After the spectacular performance from April 2020 to September 2024, India has been underperforming most markets during the last one year. As on 22nd September 2025 Nifty is down by 4 percent from the 2024 September high of 26,277. Can the market scale new heights this year? What are the fundamental factors that can drive this potential rally?
Indian economy is in a sweet spot
India’s macros are sound. The Q1 FY26 GDP growth at 7.8 percent surprised on the upside. Fiscal consolidation is on track, and the 4.4 percent target for FY26 appears achievable. Current Account Deficit at 0.6 percent is comfortable; the Consumer Price Index inflation at 2.07 percent in August is well within the RBI’s target and another 25 bp rate cut is possible in this rate cutting cycle. Recognizing these positive developments, Standard & Poor has upgraded India’s credit rating for the first time in 18 years from BBB– to BBB. Despite the Trump tariffs, India is likely to grow at 6.3 percent or even higher in FY26 with growth accelerating in FY27.
Earnings growth to revive and gather momentum
The fundamental factor which pulled the market down from the 2024 September peak was the poor earnings growth. Earnings growth during FY21 to FY24 was impressive at 24 percent CAGR, and this facilitated the rally from the Covid low of 7511 to the record high of 26277 in September 2024. The rally fizzled out and the market took a downtrend when the earnings growth nosedived to 5 percent in FY25. Now, the situation is favorable for a revival in earnings growth, and this has the potential to facilitate a rally in the market.
Reforms will boost economic growth
The strong macro backdrop has been facilitating growth stimulating reforms this year. The Government provided a massive fiscal stimulus through the 2025 Budget by raising the income tax exemption limit to Rs 12 lakh and cutting the tax rates. The fiscal stimulus was complemented by the Monetary Policy Committee (MPC) with a massive 100 bp cut in policy rates and calibrated reduction in Cash Reserve Ratio. The boldest reform came when the Goods and Services Tax (GST) council decided to rationalize the GST rates broadly into two rates of 18 percent and 5 percent with only a small number of ‘sin goods’ and super luxury items in the 40 percent rate. This bold reform will provide a big boost to consumption from September 22nd onwards, when the new rates came into existence. The combined effect of the Budget tax relief, monetary stimulus by the MPC and the GST rationalization can be significant.
The high tariffs imposed on India by the Trump administration continue to be a concern. However, the market view is that this is a short-term issue. The hope is that a trade deal between India and the US, without the penal tariff and reciprocal tariff below 20 percent, will be reached soon.
Earnings will recover in FY26 and accelerate in FY27
The earnings recovery will be led by automobiles. The sharp price reduction enabled by the GST cuts and the low borrowing cost can facilitate a significant spurt in demand for automobiles and white goods. The major contribution to earnings growth in FY27 is likely to come from these segments. With banking and financials continuing their resilience, earnings can grow above 15 percent in FY27. The market will start discounting this soon, taking Nifty to new record levels.
Investors should focus on sectors with growth potential like autos, white goods, healthcare, financials, telecom, capital goods, and digital stocks. The small cap segment valuations continue to be excessive.
