In 2024, the MSCI IMI India surpassed China in market capitalisation, but Trump's tariff punishment - which promises a reduction - halted a stock market that in 2025 "only" rose by 9%. This year, with inflation controlled (1.5%), public debt at 80% of GDP, and recent fiscal stimuli from a government with broad support, India will lead global growth at 6.8%.
Text: Vladimir Oleinikov / Guillaume Tresca (Generali Investments)
EQUITY in India has recorded a modest gain this year (the Nifty 100 rose by 9%) compared to global benchmark indices (and the 17.6% rise of the Chinese CSI 300, which includes the 300 largest companies in Shanghai and Shenzhen). This mediocre performance reflected a confluence of adverse factors that reduced its high valuation premium based on the price/earnings ratio and the CAPE: 1) global trade and tariff tensions, including the highest US tariffs in the region, which affected exporters; 2) weakness in the domestic economy, which clouded investor confidence; 3) geopolitical uncertainty, from conflicts in the Middle East to tensions between India and Pakistan, which increased risk aversion.
Since June 2024, analysts have drastically reduced earnings forecasts for MSCI India (which just over a year ago surpassed MSCI China in capitalisation, with $2 Trn): to +12% for 2025 and +10% for 2026. That said, India is characterised by having the highest past and forecast GDP growth globally, with a projected growth differential for 2026 against emerging markets and the world of 2.3 pp and 3.7 pp, respectively.
IMPROVEMENT IN THE MACRO CONTEXT
India is in an optimal macroeconomic cyclical moment. Following poor results in early 2025, the country is experiencing a combination of accelerating growth, inflation at twenty-year lows, favourable monetary policy, and new regulatory reforms. The punitive tariffs of 50% imposed by Trump are weighing down the Indian economy, but relief seems likely due to an agreement with the United States in 2026 as negotiations progress. This environment should have a positive impact on future corporate earnings and, consequently, on upcoming results, which would end the earnings downgrade cycle that began in July 2024.
"The year-on-year increase in earnings in the Nifty 100 went from 19% in Q2 2025 to 27% in Q3 2025"
Growth has recently accelerated, as evidenced by the surprising GDP figure for the third quarter, which stood at 8.2%, and is expected to continue gaining momentum. The consensus on GDP growth for the fiscal year 2026 is now at 6.8%. A broad recovery of national indicators is observed, including agricultural and industrial production, automobile sales, and credit growth. Domestic demand is benefiting from a milder monsoon and regulatory easing. For example, several reductions in GST (Goods and Services Tax) totalling nearly 1.5 bn rupees (tilted towards mass consumption) have supported discretionary demand. Upcoming moderate regulatory reforms (e.g., the 8th Pay Commission) could further boost demand for automobiles and durable consumer goods. And according to the latest election results, the National Democratic Alliance has a significant political margin to accelerate its reform agenda, focusing on deregulation and the privatisation of banks (12 public banks, with serious issues in their credit portfolios, represent 70% of credit).
Inflation has reached a new low of 0.3% year-on-year. Underlying inflation has also weakened, affected by the monsoon and deflationary forces imported from China. Inflation is now more than 100 basis points below the last RBI forecast and the official target (4% ±2%), leaving room for a final rate cut in early 2026.
India has room to meet its fiscal deficit target of 4.4% of GDP in the fiscal year 2026. Recent trends show a contained deficit compared to historical figures, although weakness in tax revenues poses a risk of marginal fiscal deviation. The Union budget in February 2026 could reaffirm India's trajectory towards a balanced primary fiscal situation. For the fiscal year 2027, the fiscal anchor shifts from deficit/GDP to debt/GDP, and the government has set a target of a debt/GDP ratio of 56%. This target seems achievable in a context of higher nominal GDP growth next year, without the need to reduce the deficit.
RECOVERY OF EARNINGS
Overall, India's macroeconomic outlook appears favourable for earnings. There are early signs pointing to a rebound in earnings as growth-friendly measures begin to take effect: income tax relief, streamlining of GST, and the recent 25 basis point cut in the interest rate to 5.25%.
"India reduced its purchase of Russian oil and in November signed a framework Defence agreement with the US. It now expects a tariff reduction to leave the rate at 15%, similar to other Asian economies"
Thus, in the third quarter earnings presentation season, the year-on-year growth in earnings for the Nifty 100 (the 100 largest companies listed on the NSE) increased from 19.7% in the second quarter to 27%, with only the financial sector recording slightly negative year-on-year growth of -5.5%. For the top 50 companies (Nifty 50), earnings growth increased from 9.7% in the second quarter to 47% in the third. Future earnings expectations for the next twelve months have already begun to rise. And while the relative price has also started to react to that improvement in relative revisions, the positive gap is still far from closing.
VALUATIONS AND EPS GROWTH
The 12-month PE ratio of the Indian market, although far from its extremes, remains high: MSCI India trades at around 22 times, slightly below the S&P 500, but above most other markets. Relative to MSCI World, it is only 0.3 standard deviations below its historical average since 2004 and 0.7 standard deviations above MSCI EM. However, India's current high PE is justified by structurally higher earnings prospects: as the fastest-growing major economy globally, it offers a greater margin for earnings growth than most emerging markets. This growth context, combined with the recent easing of RBI policy in a declining inflation environment, reduces risk aversion and improves confidence, which could support higher valuations. Additionally, MSCI India includes large private banks, leading consumer brands, and technology services that typically trade at high multiples. Finally, the increase in India's weight in MSCI EM (to 16% in October 2025, from 8% in 2015) also channels passive flows towards these quality stocks, further reinforcing valuations.
"Although far from its extremes, earnings prospects mean that MSCI India trades at a PE of 22"
In terms of market multiples (PE, PB, PCF, and DY) since 2004, Indian stocks trade at a 22% premium to their history, compared to 48% for the US, 22% for MSCI EMU, and 18% for MSCI EM. The PEG ratio (PE divided by long-term earnings growth) of MSCI India stands at 1.3, in line with MSCI EMU and S&P 500 (1.2), although higher than MSCI EM, which stands at 0.7 (dominated by China and Korea, both also overweighted). In the short term, MSCI India is supported by its value indicator (expected earnings over 12 months divided by the yield on 10-year government bonds). The improvement in the economic trend should reinforce the recovery of earnings, expand earnings per share growth, and provide additional support to multiples.
THE TARIFF UNCERTAINTY BETWEEN INDIA AND THE US
The US has imposed a 50% tariff, leaving India with one of the highest effective rates at 34%, with no reversal so far. Economic activity has responded relatively well: India's exports to the US have fallen by 25% cumulatively, but exporters have redirected shipments to other destinations. There is a high likelihood of tariff reductions following signs of improvement in relations with the US (for example, the 10-year defence framework agreement).
Bilateral agreements are being discussed that could result in a global tariff of around 15%, similar to that of other Asian economies. India has complied with US demands to reduce Russian oil purchases. The timing remains uncertain, but President Trump indicated in November that tariffs would be reduced. A realistic scenario would be a relaxation in the first quarter of 2026.
India's stock markets experienced significant outflows of foreign capital: $17 billion in 2025, comparable to 2022 when the MSCI EM global fell by 22%. This leaves room for new inflows as macroeconomic and earnings prospects improve.♦