Moneycontrol Pro Panorama | Which way will Indian equities swing in 2026?

What supported equity markets was the structural shift of retail money

Dear Reader,

Even as market veterans and analysts continue to spar over the attractiveness of Indian equity valuations, the year 2026 has opened with a lack of investor enthusiasm. This even after India drew negative attention for being the worst performing market in the MSCI pack, in 2025.

The jury is out there on whether 2026 will be a year of strong returns from Indian equities and outperformance. Here are some pointers that investors could ponder over.

On the positive side, India’s macroeconomic health is resilient. Wednesday’s advance estimates peg the FY2026 gross domestic product (GDP) at 7.4 percent, signalling robust growth at a time when the country is steering through the ramifications of US’ steep tariffs, slowdown in global economies, and the like. Stable growth rates and falling inflation and interest rates augur well for corporate earnings and hence, translate into higher price-to-earnings multiples (PE). In addition, what supported equity markets was the structural shift of retail money from fixed deposits to equities via the systematic investment plan (SIP) route over the past few years.

A report by Morgan Stanley explains there is a case for rerating in Indian equities, given factors such as falling intensity of oil in GDP and rising share of exports in GDP, especially services, and fiscal consolidation. The Reserve Bank of India’s policy support for retail loan growth and liquidity support is driving consumption.

Besides, there is reason to believe that beginning Q3 FY26, one will see the full-blown impact of the goods and services tax (GST) reforms that has spurred discretionary consumption and made it more broad based. “The quality of growth should be better than previous quarters as we expect 20 sectors/ segments to post growth in double digits, marking the completion of the full circle of earnings recovery since it first started to weaken in 1QFY25,” states a report by Motilal Oswal Financial Services. This is seen in rising vehicle and home loans and growth in sectors such as automobiles, travel and tourism and real estate.

But there are pockets of concern, too. The latest GDP data, while robust in aggregate terms, shows lopsided growth. The expansion remains narrowly driven by a couple of services sectors, leaving the vast majority of workers in agriculture and mass-employment sectors behind, says my colleague Manas Chakravarty, in a detailed analysis here.

Another serious concern is that the mojo is yet to return in private capex. In spite of corporates sporting healthy cash flows and stable revenue growth, there is no urgency to invest in fresh capacity building as utilisation levels are sticky at 70-75 percent for the last few years. “A structural consumption story that will drive capex is still at least three years away,” highlights a report by international investment advisory firm Sanford Bernstein, which has a neutral stance on Indian equities.

On top of this, the US tariffs remain a Damocles’ sword on investor sentiment. While the Indian industry’s efforts to navigate exports in new markets even as it awaits clarity on US duties is commendable, the pain in some sectors -- textiles, aquaculture -- is palpable and could impact earnings trajectory in the near quarters. Equity markets have already factored in the best case scenario of the additional punitive 25% tariffs being lifted in 2026!

Also, 2026 will see the true impact of artificial intelligence unfold. The year could bring fresh challenges for the IT sector in terms of margins, hiring freeze and projects.

In other words, there are no major tailwinds one can expect to drive earnings growth and lift animal spirits in the coming quarters.

Coming to valuations, the Nifty 50 is still trading at about 21 times one-year forward earnings. This is at a premium to the 10-year average of 19. This explains the huge sell-off in 2025 by foreign portfolio investors, who are unlikely to comeback in a hurry. In contrast, the domestic investors are more bullish. In the latest Moneycontrol Market Poll, most respondents said Indian equities are reasonably valued even as opinions remain split on earnings growth.

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Markets

MC Markets Poll: Market divided on government’s ability to meet fiscal deficit target in the upcoming budget; majority see capex growth over 8%

Tech and Startups

IT moves beyond agentic AI as Wipro, Persistent bet on autonomous, quantum-led systems for 2026

Technical Picks: Infosys, BPCL, Bajaj Holdings & Investment

Vatsala Kamat

Moneycontrol Pro