Indian stock markets are positioned for a significant upswing, with leading brokerage firm CLSA predicting a return to record highs in the coming year. After months of subdued performance, a combination of attractive valuations, robust economic fundamentals, and improving international relations is expected to fuel a fresh rally.
Market Recovery and Economic Drivers
The benchmark Nifty50 index is currently trading merely 1% below its record closing high of 26,216.05 points achieved on 26 September. According to Vikash Kumar Jain, India strategist and head of India research at CLSA, this threshold is likely to be breached soon. Jain believes Indian equities are not only positioned to reclaim their lifetime high in 2025 but also have the momentum to continue performing well into 2026.
The optimism stems from several key factors. India's economic growth has proven resilient, with first-quarter real GDP expanding by a stronger-than-expected 7.8% year-on-year. High-frequency indicators suggest that the next quarter's growth could also surpass forecasts, alleviating earlier concerns that US trade policies would severely impact the economy.
Geopolitical Winds Shifting in India's Favor
A major headwind for Indian markets appears to be receding. The Trump administration's imposition of punitive 50% tariffs on Indian goods, aimed at reducing India's reliance on Russian oil, had strained bilateral relations. However, CLSA anticipates a normalization of ties by December as India reduces its crude purchases from Russia, which is expected to prompt the US to soften its tariff stance.
Jain suggests that the steep US tariffs are unlikely to last and could reverse within three to six months, providing a substantial boost to Indian shares. Furthermore, the likelihood of a trade deal with the European Union adds another positive catalyst that could significantly improve investor sentiment.
Geopolitical tensions with Pakistan, which flared up in a brief war this summer, are also expected to become less relevant next year, further enhancing the appeal of Indian equities for global investors.
Foreign Investment and Valuation Outlook
The shifting landscape is already influencing foreign institutional investors (FIIs), who had been net sellers for three consecutive months since July. Data from NSDL and Bloomberg shows that FIIs turned net buyers in October, purchasing ₹10,167.46 crore of Indian equities, followed by another ₹500.70 crore so far in November.
Jain notes that India's relative valuation compared to China and broader Emerging Market benchmarks has become much more reasonable. This valuation comfort, combined with improving macros, positions India to finally participate in the global equity bull run. A CLSA report from 13 November highlighted that while nearly 65% of major global equity indices have hit new highs this year—one of the broadest bull-market phases on record—India has been a notable outlier.
This is particularly striking given that India has achieved new highs in 19 of the 25 years this century, making it the most consistent performer among major global indices.
Sector Preferences and Return Expectations
From a monetary policy perspective, Jain anticipates supportive tailwinds. A potential new Federal Reserve chair could implement aggressive rate cuts aligning with Trump's preference for dovish policy. Domestically, India's benign consumer inflation, which registered at just 0.25% in October, could prompt the Reserve Bank of India to lower interest rates.
This low-interest-rate environment would benefit rate-sensitive sectors. Jain is overweight on real estate and prefers rate-sensitives, consumption, and IT, which he believes may see a relief rally. Conversely, he is underweight on healthcare, industrials, and NBFCs.
Regarding valuations, Jain expressed comfort with large banks, big IT companies, and select oil & gas and PSU stocks, while noting that many mid- and small-cap sectors appear stretched.
For 2026, Jain projects more modest returns. In the best case, returns will be at best low double-digit or high single-digit, as limited multiple expansion places greater dependency on earnings growth, which he realistically expects to be in the low double digits. The biggest concern remains potential earnings downgrades, which could temper the market's upward trajectory.
