Investing in India’s Equity Market

India's equity market remains the top investment choice among emerging markets, with Morgan Stanley projecting a 14% upside for the benchmark BSE Sensex by December 2025 in its base case.

Supported by robust earnings growth, macroeconomic stability, and strong domestic inflows, India's fundamentals are distinctive despite global growth risks and near-term challenges. Analysts emphasize the validity of India's investment case due to strong performance metrics.

India enjoys improved terms of trade, a flexible inflation-targeting regime, and steady non-portfolio foreign flows, reducing its beta to emerging markets to approximately 0.4, which underpins its high valuation.

Earnings are expected to grow at an annual rate of 18-20% over the next four to five years, driven by capital expenditure cycles, corporate balance sheet deleveraging, and increasing discretionary consumption.

A stable source of domestic risk capital fosters a strong local demand for equities, helping to mitigate external volatility and sustain equity valuations.

Morgan Stanley’s base case incorporates continued fiscal consolidation, rising private investment, and a positive real growth-to-real interest rate gap.

Factors such as stable oil prices, absence of a U.S. recession, and modest interest rate reductions may enhance Sensex earnings, expected to compound at 17.3% annually through FY27, with projections remaining 15% above consensus for this period.

The Indian market is anticipated to evolve into a stock pickers’ market rather than one influenced predominantly by macro factors post-COVID.

Morgan Stanley advocates for overweighting cyclicals like financials, consumer discretionary, industrials, and technology, and recommends underweighting other sectors. Additionally, small and mid-cap stocks are favored, highlighting confidence in domestic growth drivers.