In the past 1-2 months, the Indian market has recovered over 75% of the 21% loss incurred during the consolidation period from September 2024 to April 2025. Recently, the market has been trading within a narrow range of 24,500 to 25,250 points on the Nifty 50 index, without a clear direction. The market has factored in optimism about domestic earnings growth and reduced global risks like the tariff war. After a fall in corporate earnings in Q2 and Q3 FY25, Q4 showed a 10–12% rebound, raising hopes for a better FY26. However, sustaining a long-term growth average of 15% is necessary to maintain India’s premium valuation. The World Bank has downgraded the global GDP forecast for CY25 to 2.3% and expects a weak recovery in CY26 to 2.5–2.6%, citing trade tensions, policy uncertainty, and weak investment trends.
The market is also cautious due to increased tensions in the Middle East and the end of the 90-day pause in reciprocal tariff in July. A potential long-term bilateral trade agreement (BTA) with the US could reduce tariff uncertainties. Additionally, rising Middle East tensions, especially between Israel and Iran, and the involvement of the US in the crisis, have added to market caution. Domestic players are booking profits amid geopolitical tensions and lack of new triggers. The market is expected to trade within the narrow range of 24,500 to 25,250 points on the Nifty50 index, with large caps performing better. A strong support level is expected at 24,000 points, and a “buy on dip” strategy is anticipated to continue due to confidence in stable domestic earnings growth.
Amid global fiscal and geopolitical dynamics, India needs new catalysts
A major global development influencing investor sentiment is the US fiscal landscape. The Senate is debating the “One Big Beautiful Bill” passed by the House, which includes tax cuts and spending plans projected to increase US debt by $3 trillion over the next decade. This could push the debt-to-GDP ratio to 124%, up from the current forecast of 100% in 2024. This had affected the bond market, and FIIs have become cautious. However, on 16th June the Senate finance committee released an inexpensive version which has provided some relief to the bond market. The new bill is expected to expand US long-term GDP growth. However, under the current context of high interest rates, adamant inflation, tariff risk, and aggressive FED policy, an immediate real benefit from the bill is unlikely.
The renewed Israel-Iran war is adding uncertainty to the Middle East regional tension following the reported bombing of the Iranian nuclear facilities by the US, the domestic market is cautious in anticipation of retaliation and the effect on the supplies of crude and LPG. However, given the weak strength of the new regime and mixed views in the Gulf region, the market expected a muted retaliatory response from Iran. Despite this, the worry is whether this is the first and last war between Israel and Iran or whether it will continue in the coming years, given the intention of the new theocratic regime to develop or acquire nuclear weapons, which adds concerns to the region.
India’s recent rally was underpinned by better-than-expected Q4FY25 earnings, which showed a 10-12% YoY EPS growth. However, sustaining this momentum will require a consistent and robust long-term growth trajectory. At present, the market appears to be in search of a new catalyst. Investors have begun profit booking post the rally in May and June. Also, clarity on the India-US trade agreement remains elusive and global tension has increased. Retail investors, who were strong net buyers from October to February, are now adopting a cautious stance with a profit booking approach.
India needs a better earnings trajectory outlook for FY26
As highlighted above, the earnings outlook for FY26 improved slightly, buoyed by strong Q4 results. If inflation, interest rates, and tariff uncertainties ease, market sentiment could turn more positive. Tax cuts and increased government spending are expected to stimulate domestic demand. Currently, India’s earnings growth is projected at 10–12% for FY26, up from sub-5% in FY25. Despite this, it may not be good enough to sustain a strong rally in the short-term, given premium valuation.
Sector wise, IT sector’s Q4FY25 results reflect caution, with hiring slowing due to global uncertainties and technological transitions. Q1FY26 has started on a muted note, but the sector remains optimistic due to strong order pipelines and strategic initiatives like AI upskilling. Valuations currently stand slightly above historical averages, and a meaningful recovery will likely hinge on the stabilization of US interest rates and progress in tariff negotiations.
In banking and NBFCs, the credit cycle has moderated, with a focus on managing yield spreads and asset quality. FY25 saw challenges in microfinance and personal loans, prompting caution. However, recent trends suggest easing risks and improving asset quality through FY26. Rate-sensitive sectors like Banks, NBFCs, Auto, and Realty are expected to lead, driven by increased demand and reduced operational costs. Domestic consumption is also set to rise, benefiting FMCG, Consumer Durables, Fertilizers, and the Agri sector.
Portfolio strategies are increasingly tilting toward mid- and small-cap equities, driven by a normalization in premium valuations and expectations of broader market participation. This is expected to gain traction in the medium to long term, while in the near-term, large caps are expected to perform better during global uncertainty and high USD volatility.
Market risks: A dual lens on domestic and international factors
Recently, domestic equity indices have remained largely rangebound, exhibiting a slight negative bias. The mid- and small-cap segments, which had been outperforming, are expected to see subdued performance in the near term. Key external risks include the reciprocal tariff deadline in July, India-US and US-EU trade negotiations, a weakening dollar, global tension and expectations on Q1FY26 results. July is likely to be an important month, as the upcoming June quarter should set a vital trend for the full year FY26 earnings outlook.
The RBI has provided a surprise stimulus by unleashing a growth-oriented policy. However, these measures are expected to trigger a multiplier effect in the medium to long-term. The market needed a notable short-term trigger to sustain the rally. The market had remained subdued despite strong domestic fundamentals, like Q4 real GDP growth exceeding expectations at 7.4% YoY, strong monthly auto and GST collections and RBI policy.
Markets are closely monitoring global developments, particularly as the 90-day pause on reciprocal tariffs approaches its conclusion in July. Concurrently, several bilateral trade negotiations are in progress, including the anticipated India-US trade agreement. A good Q1 results and final decision on India-US trade could positively impact market sentiment.
