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Historically, Indian companies, unlike many in other emerging markets, have been very impressive in translating economic expansion into earnings growth, a dynamic that has powered strong market returns. Therefore, there are reasons to believe that India still remains promising despite a loss in near-term momentum.
Indian macroeconomic and market performance has left a bit to be desired in the past few months. As of the end of January 2025, the MSCI India Index was one of the poorer performing markets, down versus the MSCI Asia Pacific ex-Japan Index, which was up in US dollar total return terms.
Previously, we argued that India’s high growth prospects have justified high performance of its stock market in the face of high valuations, but now we are seeing a combination of slowing macroeconomic growth, weak earnings and rising concerns over geopolitics having a negative effect.
Third quarter gross domestic product (GDP) numbers were disappointing and below expectations, slowing sharply to 5.4% year-over-year (y/y) from 6.7% in the previous quarter, the lowest result since 4Q221. The 2024 general elections delayed several government projects, leading to lower government capital spending than budgeted and in turn restricting GDP growth. Domestic consumption and private investment have also slowed. Additionally, supply chain disruptions—particularly in the Red Sea—and increased sanctions on Russian crude resulted in a decline in petroleum exports, dragging down overall export performance. The brighter news was that services and high-value engineering goods exports have remained robust.
India's National Statistical Office has forecasted 2024-2025 fiscal year growth to come in around 6.4%, the slowest overall figure in the last four years2, but it does suggest official sources are expecting a pickup in momentum over the next few months, namely from agricultural production and government spending. Higher frequency indicators show there is most likely a downside risk to meeting the target, with some indicators such as the purchasing managers’ index (PMI) being a mixed bag. While they are comfortably above 50, the latest manufacturing PMI saw a tick upwards, while services and the overall composite index slowed.
The first budget of Prime Minister Modi’s third term was closely watched for clues on the planned direction by the government. The announcement on 1 February had to balance a fine line for the economy. Weak growth domestically calls for more fiscal support, but uncertain global conditions, coupled with the need to keep the deficit under control to maintain credibility and discipline requires the government to control spending at the same time.
The overall budget turned out to focus on further fiscal consolidation instead of turning up the spending. The government’s deficit for the 2025 fiscal year is expected to improve to -4.8% of GDP, from -4.9% originally expected in July 2024 and their fiscal year 2026 target is now at -4.4%3.
In terms of support measures, the main feature was a tax cut to boost urban consumption. One point of interest was capital expenditure plans, with the target for both the current fiscal year and the next fiscal year kept at 3.1% of GDP. This could be considered a pullback of investment plans, but it is still a relatively high amount amongst G20 countries. The government appears to be trying to encourage greater private sector involvement in capital without crowding out private investment and credit, while also staying within its budget reduction plans.
With growth slowing and fiscal policy expected to tighten, the pressure will be on monetary policy to stem the slowdown. We expect the Reserve Bank of India (RBI) to loosen monetary policy and cut rates by at least another 75 basis points (bps) this year.
Inflation is still within the target range and heading back towards 5% as food prices ease4, giving the bank space to ease and support growth. After the beginning of a new rate cutting cycle in February, the RBI committee states its overall stance is neutral.
We expect further rate cuts to come, given weak growth and uncertainty on trade policies that point to volatility for inflation and currency strength. The rupee has weakened recently, but the RBI has been increasing its foreign exchange reserves and intervened when the rupee has weakened significantly.
Source: J.P. Morgan Asset Management; Tax Foundation, United States International Trade Commission, US Department of Commerce. *EU represents European Union, with total exports excluding intra-EU trade. Data reflect most recently available as of 7/02/25.
A key question is whether the current US tariffs and retaliatory actions could benefit India. Due to its lower reliance on US trade, India might gain from a trade war by being viewed as an alternative market less exposed to the US (see Exhibit 1). This was somewhat true during the first Trump administration, as India wasn't as targeted as other countries, despite some US criticism on its tariff policies and the wide tariff differential with the US. This issue hasn’t disappeared, but Indian markets could still outperform if tariffs are heavy, as India may be seen as a safer option due to its lower trade dependence and earnings reliance on the US. (see Exhibit 2).
Revenue exposure of MSCI indices
Source: J.P. Morgan Asset Management; FactSet. Data reflect most recently available as of 7/02/25.
Concerns over elevated valuations have cast a shadow over Indian equities. By September 2024, the MSCI India Index had soared to multi-decade highs at 25.1 times forward earnings. Investor sentiment shifted, partly due to rising long-term US rates after the beginning of the Federal Reserve’s easing cycle. This change increased demand for a higher risk premium, forcing a marked compression in valuations. The resulting market correction saw the index decline by roughly 12% from its September highs.
At the time of writing, Indian equities are trading at about 22.3 times forward earnings, approximately 20% above their long-run norm. Absent a reversal in sentiment, robust earnings growth will be needed for the market to progress further.
A miss on high earnings expectations has been another stumbling block. At the start of 2024, market consensus anticipated strong earnings-per-share growth. However, with most companies having reported fourth quarter results, actual earnings growth is lower than expected.
The financial sector, which carries the highest weighting in the MSCI India Index, has been particularly hard hit. A delayed rate cut by the RBI and a clampdown on retail lending led to credit growth nearly halving, significantly denting profitability.
Similarly, energy stocks also faced headwinds, as sanctions on Russian oil and ongoing supply chain disruptions prompted downward revisions in earnings forecasts. Lastly, consumer staples experienced tepid volume growth as consumers saw sluggish real wage growth. The hope is that the new tax relief measures for consumers will benefit the sector.
On a more encouraging note, near-term prospects appear to be improving. With the RBI finally embarking on an easing cycle, the government removing the windfall profit tax on oil and gas companies, and stimulating consumption through lower income taxes, there are reasons to believe that some sector-specific headwinds will abate. India’s low exposure to the US and global trade should also mean it is partially insulated from a trade war.
Looking further ahead, the long-term outlook for India remains compelling. The International Monetary Fund projects annual GDP growth of 6.5% over the next five years—positioning India as the fastest-growing major economy5. If the RBI can keep inflation close to its 4% target, nominal growth could clock 10–11% annually.
Historically, Indian companies, unlike many in other emerging markets, have been very impressive in translating economic expansion into earnings growth, a dynamic that has powered strong market returns. Therefore, there are reasons to believe that India still remains promising despite a loss in near-term momentum.
This is a marketing communication. The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are, unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all inclusive and may be subject to change without reference or notification to you. The value of investments and the income from them may fluctuate in accordance with market conditions and investors may not get back the full amount invested. Past performance and yield are not a reliable indicator of current and future results. There is no guarantee that any forecast made will come to pass. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our EMEA Privacy Policy www.jpmorgan.com/emea-privacy-policy. This communication is issued in the UK by JPMorgan Asset Management (UK) Limited, which is authorised and regulated by the Financial Conduct Authority. Registered in England No. 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP.
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