, a wave of optimism is returning. Several of Wall Street’s largest institutions—including Morgan Stanley, Citigroup, and Goldman Sachs—now project that Indian markets could stage a notable rebound next year as earnings stabilise and policy support strengthens.

Despite India’s long-term growth story, 2025 proved to be a difficult year for equities, bonds, and the rupee. Indian markets lagged global peers by the widest margin in over three decades, even as Asia’s other markets delivered stronger performance. Yet analysts now believe the worst may be behind us.

Why Markets Struggled in 2025

A combination of factors weighed heavily on investor sentiment:

US tariffs, considered the harshest in the region, hurt export-oriented sectors.
Weak earnings and a prolonged downgrade cycle disrupted the bullish momentum that Indian equities are known for.
Sluggish foreign inflows, as global investors preferred rotating out of Asia.
Heavy government bond supply, putting pressure on yields.
A weaker rupee, driven by a stronger dollar and trade uncertainties.

These pressures led to India trailing the broader emerging market (EM) benchmark by the widest gap since 1993.

Signals of a Turnaround

Despite the turbulence, strategists are beginning to see green shoots.

1. Earnings Downgrade Cycle Nearing Its End

Analysts at State Street Investment Management say the period of downward earnings revisions is “largely behind us,” as policy actions such as:

rate cuts
GST rationalisation
and measures to boost consumption

begin to filter through the economy.

2. Strengthening Economic Indicators

India’s economic resilience is once again proving to be a cushion:

Q2 GDP growth came in at 8.2%, stronger than anticipated.
India’s total exports in October jumped almost 12% year-on-year.
Corporate earnings are showing early signs of revival—the top 100 firms saw profits rise 12% in the September quarter.

Although the IMF reduced its full-year GDP projection to 6.2% due to tariff-related concerns, analysts agree that underlying demand remains healthy.

3. Rupee Showing Stability Signals

The rupee, which fell sharply earlier in the year, reached its lowest in November but appears to be finding stability. Analysts estimate an average depreciation of around 3–3.5% annually—manageable for most investors.

4. Monetary Support from RBI

The Reserve Bank of India has taken decisive measures:

100 bps rate cuts this year
Heavy intervention to protect the rupee
Record government bond purchases to maintain liquidity

With another potential 25 bps cut expected, markets anticipate additional easing to support growth.

Bond Market Outlook

While equities are gaining attention, bond markets have remained under pressure. Indian sovereign bonds have returned just 2.1% this year compared to an 8% rise in the broader EM debt index.The weaker rupee and expectations of an end to the rate-cut cycle contributed to the drag.

However, analysts believe the upcoming central bank measures may revive demand, especially for large bond-purchase programmes.

DSP Asset Managers’ Sandeep Yadav highlights that if the RBI begins large-scale bond purchases, yields could drop meaningfully—creating opportunities for debt investors.

Global Money May Return

International investors, who pulled more than $16 billion from Indian equities earlier this year, are showing early signs of renewed interest. UBS notes that “Indian equity markets are boxed in a triangle”—hinting at a breakout if policy support and earnings recovery align.

With global markets still volatile, India’s relatively stable macroeconomic backdrop may once again attract foreign portfolio flows.

The Big Picture for 2026

The consensus across major global institutions is clear:India is poised for a rebound, powered by stabilising earnings, supportive monetary policy, and strong domestic demand.

Although challenges remain—such as the strong dollar and global trade tensions—investors appear better positioned heading into the new year.

If sentiment continues to strengthen, 2026 could mark the beginning of a fresh multi-year cycle for Indian markets.

Credit: This blog is based on reporting from Mint newspaper.