Jitendra Sriram on why earnings stability, not euphoria, will drive the next leg of the Indian rally

India’s benchmark indices may be hovering around all-time highs, but the next phase of the market’s trajectory will be determined more by earnings stability and macro resilience than excitement, says Jitendra Sriram, Senior Fund Manager, Baroda BNP Paribas Mutual Fund.In an interview with ET Now, Sriram noted that the Q2 2025 earnings numbers marked a turning point after four consecutive quarters of downgrades. “The numbers are finally in line with expectations,” he said, adding that the government’s demand stimulus measures – VAT cuts, tax cuts and consumption incentives – will feed into financial performance in the coming quarters.

Santa Claus rally? Maybe not a 30% gain, but the trend is upward

While historical data suggests the market is posting an average gain of 30% after surpassing previous quarterly highs, Sriram cautions that such expectations may be “a little too optimistic.” However, he remains firmly constructive on the market’s direction, citing improved earnings visibility and moderating valuations.

India’s macros are flashing green, but nominal GDP is the main focus

India’s strong real GDP growth of 8.2% provides a supportive macroeconomic environment. But as inflation remains unusually low, nominal GDP growth – crucial for sales growth – may be subdued in the short term.

Sriram expects double-digit earnings growth in FY26, with low to mid-teens growth likely in FY27 and FY28 once inflation normalizes and nominal GDP gains momentum.

Financial services, pharmaceuticals and energy companies are among the top sector bets

Sriram identifies three clear sector leaders for the next market leg:

1) Financial data

Fairly valued and poised to benefit from softer monetary policy, improving credit growth and stable asset quality. He expects that banks and lenders will continue to form the basis for market leadership.

2) Pharmaceutical products

Strong opportunities in CDMO, contract manufacturing and innovation-led drug development make the pharmaceutical sector a promising multi-year story.

3) Power and energy infrastructure

A global increase in electricity demand, driven by data centers and AI investments, is driving a structural revival.
Indian power equipment makers and T&D players will benefit from the accelerated expansion of capital investments and hyperscalers.

FII sales will slow down and purchasing is likely to resume in 2025

Foreign investors have been net sellers over the past year as currency weakness and earnings downward revisions hurt dollar yields.

But this trend is now declining, Sriram said. With the rupee stabilizing, earnings recovering and relative valuations improving sharply against Asian peers, FII inflows should resume next year.

“FIIs will return once India’s risk-return becomes more favorable than regional alternatives,” he noted.

RBI’s dilemma: Should interest rates be cut if GDP grows at 8%?

The upcoming monetary policy review will be a balancing act. With real GDP strong and consumption improving, the RBI must decide whether to preserve policy space for future shocks or cut rates early to support growth amid weak nominal GDP.

Sriram expects a nuanced, cautious stance, but believes the policy environment will ultimately become more favorable to lenders.

In short

The market’s record highs are not a sign of turmoil, but of stabilizing fundamentals, better visibility into earnings and stronger sector-specific tailwinds.

The year ahead, Sriram concludes, will not be defined by momentum trading, but by selective, fundamentals-driven sector rotation – with financials, pharmaceuticals and energy companies leading the way, and FII flows gradually turning supportive.