India’s macro environment is entering a sweet spot. Weexpect corporate earnings to pick-up after a weak FY25, overFY26–28. This view is supported by a revival in private capex,operating leverage, and broader economic formalisation.
Concurrently, both domestic and global interest rate cyclesare turning supportive. Whilst Indian equity marketvaluations are by no means cheap, it is our view that earningsgrowth and the rate-cut cycle will be supportive.
Earnings Upside: Key Drivers
1) Capex
Source: MSCI, Care Rating, RIB
- Ministry of Statistics and Programme Implementation – National Accounts Statistics 2024
- Press Information Bureau – PLI Schemes Overview
- India passed 100 GW of installed renewable capacity in 2021 and is targeting 450 GW by 2030 Major projects include 50 MWh battery storage in Leh and 2,000 MWh tenders by SECI
2) Operating Leverage
3) Deleveraged Corporate Balance Sheets
Source: CMIE, Capitaline, Bloomberg, Internal Research
Structural Tailwinds
1) Formalisation
Source: GSTN, NCPI, Nielsen, RBI, Ministry of Finance, Industry Reports
2) Global Diversification
Source: DGFT, Commerce Ministry, PLI Dashboard, Invest India
3) Financialisation
Source: AMFI, NSE, NSDL, SEBI
Rate Cycle: Global and Domestic
3) Global
2) Domestic
| Indicator/ Sector | Current | Outlook | Expected Impact |
|---|---|---|---|
|
Repo Rate (%) |
6.50% |
5.50% |
Lower borrowing costs |
|
CPI (YOY, %) |
2.82% |
4-4.5% |
Stable price environment |
|
Auto Sales Growth |
8% |
12-14% |
Affordability boosts demand |
|
NBFC Credit Growth |
15% |
18-20% |
Cheaper funds |
|
Real Estate Absorption |
Steady |
Rising |
Interest-rate sensitive, mid-income traction |
|
Capex Lending by Banks |
Moderate |
Improving |
Rate-sensitive, Private Investment recovery |
Falling Rates and Rising Earnings
- Between 2003–2007, a 22% EPS CAGR and a declining policy rate environment drove the Nifty to deliver a stellar 38% annualised return.
- Similarly, during 2013–2017, an 11–13% earnings CAGR alongside easing rates saw the index double in value over four years.
- Looking ahead, projections for 2025–2028 suggest a 12-15% EPS CAGR with another likely easing cycle, creating conditions that have historically triggered market reratings.
Sector Implications
- Ongoing capex cycle: Boost demand for industrials, building materials, and logistics players tied to infrastructure and manufacturing growth.
- Diversification of global supply chains: A focus on exports will benefit industries where India has expertise and value embedded, through economic scale and a rising global footprint, such as pharmaceuticals, technology and auto ancillaries.
- Rates: Falling interest rates are expected to benefit rate-sensitive sectors like NBFCs, autos, and real estate, which thrive on improved credit availability and lower financing costs.
- Renewables: Green tech and high-value manufacturing, such as EVs, solar, batteries, and semiconductors, are emerging as strategic priorities, supported by policy incentives and global shifts.
- Consumption: Mid-premium durables, FMCG brands, and rural-focused products are gaining traction as incomes rise, and demand broadens.
Risks to Monitor
- Key among them are sharp increases in oil and agricultural prices, which could trigger imported inflation and strain the current account
- Delays in global policy easing or unexpected strength in the U.S. dollar may also lead to capital flow volatility and currency pressure
- Additionally, rising geopolitical tensions—particularly in the Gulf or Indo-Pacific—could disrupt trade routes and fuel risk aversion
- However, India is relatively well-positioned to absorb such shocks, supported by a robust $700 billion foreign exchange reserve buffer and strong, consistent domestic inflows from retail and institutional investors
Conclusion
India stands at an inflection point, where the convergence of improving corporate earnings, easing real interest rates, and sustained structural reforms should lay the groundwork for a continued outperformance relative to the MSCI ACWI and Emerging Markets.
With earnings visibility improving across sectors and monetary conditions turning supportive both globally and domestically, the setup is highly favourable for investors seeking exposure to both cyclical resilience and long-duration growth. As we head into FY26–28, the deepening of India’s earnings cycle, underpinned by broadbased capex, export growth, formalisation, and liquidity support, suggests the potential for a structural story. This phase could mirror past periods where strong fundamentals met conducive policy environments, unlocking alpha for investors with a long-term approach.
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