India’s macro environment has been tested by a series of external and domestic shocks over the past two years, ranging from tariff-related pressures and AI-driven uncertainty to geopolitical volatility in the Middle East (which pushed up oil prices sharply) and evolving weather-related risks from El Niño.
While Indian equities have underperformed both emerging markets and the S&P 500 indices over the past two years, there have been shorter periods witnessing a reversal of sorts. This happens whenever there is an easing of crude oil prices, a correction in global technology stocks or any positive news on the economy, trade deals or tariffs.
Indian policymaking has remained active and responsive, helping cushion the economy from recent external shocks. Despite the sharp rise in oil prices this year, the pass-through to domestic prices was relatively mild, which has helped contain broader inflationary pressures. In addition, the broader market and the company’s portfolio specifically only have minor exposure to the direct impact of US tariffs.
The foreign currency deposit mobilisation scheme has helped India raise a provisional total of $127.2bn, thereby bolstering the capital account and stabilising the currency.
For commercial banks, this provides a vital funding stream to sustain credit growth and generate healthy margins. The central bank’s foreign-exchange reserves rose to a record $740.8bn by the end of August 2026, providing a sizeable external buffer.
In the medium term, the recent energy crisis has prompted a policy shift from pure energy transition to broader energy security and domestic capacity creation. The government is accelerating renewables, coal reliability, nuclear expansion, fertiliser diversification, defence indigenisation and data centre infrastructure to reduce external vulnerabilities.
Over the past year, India has signed trade agreements with the UK and EU. While contingent on effective implementation, regulatory alignment and capacity expansion, the key positives are enhanced market access and competitiveness over the medium term.
During this time, despite the conflict, high-frequency indicators continued to point to a resilient domestic demand environment. Consumption was steady, as reflected in passenger vehicle and two-wheeler sales and GST collections, while investment activity has been showing signs of improvement as seen in project announcements, supported by public spending, improving credit growth and a recovery in manufacturing.
Temporary energy supply constraints did lead to some industrial disruptions in the initial days of the Middle East crisis, but strategic trade deals and supply-chain normalisation should support improving strength in both domestic and external demand, with consensus projecting full-year 2026/2027 estimated real GDP growth of more than 6.5%.
The recent real GDP growth of 7.8% year-on-year (YoY) in the first quarter of the 2027 financial year (FY) was comfortably ahead of the market expectations, reflecting broad-based improvement across manufacturing and services. Healthy capital-goods activity, bank credit growth and sustained government infrastructure spending all point to an improving investment cycle.
India’s corporate earnings trajectory remains broadly stable despite a short-term slowdown over the past year. The first quarter of FY27 saw earnings tracking ahead of expectations, with net-profit growth for reporting Nifty companies in the mid-teens, while small- and mid-cap earnings growth has been closer to 20% YoY.
Indian companies have largely protected their margins despite higher input and logistics costs through pricing, premiumisation, mix improvement and cost control.
However, given continuous geopolitical uncertainty, corporate commentaries on future growth/profitability could be more important for the market than past earnings.
Given the near-term underperformance of the market, India’s valuation premium to emerging markets has moderated and remained in the range of approximately 50-75% over the past few months (against a long-term average of 40-45%), below its peak of 80-90% premium observed over 2023 and 2024.
On an absolute basis, India is trading at 18.4x one-year forward price-to-earnings, below its 10-year average of 20.7x.
Drivers of foreign inflows and a potential increase in positioning seem favourable: there is an earnings recovery from medium-term lows; high global bond yields are pushing investors to favour fundamentally strong growth markets; the global AI trade is witnessing some volatility; India’s weight in MSCI Emerging Markets index and investor’s active weight on India are at 10-year lows.
Near-term key catalysts include geopolitics, management commentary on the future earnings and capacity expansion, El Niño and spatial/temporal distribution of rainfall and domestic policy/reform environment.
We believe that India is on the cusp of realising its true economic potential while benefitting from several secular tailwinds, the most important being its favourable demographics and rising income levels, which will allow domestic consumption to flourish, with the demand for discretionary goods, travel and leisure, financial and healthcare services on the rise.
The country is also experiencing a rapid digitalisation of services, supported by increasing internet penetration and formalisation on the back of ongoing structural reform.
Additionally, the most attractive aspect of investing in India, in our opinion, is the outsized alpha opportunity that the market presents compared to any other equity market globally, particularly as the Indian market is still relatively under-researched.
Such alpha opportunities are present across the large-, mid- and small-cap spectrum. All these factors place India as one of the most promising economies over the medium term and make for a highly compelling investment proposition.
Ayush Abhijeet is investment director at Ashoka India Equity trust. The views expressed above should not be taken as investment advice.