The Indian stock market has made headlines by becoming the first major global index to completely recover from the losses triggered by President Donald Trump’s implementation of reciprocal tariffs on April 2. Currently, the Nifty50 has surpassed its pre-April 2 levels, showcasing India’s remarkable resilience. In contrast, other significant indices, including the S&P 500, Nasdaq, Hang Seng, Shanghai Composite, and Euro Stoxx 50, remain below their pre-tariff levels.
Foreign Portfolio Investors Shift Strategies
In a surprising turn of events, Foreign Portfolio Investors (FPIs), who had been persistent sellers in the Indian market for several months, have recently made a remarkable comeback. Over the last three trading days, FPIs purchased stocks worth ₹14,670 crore, signaling a potential shift from their previous bearish stance to a more bullish outlook.
What’s Driving the Change?
The dollar’s steady appreciation post-Trump’s election led many FPIs to shift their investments from international markets, including India, to the U.S. This shift was further fueled by the “sell India, buy China” strategy as Chinese stocks appeared more attractive. However, the landscape is changing, and several factors are influencing this trend.
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Dollar Weakness: The dollar has weakened from a peak of 110 in mid-January 2025 to around 99 now. This decline is anticipated to continue, potentially favoring capital inflows into emerging markets like India.
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Economic Outlook: The U.S. and China are projected to be the most affected economies in 2025, with the U.S. expected to grow less than 1% and China’s growth forecast at about 3.5%. Meanwhile, India’s consumption-driven economy is positioned for a robust growth rate of 6% in FY26, even amid global slowdowns.
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Strategic Trade Alliances: As reported by the Wall Street Journal on April 14, U.S. Treasury Secretary Scot Bessent revealed that the U.S. intends to prioritize trade agreements with key allies, including India. This development indicates a stronger economic relationship between the two nations.
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Favorable Macroeconomic Indicators: India’s economic fundamentals are looking solid. With controlled fiscal and current account deficits and a Consumer Price Index (CPI) inflation rate dropping to 3.34% in March, the Reserve Bank of India (RBI) is likely to adopt a more accommodative monetary policy, paving the way for potential rate cuts.
- Stimulus Measures: The recent budget has introduced significant fiscal stimuli, including substantial income tax reductions, which could support a GDP growth rate of 6% in FY26. As a result, India may emerge as a preferred destination for FPIs, especially compared to other emerging markets that are more vulnerable to economic downturns.
Market Trends and Future Prospects
The influx of FPI investments into India, backed by improving economic indicators, could propel the market higher. Notably, many stocks in the domestic consumption sector are reaching record highs, despite the Nifty still being about 10% below its September 2024 peak. While the Nifty is currently trading at 20 times the estimated earnings for FY26, which might seem high, sustained investment flows could justify these valuations.
Earnings Growth Considerations
While there is potential for market gains, a sustained rally may face challenges due to modest earnings growth. From FY22 to FY24, earnings experienced an average growth of 20%, but projections for FY25 suggest a dip to around 5%. However, a recovery to approximately 12% growth is expected in FY26, which is crucial for any significant market momentum.
Focus on Domestic Consumption
Despite the challenges in the IT sector due to U.S. economic slowdowns, mid-cap IT stocks may offer value at lower valuations. Investors are advised to concentrate on domestic consumption themes such as financial services, telecommunications, hospitality, aviation, and discretionary sectors like jewelry, automobiles, and healthcare.
In summary, the Indian stock market is showing remarkable resilience and could continue to attract investments as macroeconomic conditions improve. With strategic shifts from FPIs and favorable economic indicators, India stands to be a leading player in the global market landscape.
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