In 2025, capex and SIP flows will lend support, but valuations a worry, says Kotak Securities

Looking ahead, Kotak predicts that the Reserve Bank of India (RBI) will begin easing rates in early FY26, as inflation moderates and growth momentum slows.

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26 Aug, 2025 12:21

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Leading investment and trading platform Kotak Securities is cautious in its market outlook for 2025, balancing India’s fundamentals with concerns over valuation and global uncertainties, but has not ruled out a level of 29,000 on the Nifty 50 index.

While the country’s growth trajectory remains robust, recent economic data and corporate results indicate a slowdown in some areas, prompting a more tempered outlook, said the note. Kotak Securities has highlighted the slowdown in rural demand during Q2FY25, in contrast to the recovery seen in Q1FY25.

The 'unexpected' deceleration in urban demand has added to the mixed signals coming from the economy, said Kotak Securities. On a positive note, banks have shown positive surprises in net interest margins (NIMs) and credit costs, while IT services have seen better-than-expected sequential earnings growth.

The recent electoral victories of Bharatiya Janata Party (BJP) in Maharashtra and Haryana are being seen by the equity markets as positive for the continuation of Centre's development agenda. Kotak Securities now expects a ramp-up in government capital expenditure in the second half of FY25, which should provide a boost to the GDP growth.

With real GDP growth expected at 6.1 percent in FY25 and 6.4 percent in FY26, Kotak Securities told its investors that it remains optimistic about India's long-term prospects, driven by improved government spending, global growth, and a gradual recovery in domestic consumption.

The report projects earnings growth of 4.9 percent for the Nifty 50 in FY25, with a more robust 16.3 percent in FY26 and 14 percent in FY27. While valuations remain on the higher end, there are still opportunities in select sectors. Kotak’s preferred sectors for investment include Banks, IT, Realty, Pharma, and Healthcare, urging investors to focus on quality stocks and remain selective in their picks.

"The next key event, the budget announcement, is anticipated to have a major impact. Next year, after the budget the market can even reach the levels of maybe 28,000 and 29,000," Shrikant Chouhan, Head of Equity Research at Kotak Securities, said.

Also read: Equity fund inflows fall 14% to Rs 35,943 crore in November, large-cap fund demand dips: AMFI

One important factor supporting Indian stock market’s resilience is the continued strength of Systematic Investment Plan (SIP) flows from the mutual funds. Since July 2023, monthly SIP inflows have exceeded Rs 15,000 crore, with FY24 seeing a total of Rs 1.99 lakh crore. This trend has continued into FY25, with Rs 1.59 lakh crore already invested in the first seven months.

The strong retail participation serves as a crucial stabilising factor, especially as FPI flows have turned more cautious. Kotak’s outlook suggests that the trend of strong SIP flows will persist, supporting Indian equities in the face of potential outflows from foreign investors.

While the Centre's focus remains on ramping up capex and completing ongoing projects, Kotak Securities does not anticipate any major fiscal stimulus in the near term. With the BJP’s strong electoral performance and no major state elections looming, fiscal consolidation is expected to continue, although the increasing trend of populist measures by States may weigh on India’s consolidated fiscal deficit.

Looking ahead, Kotak predicts that the Reserve Bank of India (RBI) will begin easing rates in early FY26, as inflation moderates and growth momentum slows. The report highlights a 75 basis point rate cut through the cycle, although a persistent food price shock could delay easing in the near term. Global uncertainties, particularly related to US trade policy and geopolitics, may also influence RBI’s cautious stance.

From a currency perspective, the last two years have seen exceptionally low volatility in the Rupee. However, 2025 could mark a sharp shift. With President-elect Donald Trump set to assume office, significant disruptions in global trade are expected, the Kotak report noted.

"We anticipate Trump will be far more aggressive in his second term, employing both tariff and non-tariff barriers to promote US manufacturing and services. Such policies are likely to fracture global trade networks, generating substantial economic uncertainty that could extend into financial markets and drive US Dollar appreciation," the report said.