Can Indian equities stay in the fast lane?

Please note: This article is written by our Investments team in India, and may reflect a different positioning versus portfolios managed in other regions.

All data referenced in this article is sourced from Refinitiv Datastream unless otherwise stated, and is accurate at the time of publishing.

Key points

• The Indian economy appears set to outperform again in 2025.    
• Earnings growth and fund flows will be vital to the equity market.
• The timing and size of anticipated rate cuts will be crucial for bond investors.
• Exposure to gold and private markets aids portfolio diversification.

Global economic growth is forecast to have dipped to 3.2% in 2024, as the US continues to power ahead. Far from the fears of a recession voiced by some economists twelve months ago. With leading central banks in rate-cutting mode and inflation back, or close, to target in many countries, the world economy will start 2025 in good shape.  

Meanwhile, India is on a roll, being forecast to be the fastest growing top-ten economy in 2024, at 7.0%. The outlook for 2025 is also encouraging, as its expansion rate continues to outshine peers, while China struggles to hit its 5% growth target. At a time of conflicts in Ukraine and the Middle East, brewing trade tensions and a new US administration, the country has surprisingly emerged as a beacon of relative stability.

India is forecast to expand by around 7.1% in fiscal year (FY) 2025, supported by strong domestic demand, higher agricultural output and more employment-focused policies. Reflecting its new-found economic mojo, the World Bank, International Monetary Fund and Asian Development Bank have all revised their growth forecasts upwards in recent weeks. 

Turning to the government’s finances, the fiscal deficit is expected to be around 4.9% of gross domestic product (GDP) in FY2025. The administration aims to reduce it to 4.5% of GDP by FY2025-26. In managing the deficit, there is likely to be much focus on continuing to invest in infrastructure and social programmes aimed at maintaining economic stability.

Equity prospects for 2025

Despite a much-awaited market correction in October and early November, knocking almost 9% off the value of the Nifty 50 from its September high, the Indian equity market climbed by around 10% in 2024. As we enter 2025, the following factors are likely to play a key role in dictating prospects, so should be watched:

Earnings growth: We expect the Nifty 50 to report double-digit earnings growth in 2025, although the market consensus estimates may see some more moderation in the coming quarter. In the near term, earnings growth should slowly recover from that seen in the second quarter of FY25, which was hit by weak consumption (likely driven by higher food inflation, an extended monsoon season and some moderation in the post-COVID consumption boom) and micro and personal finance stresses that affected several financial lenders. 

It is important to note that, unlike earlier market cycles when earnings growth saw moderations, the balance sheets in the economy remains very healthy across government, corporates and financial sector, which should allow quick rebound from any short-term cyclical earnings slump.

Flows/liquidity: - Given the increased acceptance of equities, as an asset class, among investors, domestic liquidity is likely to remain healthy in 2025 (for instance, monthly equity SIP fund flows crossed $2.5 billion in September). It remains to be seen how quickly institutional buying returns in 2025, following the $12 billion of outflows seen in October that were largely led by foreign investors.

Valuations: Consensus expects 11-12% earnings growth for the Nifty 50 in FY26 (following some downgrades seen in the second quarter of FY25) implying the index is trading below 20x price-earnings on FY26. Given the decent global growth backdrop and leading central banks globally being in rate-cutting mode, we are entering a stage in the cycle where companies, with a track record of sustained growth and profitability, can thrive.

In other words, this is a good environment for quality growth companies, ones that typically generate higher returns on capital and have more resilient business models.

Large supply lined up in the primary markets, both new listings and Qualified Institutional Placements (QIPs), may take some liquidity off the secondary equity markets in the short term, but also provide a wider market base to attract and absorb the resumption in global and local flows.

Market-cap and sector preferences: We continue to retain equal preference towards large-caps, mid-caps and small-caps. A sharper correction in the mid- and small-cap segment could provide an opportunity to increase exposure to quality growth names. 

Within financials, large private banks are expected to report double-digit credit growth in 2025, despite net-interest margin pressure risk. Financial intermediaries and capital market plays are likely to continue their strong growth trajectory on the back of the mega financialisaton of savings trend in the country.

