Wall Street predicts a recovery in the Indian markets after a difficult year

After one of India’s worst years of market underperformance in decades, some of the biggest names on Wall Street are calling for a recovery.Morgan Stanley, Citigroup Inc. and Goldman Sachs Group Inc. are among those who expect the country’s markets to regain lost ground next year as earnings stabilize and policy support kicks in.

Indian markets have lagged in terms of assets. Stocks have lagged their peers by the largest margin in more than three decades. The rupee is performing the worst in Asia. Bonds remain under pressure due to a large supply of government bonds. US tariffs – the heaviest in the region – have hit exporters’ earnings and slowed dollar inflows, adding to tensions.Yet the first signs of a turnaround are emerging. Growth-supporting measures, combined with a pause in the long streak of profit cuts, are improving sentiment. Investors are also positioning themselves for a possible rotation out of artificial intelligence trading, a move that could divert foreign flows to markets like India.

“A recovery looks increasingly likely in 2026,” said Angela Lan, senior strategist at State Street Investment Management, which has a neutral to slightly overweight stance on India in its emerging market funds. “The cycle of profit cuts is largely behind us, with recent policy measures, interest rate cuts and VAT rationalization feeding through to consumption and lending.”

MSCI Inc.’s India Index is up 8.2% this year, trailing the broader EM benchmark by the largest margin since 1993. If some of these AI gains start to look frothy, flows could shift back to less tech-dependent markets like India, narrowing the gap. “The conversation around India remains a potential haven for money being rotated out of North Asia,” Alexander Redman, chief global equity strategist at CLSA Ltd., said in an interview. AI trading is likely to come to a standstill in the first half of next year, which could make the South Asian market more attractive to investors, he added.

The rupee, which hit a record low in November and has fallen 4.3% this year, may be nearing a bottom in the near term. ING Bank NV considers the currency as the regional currency with the most recovery potential. PineBridge Investments portfolio manager Anders Faergemann said local bonds and the currency will benefit from a more stable global environment and high carry.

That assessment is broadly in line with comments from Sanjay Malhotra, governor of the Reserve Bank of India, who recently said the rupee typically weakens about 3% to 3.5% a year — a range that some investors view as a rough guide to when losses might start to level off.

Despite the shocks of 2025, the Indian economy has held up better than expected. Gross domestic product grew 8.2% in the September quarter from a year earlier, official data showed on Friday. Still, the International Monetary Fund lowered its forecast for the country’s growth next fiscal year to 6.2%, down from its previous forecast of 6.4% due to US tariffs.

Corporate profits are also showing cautious signs of recovery. Earnings at the top 100 companies rose 12% in the September quarter, slightly ahead of expectations and the first in many quarters without a cut in estimates, Citi analysts said. The benchmark NSE Nifty 50 Index briefly hit a record high on November 20, surpassing the September 2024 peak.

Still, it’s been a sharp turnaround for a market once seen as the standout. While peers roared into 2025, India faltered as the economy slowed and President Donald Trump’s tariffs crushed the rupee and cooled a multi-year stock rally.

There are still headwinds beyond tariffs: a stronger dollar and prolonged trade tensions could undermine momentum. Data released this month showed that total Indian exports fell nearly 12% in October from a year earlier, pushing the trade deficit to a record high.

Meanwhile, the recovery in domestic demand and equity valuations, while no longer as extreme, is still robust. The Nifty 50 is trading above 20 times forward earnings, well above its long-term average. Record inflows of $80 billion this year have kept the market buoyant, even as foreign sales and a rush of initial public offerings gobbled up much of that money.

That mix can keep the market within a tight range, said Gautam Chhaochharia, India head of global markets at UBS Group AG. “Indian stock markets are triangulated,” he said. “This could continue for a while.”

RBI support

The Reserve Bank of India has done much of the heavy lifting this year, cutting policy rates by 100 basis points, defending the rupee and buying record amounts of government debt to ease liquidity pressures.

Yet government bonds have lagged behind. They have returned just 2.1%, versus an 8% gain for broader emerging debt, pressured by a weaker rupee and expectations that the rate-cutting cycle may be coming to an end.

With RBI’s Malhotra hinting at another rate cut on December 5, traders are looking for the central bank to revive massive bond purchases. According to Sandeep Yadav, head of fixed income at DSP Asset Managers Pvt, yields could fall about 25 basis points from current levels if the authority were to buy 3 trillion rupees ($33.5 billion) worth of securities.

This support and more stable local data will help restore calm to investors.

Global funds are clawing back after withdrawing more than $16 billion from equities earlier this year. The past two months have seen inflows of $1.7 billion, and with emerging market investors still heavily underweight, some see room for a bigger turnaround if conditions improve further.

“With a brighter outlook for Indian equities in 2026, we think there is a reasonable chance of a reversal of outflows,” said Prashant Kothari, senior investment manager at Pictet Asset Management. “The impact of the tariffs is manageable and hopefully temporary.”