AFTER one of India’s worst years of market underperformance in decades, some of Wall Street’s biggest names are calling for a rebound.
Morgan Stanley, Citigroup and Goldman Sachs Group are among those who expect the country’s markets to claw back lost ground next year as earnings stabilise and policy support kicks in.
India’s markets have trailed across assets. Stocks have lagged peers by the widest margin in more than three decades. The rupee is Asia’s worst performer. Bonds remain under pressure from heavy government debt supply. US tariffs – the harshest in the region – have hit exporters’ earnings and slowed dollar inflows, amplifying the strain.
Even so, early signs of a turn are emerging. Growth-supportive measures, combined with a pause in the long stretch of earnings downgrades, are improving sentiment. Investors are also positioning for a possible rotation out of the artificial intelligence trade, a move that could redirect foreign flows toward markets like India.
“A rebound appears increasingly likely in 2026,” said Angela Lan, senior strategist at State Street Investment Management, which has a neutral to slight overweight stance on India in its emerging market (EM) funds. “The earnings downgrade cycle is largely behind us, with recent policy measures – rate cuts and GST rationalisation – filtering through consumption and credit.”
MSCI’s India gauge is up 8.2 per cent this year, trailing the broader EM benchmark by the widest gap since 1993. If some of those AI gains start to look frothy, flows could shift back toward less tech-dependent markets like India, helping narrow the gap.
“The conversation around India remains as a potential refuge for money rotated out of North Asia,” Alexander Redman, chief global equity strategist at CLSA said in an interview. The AI-trade will likely unwind 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 is down 4.3 per cent this year, may be approaching a near-term floor. ING Bank views it as the regional currency with the most rebound potential. PineBridge Investments portfolio manager Anders Faergemann said local bonds and the currency stand to benefit from a steadier global backdrop and high carry.
That assessment broadly aligns with remarks from Reserve Bank of India (RBI) governor Sanjay Malhotra, who said recently that the rupee typically weakens about 3 to 3.5 per cent a year – a range that some investors view as a rough guide for when losses might start to level off.
Despite the shocks of 2025, India’s economy has held up better than expected. Gross domestic product expanded 8.2 per cent in the September quarter from a year earlier, official data showed on Friday (Nov 28). Still, the International Monetary Fund has cut its projection for the nation’s growth next financial year to 6.2 per cent from its earlier forecast of 6.4 per cent due to US tariffs.
Corporate earnings also show tentative signs of recovery. Profits for the top 100 firms rose 12 per cent in the September quarter, slightly above expectations and the first in many quarters without an estimate cut, Citi analysts said. The benchmark NSE Nifty 50 Index briefly hit a record on Nov 20, surpassing its September 2024 peak.
Still, it’s been a sharp reversal for a market once seen as the standout. While peers roared back in 2025, India faltered as the economy slowed and US President Donald Trump’s tariffs crushed the rupee and cooled a multi-year equity rally.
Headwinds beyond tariffs persist: a stronger dollar and prolonged trade tensions may sap momentum. Data released this month showed India’s total exports plunged almost 12 per cent in October from a year earlier, pushing the trade deficit to a record high.
Meanwhile, the recovery in domestic demand, and stock valuations, though off their extremes, are still rich. The Nifty 50 trades above 20 times forward earnings – well above its long-term average. Record local inflows of US$80 billion this year have kept the market cushioned, even as foreign selling and a rush of initial public offerings soaked up much of that money.
That mix may keep the market in a tight range, according to Gautam Chhaochharia, head of global markets India at UBS Group. “Indian equity markets are boxed in a triangle” he said. “This may continue for a while.”
RBI support
The RBI 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 sovereign bonds have lagged. They’ve returned just 2.1 per cent versus an 8 per cent gain for the broader EM debt, weighed down by a weaker rupee and expectations that the rate-cut cycle may be nearing an end.
With RBI’s Malhotra hinting at another rate cut on Dec 5, traders are looking for the central bank to revive large-scale bond purchases. Yields could drop about 25 basis points from current levels if the authority were to buy three trillion rupees (S$43.5 billion) of securities, according to Sandeep Yadav, head of fixed income at DSP Asset Managers.
That support and steadier local data is helping restore some investor calm.
Global funds are tiptoeing back after pulling more than US$16 billion from equities earlier this year. The past two months have brought inflows of US$1.7 billion, and with EM investors still heavily underweight, some see scope for a larger reversal if conditions improve further.
“With better prospects for Indian equities in 2026, we believe there is a fair chance of a reversal of the outflows,” said Prashant Kothari, senior investment manager at Pictet Asset Management. “Tariff impact is manageable – and hopefully temporary.”
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