Indian Equities Outlook Brightens Amid Rising GDP and Earnings Growth

Indian stock markets faced headwinds during fiscal years 2025 and 2026 as high valuations combined with slowing earnings growth weighed on investor sentiment. However, R Sivakumar, Chief Investment Officer at Axis Mutual Fund, notes that the landscape is shifting favorably. He pointed out that valuations have begun to correct and earnings are now being supported by stronger nominal GDP growth, improving prospects for Indian equities.

Despite global uncertainties such as the US-Iran conflict, revenues and earnings recorded solid growth in the first quarter of fiscal 2027. Sivakumar explained that the recent years experienced subdued earnings mainly due to weak nominal GDP growth, which directly impacts corporate sales and profits. Nominal GDP growth serves as a broad indicator of the economy’s profitability, and after a prolonged period of low growth, India has returned to double-digit nominal GDP expansion as of the March 2026 and June 2027 quarters.

Last fiscal year, inflation measured by the Consumer Price Index (CPI) remained low, between zero and two percent, resulting in nominal growth at about 8 percent despite a strong 7 percent real GDP increase. Now, with inflation rising, the same real growth translates into an 11 to 12 percent nominal GDP increase. Sivakumar emphasized that the 8.5 percent nominal GDP growth recorded in fiscal 2026 was the slowest in over two decades, excluding the Covid-19 pandemic year. The current momentum suggests a normalization toward sustained double-digit growth.

The Reserve Bank of India projects inflation around 5 percent for the upcoming year, which, if accurate, should enable corporate earnings to maintain strong double-digit growth through the rest of the year and possibly beyond. While inflation can pressure operating margins, especially for companies dependent on commodities, the overall impact is mixed. Commodity producers may benefit from price increases, while consumers of these inputs face tighter margins.

Additionally, companies can experience operating leverage benefits if fixed costs remain stable. Even with slightly narrower margins per unit, rapid business expansion can boost overall profits. The depreciation of the Indian rupee also plays a role by enhancing the competitiveness and profitability of the export sector, which tends to be higher value-added. These factors combine to help sustain margins and profit levels despite rising commodity costs.

The Indian stock market has been among the weaker performers internationally this year. However, this correction has helped reduce overvaluation concerns. Two years ago, the Nifty index traded at roughly 23 to 24 times earnings while earnings growth lingered in single digits. This imbalance discouraged foreign investors, especially compared to markets like the US, China, Korea, and Taiwan, which benefited from AI-related growth and more reasonable valuations.

Today, the Nifty’s price-to-earnings ratio has declined to around 18 times, while earnings growth is accelerating. This marks an improvement in India’s relative attractiveness, with many global markets now trading at valuations equal to or exceeding India’s. Sivakumar expects this to encourage a rotation of funds back into Indian equities. He also noted skepticism emerging around AI-driven companies and their profitability, which may temper enthusiasm in other markets.

At the sector level, valuation declines have been concentrated in banking, information technology, certain consumer stocks, and oil and gas sectors. These sectors collectively represent about 50 to 60 percent of the Nifty 50 index. Meanwhile, mid-cap and small-cap stocks continue to command higher valuations, reflecting their stronger earnings growth profiles. The market currently differentiates sharply between companies with accelerating earnings, which are being re-rated positively, and those with slower growth, which face de-rating pressures.

Sivakumar acknowledged pockets of froth, especially related to expectations around AI and the data center boom in India. Some stocks in mid- and small-cap segments appear priced for growth that may not materialize. He advised investors to critically assess whether companies can justify their valuations based on fundamentals rather than following popular themes. Active portfolio management requires regularly evaluating whether market themes remain promising or have become overextended.

Concerns over rising US Treasury yields have also captured investor attention. Yields have increased due to strong US economic data, ongoing investments in data centers, and inflation pressures. Sivakumar pointed out that rising yields driven by growth, rather than attempts to slow the economy, are not inherently negative for risk assets. However, higher yields raise borrowing costs and increase the required return thresholds for companies, which can lead to wider valuation disparities between financially strong and weaker firms.

While the US faces fiscal challenges from higher interest expenses on its large debt burden, India’s near-term impact mainly involves monitoring the increased cost of capital. For foreign portfolio investors, the improved earnings outlook and more reasonable valuations in India are key factors that could encourage renewed inflows. Sivakumar emphasized that growth and value remain the primary drivers for investment decisions. Changes to capital gains tax or securities transaction tax are secondary considerations once compelling reasons to invest exist.

In summary, the Indian equity market appears poised for a more favorable phase supported by accelerating nominal GDP growth, resilient corporate earnings, and valuation adjustments. Export-oriented sectors, manufacturing, and banking are positioned to benefit from these trends. Investors are advised to focus on companies demonstrating solid earnings growth and to remain cautious of overly optimistic valuations in certain segments. The evolving economic and market environment suggests that India could regain appeal among global investors seeking growth opportunities.