Indian equities: light at the end of the tunnel?

Please note: This article is written by our Investments team in India, and may reflect a different positioning versus 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 government’s Union budget hints at further fiscal consolidation, despite planned tax cuts and increased borrowing.
• With inflation in retreat, the Reserve Bank of India has trimmed interest rates for the first time in two years.  
• While the strong economy and lower rates should support the medium-term prospects for equities, a recent stock market sell-off has taken valuations below their 10-year price-earnings average.
• As for bond investors, India’s increasing weighting in international bond indices and the healthy supply of debt are all positive signs.

This year has started well for many markets globally, as US and European stock exchanges hit all-time highs and Chinese technology staged a sharp rebound. The latter rallied on the back of positive domestic artificial-intelligence achievements, supportive policy and a meeting between President Xi Jinping and leading entrepreneurs in the sector. 

While Indian equities have retreated in 2025, the economy shows encouraging signs. The dip in growth seen in the first half of 2024 has been followed by better news on the fiscal and monetary policy front. Furthermore, after seemingly troughing in the three months to September 2024, the economy is on course to grow towards its long-term trend level this year. 

With the threat of tariffs hanging over global growth forecasts for 2025, India looks like being one of the fastest-growing large economies again this year¹, outpacing the US, China and Japan. While growth may slow somewhat later in 2025, domestic inflation should ease and another rate cut cannot be ruled out.

As for government finances, the Indian administration’s Union budget, held on 1 February, hints at continued fiscal consolidation, despite announcing planned personal tax cuts projected to cost 1 trillion rupees in foregone income tax. However, government borrowing is expected to rise by 5.8%, due to lower recourse to small savings and short-term borrowing. Overall, the budget reflects the government’s fiscal prudence.

Indian equities – ready to bounce?

The potential for India to get caught by US tariffs, and the consequential economic costs, has driven weaker market sentiment. Foreign institutional investors (FIIs) have been net sellers of Indian equities to the tune of 1.2 trillion rupees in 2025.

Overall, growth prospects (the Reserve Bank of India (RBI) anticipates domestic economic growth of 6.7% in 2026 after hitting 6.4% this year) and earnings are likely to improve in coming quarters, supported by the central bank cutting interest rates, additional fiscal stimulus and a brightening government capital-spending outlook.

After their recent correction, domestic equity valuations are now below their 10-year average (the Nifty 50 having a one-year forward price-earnings ratio of 19.1x against its 19.4x 10-year average). With more focus on company fundamentals again, stock selection is key. As is retaining a long-term perspective. Indeed, the regular bouts of extreme volatility seen in equity markets suggests staggering the timing of investments.

Indian rate-cutting cycle likely to be a slow grind

After two years of interest rates being on hold, the RBI, as expected, cut its policy repo rate by a quarter-point, to 6.25%, in February. The move was prompted by a retreat in inflation, which should be close to target this year, and a slowdown in the economy in fiscal year (FY) 2025 compared with FY 2024.

In what was the RBI Governor Sanjay Malhotra’s first rate-setting meeting, there was no change to the central bank’s liquidity measures, although policymakers reaffirmed their commitment to supply both durable and transient liquidity in a proactive manner.  

There is still scope for the central bank to cut further (perhaps two or three quarter-point moves in 2025), especially if economic growth disappoints.  That said, the underlying economic picture is positive, and the increasing inclusion of India in international bond indices and a healthy supply of debt are all encouraging signs for bond investors.

With that in mind, a dynamic ‘barbell’ strategy of long-duration government securities with curated high yield bonds seems a prudent approach at this point in time.

Alternative assets: gold and private markets

With persistent geopolitical tensions and central banks purchases helping to spur the gold price towards new highs, the yellow metal offers significant diversification benefits for investors. Indeed, well-diversified portfolios can be one way to ease the effects of particularly volatile periods on investments.

In addition, private market opportunities, such as private equities and credit, REITs and InvITs, can also help investors to create well-diversified portfolios. However, private-market investments can be complex and illiquid, and so need careful consideration prior to dealing in them.