As we begin 2026, India’s equity markets enter the year on a resilient note following a relatively muted 2025, marked by global trade uncertainties, U.S. tariffs, and earnings pressures. However, the consensus among analysts, brokerages, and institutions points to a stronger, more constructive performance ahead — potentially delivering double-digit returns and marking a comeback for Indian equities.
Macroeconomic Foundation: A Rare ‘Goldilocks’ Environment
India’s economy remains a global bright spot, with robust domestic drivers offsetting external headwinds. Real GDP growth for FY 2025-26 has been revised upward to 7.3% by the RBI (from 6.8%), supported by strong consumption, government capex, GST rationalization, and income tax relief. Looking into FY 2026-27, forecasts hover around 6.5-7.5%, with the IMF and others projecting sustained momentum.
Inflation has been exceptionally benign — CPI at historic lows around 2% for FY26 — well below the RBI’s 4% target. This has enabled cumulative repo rate cuts of 100 bps in 2025 (to 5.25%), creating accommodative conditions. The RBI’s neutral stance suggests limited further easing in 2026, but the overall setup of high growth and low inflation supports corporate earnings recovery and valuation comfort.
Domestic liquidity from mutual funds and retail investors continues to anchor the market, even as FII flows may revive with normalizing global conditions and attractive relative valuations.
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Equity Market Expectations
After underperforming global peers in 2025, Indian benchmarks are poised for a rebound driven by:
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Earnings Acceleration
We expect 12-16% growth in Nifty 50 EPS for FY26-27 (fiscal years ending March 2027), marking a significant rebound from the muted single-digit (or even near-flat) growth seen in recent periods, particularly in FY25 and early FY26. This pickup is driven by improving macroeconomic conditions, including lower inflation, rate cuts boosting credit growth, stronger consumption revival, and the positive effects of recent tax and GST reforms flowing through to corporate bottom lines.
- We expect low double-digit growth in FY26, accelerating to 14-17% in FY27, led by sectors benefiting from cyclical recovery.
- Specific examples include BFSI (banking & financial services) expecting robust credit expansion and margin stability; telecom from tariff hikes and subscriber growth
- Capital goods/infrastructure from sustained government capex execution; and consumption-linked sectors (e.g., autos, FMCG) from rural demand revival and higher disposable incomes post-GST/income tax relief.
- We feel the worst of earnings downgrades (seen in 2025 due to global pressures) appears behind us, with early upward revisions emerging in late 2025.
This earnings momentum is expected to be the primary driver of equity returns in H2 2026, as visibility improves.
Valuation Reset
The Nifty 50 is currently trading at a forward P/E ratio of around 22-23x (as of early January 2026), which is much closer to its long-term historical average of ~20-21x compared to the elevated levels (often 24-25x+) seen in prior peak periods. This reset provides more reasonable entry points and reduces the risk of sharp deratings.
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Additionally, India’s premium over broader emerging markets (MSCI EM) has compressed significantly — from peaks of ~80% in late 2024 to around 47% by late 2025 (below the 10-year average of ~57%). This makes Indian equities relatively more attractive on a global comparison, especially as EM peers (e.g., China, Taiwan) have seen stronger performance in 2025 due to AI/tech themes. With India’s structural growth story intact and valuations now offering better risk-reward, any earnings upside could trigger rerating and inflows.
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Policy Tailwinds
Supportive domestic reforms continue to provide a strong foundation, offsetting external uncertainties like global trade frictions. Key examples from recent developments include:
- GST rationalization (GST 2.0) rolled out in September 2025 — simplifying slabs to primarily 5% and 18% (with luxury/sin goods at 40%), reducing taxes on ~375 everyday items (e.g., consumer durables, electronics, construction materials), boosting consumption and easing compliance for businesses.
- Income tax relief — Higher exemption limits and revised slabs (e.g., zero tax up to ₹12 lakh in some cases under the new regime), increasing disposable incomes for the middle class and supporting demand revival.
- Ongoing government capex focus — Sustained high public investment in infrastructure (roads, railways, urban projects), which has a multiplier effect on private sector activity, employment, and related industries like capital goods and construction.
- Broader reforms, such as the implementation of new labour codes and potential easing of customs/FDI regulations, further enhance the ease of doing business.
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Brokerage targets for end-2026 reflect optimism:
- Nifty 50 — Consensus around 28,500-29,300 (base case), with bull scenarios reaching 30,000+ (implying 10-15%+ upside from early January levels).
- Sensex — Targets in the 95,000-98,000 range (base), with bull cases up to 1,07,000 (potential 12-26% gains).
Key sectors to watch include banking/financials (strong credit growth), autos, IT (gradual recovery), consumption-linked plays, and infrastructure/capital goods (policy support).
Ideal Asset Allocation for Indian Investors in 2026
Given the current domestic strength (earnings revival, low inflation, and rate cuts) alongside global uncertainties (U.S. policy shifts, trade risks, and varying growth cycles), experts emphasize the importance of disciplined, diversified multi-asset allocation over chasing single-asset performance. Asset allocation remains the cornerstone of long-term returns, helping manage volatility while capturing India’s growth story.
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Recommended allocations vary by risk profile and horizon, but consensus from leading voices points to the following balanced frameworks for 2026:
- Moderate Risk (Typical Long-Term Investor, 8-10+ Year Horizon):
- Equity (Domestic): 50-65% — Focus on quality large-caps (leading the rally) with selective mid-caps for growth.
- Debt/Fixed Income: 20-30% — For stability and income, especially as rates stabilize.
- Gold/Precious Metals: 5-15% — As portfolio insurance and hedge (central bank buying supports outlook).
- International/Global Assets: 10-20% — For diversification (e.g., U.S. tech/AI themes) and to hedge rupee/currency risks.
- Aggressive (Higher Risk Appetite): 65-80% equity (domestic + some international), 10-20% debt/gold.
- Conservative (Shorter Horizon or Lower Risk): 30-50% equity, 40-60% debt, 10% gold.
Additional Guidance:
- Within domestic equity: Prioritize 55-60% large-caps, 20-30% mid-caps, and limited small-caps for risk control.
- Global exposure (10-30% recommended by many) via feeder funds/ETFs adds resilience against domestic concentration and captures themes like Strategis Minerals/Global Mining/AI/clean energy.
- Rebalance annually or on major life events to maintain targets.
- Use SIPs/staggered deployment for equity entry to navigate volatility.
This multi-asset approach aligns with the “Principle of Asset Allocation” — balancing India’s structural growth with global diversification and hedges.
Risks to Monitor
- Global factors — U.S. policy shifts, tariffs, or AI market resets could introduce volatility.
- Domestic execution — Any slowdown in consumption revival or earnings delivery could cap upside.
- Broader markets (mid/small-caps) may remain selective, with large-caps likely leading.
Bottom Line
2026 looks set to be a year where India’s structural growth story regains momentum, supported by improving macros, earnings pickup, and reasonable valuations. After a year of consolidation, this could be the setup for a more rewarding phase — rewarding patient, quality-focused investors.
We recommend maintaining diversified exposure to high-quality large-caps and selective cyclicals, while staying vigilant on global developments. Align investments with your risk profile, time horizon, and the asset allocation principles outlined above for optimal resilience.
As always, align investments with your risk profile and long-term goals.
Wishing you a prosperous 2026. (You can reach out to the author at srinivasbg@invictusfinserv.com)
