Indian equities are set to bounce back in 2026 after lagging behind global markets in 2025. Despite underperformance last year, benchmark indices like Nifty and Nifty500 showed gains, albeit lower than global peers. Motilal Oswal Financial Services Ltd (MOFSL) highlighted that nearly $19 billion in FII outflows occurred in 2025 due to US trade measures, but domestic institutional investors (DIIs) offset this trend.
Policy measures by the Reserve Bank of India and the government, such as rate cuts, liquidity injections, and tax relief, are expected to boost domestic growth in 2026. MOFSL suggests that the India-US bilateral trade agreement could attract more FII investments and lead to a market re-rating. Q3 FY26 earnings are projected to be strong, with a 16% year-on-year PAT growth expected in the MOFSL universe.
Earnings growth, excluding certain sectors, is anticipated to be at a healthy 13% YoY, despite some moderation in Banking and Technology sectors. The earnings recovery is broad-based, with around 20 sectors likely to report double-digit growth, indicating the end of an earnings downcycle that began in FY25. Factors like GST cuts, festive demand, lower interest rates, and increased disposable incomes have boosted discretionary consumption.
Domestic flows, including steady SIP inflows, played a crucial role in supporting the market in 2025. DIIs invested approximately $90 billion last year, absorbing FII selling and contributing to robust primary market issuances. The report concludes that India is entering 2026 with strong domestic growth drivers and a strengthening earnings momentum.
