Wall Street Sees Bright Future for Indian Markets
After experiencing one of its most challenging years in decades, India's financial markets are poised for a significant recovery according to leading Wall Street institutions. Major players including Morgan Stanley, Citigroup Inc., and Goldman Sachs Group Inc. anticipate that Indian markets will regain lost ground next year as corporate earnings stabilize and government policy support begins to show results.
Current Market Challenges
Indian markets have faced substantial pressure across all asset classes during 2025. Stocks have underperformed their global peers by the widest margin in over thirty years, while the rupee has earned the unfortunate distinction of being Asia's worst-performing currency. Government bonds continue to struggle under the weight of heavy debt supply, and US tariffs - the most severe in the region - have significantly impacted exporter earnings while slowing dollar inflows.
The MSCI Inc's India gauge has managed only an 8.2% gain this year, trailing the broader emerging market benchmark by the largest gap since 1993. The rupee hit a record low in November and remains down 4.3% for the year, adding to investor concerns about the market's direction.
Early Signs of Recovery
Despite these challenges, several positive indicators suggest a turnaround may be imminent. Growth-supportive government measures combined with a pause in the prolonged earnings downgrade cycle are beginning to improve market sentiment. Corporate profits for India's top 100 companies rose 12% in the September quarter, slightly exceeding expectations and marking the first quarter in many without estimate reductions according to Citi analysts.
Angela Lan, senior strategist at State Street Investment Management, which maintains a neutral to slight overweight position on India in its emerging market funds, stated: "A rebound appears increasingly likely in 2026. The earnings downgrade cycle is largely behind us, with recent policy measures - rate cuts and GST rationalization - filtering through consumption and credit."
Foreign Investment Opportunities
Market experts identify several factors that could drive foreign investment back to Indian markets. Alexander Redman, chief global equity strategist at CLSA Ltd., highlighted in an interview that "The conversation around India remains as a potential refuge for money rotated out of North Asia." He added that the artificial intelligence trade will likely unwind in the first half of next year, potentially making Indian markets more attractive to global investors.
Global funds are already showing tentative signs of returning after withdrawing more than $16 billion from Indian equities earlier this year. The past two months have seen inflows of $1.7 billion, and with emerging market investors still heavily underweight on India, many see potential for larger reversals if conditions continue improving.
RBI's Supportive Measures
The Reserve Bank of India has played a crucial role in stabilizing markets through aggressive policy actions. The central bank has cut policy rates by 100 basis points, actively defended the rupee, and purchased record amounts of government debt to ease liquidity pressures. With RBI Governor Sanjay Malhotra hinting at another rate cut on December 5, traders are watching for the central bank to revive large-scale bond purchases.
Sandeep Yadav, head of fixed income at DSP Asset Managers Pvt., estimates that yields could drop approximately 25 basis points from current levels if authorities purchase 3 trillion rupees ($33.5 billion) of securities.
Economic Resilience Amid Challenges
India's economy has demonstrated remarkable resilience despite the shocks of 2025. Official data showed gross domestic product expanded 8.2% in the September quarter compared to the previous year, though the International Monetary Fund has revised its growth projection for the next financial year downward to 6.2% from 6.4% due to US tariff impacts.
Prashant Kothari, senior investment manager at Pictet Asset Management, expressed cautious optimism: "With better prospects for Indian equities in 2026, we believe there is a fair chance of a reversal of the outflows. Tariff impact is manageable - and hopefully temporary."
While challenges persist including a stronger dollar and prolonged trade tensions, the consensus among major financial institutions suggests that India's worst market performance in decades may soon give way to a sustained recovery as policy measures take full effect and global investment patterns shift.
