Our Head of India Research and Chief India Equity Strategist
Ridham Desai addresses a big debate: whether India stocks are
poised for a recovery after underperforming other emerging
markets in 2025.
Read more insights from Morgan Stanley.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Ridham Desai, Morgan
Stanley’s Head of India Research and Chief India Equity
Strategist.
Today: one of the big debates in Asia this year. Can Indian
equities recover their strength after a historic
slump?
It’s Wednesday, January 14th, at 2pm in Mumbai.
India ended 2025 with its weakest relative performance versus
Emerging Markets since 1994. That’s right – three decades. The
reason? A mid-cycle growth slowdown, rich valuations, and the
fact that India doesn’t offer an explicit AI-related trade. Add
in delays on the U.S. trade deal plus India’s low beta in a
global bull market, and you’ve got a recipe for
underperformance.
But we think the tide is turning.
Valuations have corrected meaningfully and likely bottomed out in
October. More importantly, India’s growth cycle looks poised for
a positive surprise. Policymakers have gone all-in on reflation,
deploying a mix of aggressive measures to revive momentum. The
Reserve Bank of India has cut rates, reduced the cash reserve
ratio, infused liquidity and gone in for bank deregulation which
are adding fuel to the fire. The government has front-loaded
capital expenditure and announced a massive ₹1.5 trillion GST
rate cut to encourage people to spend more on goods and
services.
All these moves – along with improving ties between India and
China, Beijing’s new anti-involution push, and the possibility of
a major India-U.S. trade deal – are laying solid groundwork for
recovery. Put simply, India’s once-tough, post-pandemic economic
stance is easing up. And that could open the door to a major
shift in how investors see the market going forward.
India’s macro backdrop is also evolving. The reduced reliance on
oil in GDP, the growing share of exports, especially in services,
the ongoing fiscal consolidation – all indicate a smaller saving
imbalance. This means structurally lower interest rates ahead.
And flexible inflation targeting, and volatility in both
inflation and interest rates should continue to decline.
High growth with low volatility and falling rates should
translate into higher P/E multiples. And don’t forget the
household balance sheet shift toward equities. Systematic flows
into domestic mutual funds are evidence of this trend.
Investor concerns are understandable, but let’s keep them in
context. More companies raising capital often signals growth
ahead, not just high valuations. Domestic investment remains
strong, thanks to a steady shift toward equities. India’s premium
valuations reflect solid long-term growth prospects and
expectations for lower real interest rates. On the policy front,
efforts to boost growth are robust, and we see real growth
potentially surprising to the upside. While India isn’t a leader
in AI yet, the upcoming AI summit in February could help address
concerns about India’s role in tech innovation.
What key catalysts should investors watch? Look for positive
earnings revisions, further dovishness from the RBI, reforms from
the government including privatization, and the long-awaited U.S.
trade deal. But also keep an eye on key risks – slower global
growth and shifting geopolitical dynamics.
So, after fifteen months of relative pain, could India be on the
cusp of a structural re-rating? If growth surprises to the upside
– and we think it will – the story of 2026 may just be India’s
comeback. Stay tuned.
Thanks for listening. If you enjoy the show, please leave us a
review wherever you listen and share Thoughts on the Market with
a friend or colleague today.
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