Meanwhile, industrials are likely to report healthy earnings growth, driven by rising capital expenditure across power, capital goods, data centres and semiconductors. A resumption of the pace of government fiscal spending (with a continued bias towards capital expenditure) was seen in second half of FY25, alongside execution of the large private capex led order book should aid this trend.

So-called ‘China+1’ manufacturing plays (such as electronics manufacturers) should continue to see their high growth momentum continue, powered by the fashion to diversify global supply chains. Within pharma, contract development and manufacturing organisation players are expected to report better growth, plus margin expansion.  

Tech is expected to perform better in CY25 compared with 2024, both when it comes to revenue and margins. Turning to the consumption sector, discretionary is likely to outperform staples suppliers. While in autos, it should be a repeat of 2024: a still competitive petrol-powered vehicle sector, rising sales volumes of electric-powered cars and continued revival in the two-wheel sector. 

Rate cuts set to define bond market prospects in 2025

With strong economic growth and the government finances seemingly under control, India's inflation prospects remain key, from a bond-market perspective. 

The Reserve Bank of India (RBI) expects inflation to hover around 4.5% in FY25, despite the upward price pressures from rising food prices and geopolitical tensions. Indeed, inflation is forecast to head lower in FY26, coming in at around 4.1%, not least on the basis of weaker global growth. 

After the rate cuts of 2024, we anticipate that the Fed will cut rates by a quarter of a point three times in 2025 (in March, June and September). This would take the terminal rate to 3.50-3.75% by the end of that year. By contrast, the Fed's ‘’dot plot’ rate projections point to a US fed funds rate of around 3.75%-4.0% by the same time. 

Domestically, the RBI's Monetary Policy Committee (MPC) has shifted its stance, from "withdrawal of accommodation" to "neutral", signalling potential rate cuts soon. Indeed, we expect to see three quarter-point rate cuts in 2025.

Government debt and high yield prospects for 2025

India's credit-rating outlook is encouraging. Strengthening fiscal credibility, stronger, and widespread, GDP growth, contained inflation and manageable current account deficits, could all build a case for a more positive rating. 

The country’s growing appeal to international investors was helped by the inclusion of Indian government bonds, by FTSE Russell in 2024, in the Emerging Markets Government Bond Index (EMGBI) from September 2025. This follows similar moves by JP Morgan and Bloomberg in 2024. This has helped to open India's bond market to a wider investor base. 

With more rate cuts seemingly on the way in 2025, certain fixed income securities stand out as likely beneficiaries. Government debt with longer maturities tends to benefit more from falling interest rates, though risk remains, if the speed or number of rate cuts disappoints. Appropriate selection of bonds, based on their relative sensitivity to lower rates and higher liquidity, would remain key in maximising benefits from this trend.

Curated high yield bonds (AA-rated and lower) should offer value for those willing to hold their investments over an 18-24-month period, with credit spreads above their long-term average. A portfolio mix of long duration government (and quasi-sovereign) securities and curated high yield bonds would appear to be well positioned for 2025, while also helping to diversify fixed income portfolios. 

Gold and private markets: diversification candidates 

With conflicts in Ukraine and the Middle East, trade tensions, anticipated lower US real rates and central banks hoovering up gold, the yellow metal remains an attractive option for investors. In particular, it can help to offset the effects of particularly volatile periods on other asset classes.

In addition, investing in private market opportunities can help to create well-diversified portfolios, by improving the return profile along with reducing its overall volatility. Private markets offer access to high-growth opportunities such as cutting-edge businesses or products and access to market leaders in niche segments or investments not available in public markets. That said, private markets can be illiquid, and so may need careful consideration prior to investing. 

Given the current macroeconomic backdrop, interest rate environment, valuations, and widening and deepening private markets industry in India, 2025 could be a good vintage to add to one’s portfolio. Diversified performing credit, yielding real assets as well as private equity (mix of early-stage venture capital and growth, buyouts and late-stage private equity) spaces look better positioned in the period ahead.