The Indian stock market wrapped up the fiscal year 2025 (FY25) with a lackluster performance, delivering a modest return of 5.35%. This marks a stark contrast to the impressive 39% gain seen in FY24. The downturn, particularly pronounced in the latter half of FY25, was largely influenced by a notable decline in corporate earnings growth.
Economic Conditions and Expectations
In the initial months of FY25, the market remained hopeful, buoyed by a stable domestic economy. The Reserve Bank of India (RBI) forecasted a 7.2% growth in real GDP during its June 2024 policy review. However, reality diverged from these optimistic projections. Weak capital expenditure, compounded by a politically charged election year, dampened growth prospects significantly.
- 10 elections were held in FY26, including a national election, which restricted both ongoing and new government spending.
- The rural economy faced challenges due to heatwaves, erratic monsoon patterns, and persistent inflation, negatively impacting agriculture and related sectors.
Foreign Institutional Investors’ Response
As earnings began to falter, Foreign Institutional Investors (FIIs) initiated substantial selling from September onward. Reports indicated a mere 5% earnings growth for the first half of FY25, falling far short of the anticipated 16% EPS growth for the entire fiscal year. During this period, India’s market was trading at a premium valuation of 21.3x on a one-year forward price-to-earnings basis.
- In contrast, emerging markets like China were trading more attractively at 10x P/E, prompting FIIs to redirect their investments.
- The US market also remained appealing due to its robust growth, influenced by quantitative tightening measures that encouraged capital inflows.
Market Dynamics and Tariff Implications
The selling trend intensified between January and March as domestic inflows weakened, driven by declining portfolio values amidst global market downturns. Investor sentiment turned cautious due to uncertainties surrounding US economic policies. A recent 10% drop in the S&P 500 highlighted these concerns, particularly as new tariffs on car imports raised alarms for major players like Japan, Korea, and Germany. Indian component manufacturers, heavily reliant on the North American market, could face long-term losses.
- Ongoing negotiations between US and Indian officials over a bilateral trade agreement may alleviate some of the negative impacts of these tariffs.
- The pharmaceutical sector, a crucial supplier to the US market, also faces risks from pending reciprocal tariffs set to take effect on April 2.
A Promising Outlook for FY26
Looking ahead, the economic landscape for FY26 appears more optimistic. Analysts predict a significant rebound in government spending, coupled with a decrease in inflation and interest rates. Monthly data indicates rising demand in both rural and urban areas, suggesting a continued reliance on domestic consumption over exports.
- Corporate earnings are projected to recover, moving toward a long-term average growth of 15% in FY26-27, compared to an estimated 7% in FY25.
- The Indian stock market has already seen a 20% correction, which has likely priced in many of the current challenges.
Although FY25 concluded on a subdued note, the prospects for FY26 seem brighter, with expectations for improved market performance in the first half of the new fiscal year. Earnings results for Q4FY25, set to be released soon, will provide critical insights into the upcoming year.
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