Raychaudhuri: Indian equities are a bright spot in the market.
Indian stocks, once the darlings of global investors have been underperforming other emerging markets in the past year due to?trade tensions and falling earnings estimates, while high valuations also dulled their shine. Changing domestic and geopolitical tendencies may attract global investors again.
Last year, the main problem for Indian shares was that earnings expectations declined even though valuations remained high. The weakening of household consumption and the'muted corporate expenditure' were the main factors that impacted earnings forecasts.
The government is working to fix the damage on the front of consumption. In its budget for 2025, the government adjusted the personal income tax brackets. This 'effectively reduced the total tax burden of 11 billion rupees. In September, the government cut the GST by another 1 trillion rupees.
These measures are already having a positive impact on high-frequency data. The components of the Index of Industrial Production show that consumer goods production has increased since the end of 2012, which indicates a rising demand. The consumer durables are rebounding faster than staples. This is due to the extra income flowing into discretionary expenditure. As a result of policies that encourage advanced manufacturing and AI, the government's expenditure on long-term investments is now increasing as a percentage of total spending. Hyperscalers have made several announcements in recent months, such as the Adani Group’s pledge to invest $100 billion into AI data centers by 2035.
This should, in turn boost demand for building materials, equipment, and base metals.
TRADE DEALS FOR THE RESCUE? India's recent 'trade-deal spree' - notably with the European Union, and the U.S. – could help when it comes to currency and capital worries. However, the U.S. Supreme Court has invalidated President Donald Trump’s tariffs under International Emergency Economic Powers Act.
The rupee will depreciate by about 5% in 2025 due to a lack of?foreign investment (FDI) as well as portfolio flows. According to Reserve Bank of India figures, FDI was just $353 millions in fiscal year 2024-25 as overseas investors pulled their money out. According to National Stock Exchange of India data, foreign portfolio investors sold $19 billion of Indian equity in 2025.
If India is able to negotiate competitive trade terms with a greater number of partners, it could spur FDI and stabilize the rupee, attracting portfolio investors. This could create a familiar positive cycle: A stronger currency would attract more flows, which in turn would support the currency.
The trade and tariff picture has now changed. The latest development from the U.S. Supreme Court may improve India's position during ongoing negotiations.
India's appeal for manufacturers seeking to locate outside China may diminish if India’s regional competitors end up being subjected to the same U.S. Tariff levels.
A positive sign among the noise is the fact that portfolio flows from abroad are showing signs of a recovery.
Foreigners purchased $2.2 billion worth of Indian stocks in the first 3 weeks of February. During that time, the rupee recovered from its record low against the US dollar. This move, while partly driven by dollar weakness, also indicates that investor sentiment towards India may be stabilizing.
Falling values, more investor interest
Indian stocks have traditionally traded at a higher price than other Asian markets. This is due to their better earnings and capital efficiency.
FactSet reports that this premium, which peaked at 87% in September of 2024, has now fallen to 38%. This is close to the average for the past 15 years. The average price to earnings multiple has dropped from 25.2 to 21.7, which could attract renewed investor interest.
Investors are likely to focus their attention on sectors that will?benefit government policy such as consumer discretionary goods, industrials and construction, chemicals, and base metals. The growth of the economy could benefit both banks and non-bank lenders.
However, Indian stocks are far from being a "slam-dunk". Contrary to North Asia, India's consensus profit estimates have not yet recovered. Capital costs remain high. The yield on the 10-year bonds of the country has barely changed, even though the RBI cut interest rates by about 125 basis points in the last year. Another challenge is creating jobs. According to the Periodic Labour Force Survey of the Indian government, India's youth unemployment rate is at or near 10%. This could increase if tech companies implement mass layoffs as some experts predict. This would have a negative impact on overall economic growth and consumption.
Of course, there is a lot of uncertainty in the trade. The interim U.S. agreement offered India an advantage over its regional competitors, but came with strict conditions. Among them was a requirement for India to import U.S. products worth $500 billion. The U.S. Supreme Court's decision has raised questions as to what terms will ultimately be included in the?trade agreement.
Investors may be taking another look at Indian stocks, but this fragile improvement is likely to last only if there's clarity on the trade front and if government measures that boost consumption are successful.
(source: Reuters)
