India’s growth story: sectors poised to lead the next wave of market expansion

India has become the world’s fifth largest economy by GDP ($4.1 trillion) and is expected to grow at around 7% per annum in FY27, making it the fastest growing major economy globally. It is also one of the most populous countries, with a predominantly young population, making India one of the largest domestic markets and a strong source of a skilled, English-speaking workforce.Over the past year, a series of reforms and initiatives by the government and other authorities are expected to provide a strong boost to the macroeconomic environment and in turn support growth in financial markets. These include the following:

(1) Monetary policy easing

Indian monetary policy has shifted towards softer interest rates to stimulate economic growth. The Reserve Bank of India (RBI) has taken several measures, including reducing the repo rate by 125 basis points through gradual cuts and cutting the Cash Reserve Ratio (CRR) by 100 basis points this year. Moreover, the RBI has provided liquidity through open market operations (OMOs), including purchases worth Rs 1 lakh crore by December 2025.These measures are intended to stimulate credit growth and lower interest rates, thus encouraging borrowing. Once credit growth picks up, procyclical momentum could push annual growth into the low to mid teens. Banks are also willing to lend, supported by clean balance sheets, as borrowers continue to deleverage.

(2) Fiscal stimulus through tax reforms

The government announced cuts in direct taxes in the February 2025 budget and VAT cuts in September 2025 to increase disposable income and reduce costs. These measures are already paying off: agricultural growth appears promising, credit expansion is underway and car sales are rising after the VAT cut.

(3) Government regulatory reforms

India’s 2025 regulatory reforms aim to improve ease of doing business, attract foreign investment and promote innovation. These reforms cover financial markets, industry, tax, trade and SMEs, with an emphasis on digitalisation, simplification and transparency.

Financial sector reforms:The RBI has announced 22 measures to strengthen the resilience and competitiveness of the banking system, improve credit availability and streamline currency management. Key changes include the liberalization of the external commercial borrowing (ECB) framework.

SEBI has also introduced reforms to increase market participation, strengthen investor protection and enhance India’s global competitiveness.

Relaxation of foreign investment norms:

Restrictions on foreign direct investment (FDI), especially in insurance and defense, have been eased, improving access for global investors.

Deregulation of industry and business:

The labor laws have been consolidated from 29 statutes into four labor laws, simplifying compliance and ensuring employee welfare.

The expansion of single window clearance systems, including the National Single Window System (NSWS), has reduced approval times for new projects.

Tax and trade facilitation:

The simplification of the GST has led to fewer rate bands and easier filing for small businesses.

The digitalization of customs and export procedures has improved efficiency and transparency.

Support for MSMEs:

SMEs now benefit from simplified registration and improved access to credit, including digital onboarding and collateral-free lending. In FY25, SMEs’ share of new non-food loans increased due to lower interest rates, government credit guarantees, data-driven underwriting and reduced stress levels.

Overall, these measures are expected to boost capacity utilization, encourage new investments and position private capital expenditure as a key growth driver.

(4) Improving U.S.-India trade relations

A favorable US-India trade deal could boost investor confidence, attract foreign investment and stabilize the rupee. Recent developments, including a 10-year defense deal, indicate progress toward such an agreement. Lower tariffs could support export-oriented sectors by improving the visibility of profits.

(5) Restoration of consumption

Rural consumption has improved, reflected in higher tractor sales, lower demand for MGNREGA and rising consumer goods volumes, supported by a strong monsoon.

The 8th Pay Commission recommendations and arrears, expected to come into effect in FY27, could further boost consumption of automobiles, consumer durables and housing for middle to low income earners.

India has also become the world’s second largest e-commerce market in terms of number of online shoppers. Sectors such as travel, leisure, SUVs, luxury homes and high-speed commerce are showing strong growth, driven by premiumization and increasing formalization.

(6) Revival of the investment cycle

India’s investment cycle is expanding into areas such as energy transition, defense manufacturing, data centers, semiconductors and electronics. Supported by policy incentives, these investments are aimed at sustainable, resilient and high-tech growth. Private sector participation in these segments is steadily increasing.

Sectors likely to take center stage in FY27

Financial data: Bank and NBFC stocks are expected to post strong earnings growth in FY27E, driven by credit recovery, margin expansion and better asset quality. Private loans, mortgages and SME loans are leading the recovery. NIMs are likely to benefit from the repricing of deposits, excess liquidity and policy easing. MFIs may also see an improvement in asset quality.

Metal: Supported by domestic demand and government policies, the sector could benefit from developments in China, including the ‘anti-involution policy’ and the Five-Year Plan, which could potentially act as a catalyst until March 2026.

Cement: Consolidation, housing market recovery, rural demand, government investment and cost efficiency, together with price increases, are likely to support profitability and revaluation.

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