After one of the worst years of market underperformance in decades, India may finally be on the cusp of a recovery, according to some of Wall Street’s biggest names. Morgan Stanley, Citigroup Inc., and Goldman Sachs Group Inc. are among the firms forecasting that the country’s markets could regain lost ground next year as earnings stabilize and policy support strengthens.
India’s markets have struggled across multiple asset classes in 2025. Stocks have lagged peers by the widest margin in over three decades, the rupee has been Asia’s worst-performing currency, and bonds remain pressured by heavy government debt issuance. Compounding these challenges, U.S. tariffs — the harshest in the region — have weighed on exporters’ earnings and slowed dollar inflows, exacerbating market strains.
Despite these setbacks, early signs of a turnaround are emerging. Growth-supportive measures, alongside a pause in earnings downgrades, are improving sentiment. Investors are also eyeing a potential rotation out of the artificial intelligence trade, which 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 maintains a neutral to slight overweight stance on India in its emerging market funds. “The earnings downgrade cycle is largely behind us, and recent policy measures — such as rate cuts and GST rationalization — are starting to filter through to consumption and credit.”
Indian Stocks Lag but Opportunity Looms
MSCI Inc.’s India gauge is up 8.2% this year, trailing the broader emerging market benchmark by the widest gap since 1993. Analysts suggest that if some AI-driven gains in other markets appear overstretched, capital could flow back to less tech-dependent markets like India.
“The conversation around India remains as a potential refuge for money rotated out of North Asia,” said Alexander Redman, chief global equity strategist at CLSA Ltd. “The AI-trade is likely to unwind in the first half of next year, which could make the South Asian market more attractive to investors.”
The rupee, which hit a record low in November and has fallen 4.3% this year, may be approaching a near-term floor. ING Bank views it as the regional currency with the most rebound potential, while PineBridge Investments portfolio manager Anders Faergemann said local bonds and the currency could benefit from a steadier global backdrop and high carry.
Reserve Bank of India Governor Sanjay Malhotra noted that the rupee typically weakens around 3%–3.5% annually, a range some investors use as a rough benchmark for when losses may begin to stabilize.
Economic and Corporate Resilience
India’s economy has weathered the shocks of 2025 better than expected. GDP grew 8.2% in the September quarter compared with a year earlier. While the International Monetary Fund cut its projection for the next financial year to 6.2% from 6.4% due to U.S. tariffs, corporate earnings show tentative signs of recovery. Profits for the top 100 firms rose 12% in the September quarter, slightly surpassing expectations and marking the first quarter in many without an estimate cut.
Even as India’s markets struggle to match the post-pandemic rebounds seen in peers, valuation gaps are narrowing. The Nifty 50 Index trades above 20 times forward earnings, above its long-term average, while record local inflows of $80 billion have cushioned the market despite foreign selling and heavy IPO activity.
Policy Support Remains Crucial
The Reserve Bank of India has been pivotal in supporting markets, cutting policy rates by 100 basis points, defending the rupee, and purchasing record amounts of government debt to ease liquidity pressures. Despite this, sovereign bonds have lagged, returning just 2.1% compared to 8% for broader emerging market debt.
With hints of another rate cut, traders expect the RBI to potentially resume large-scale bond purchases, which could reduce yields and stabilize the market further.
Global funds are cautiously returning after $16 billion in equity outflows earlier this year, with $1.7 billion flowing back in the past two months. Analysts see room for a more substantial reversal if conditions continue to improve.
“With better prospects for Indian equities in 2026, there is a fair chance for a reversal of the outflows,” said Prashant Kothari, senior investment manager at Pictet Asset Management. “The tariff impact is manageable — and hopefully temporary.”