 "Dalal Street, BSE")
India enters 2026 with its most balanced and opportunity-rich macro setup in nearly three years. Banking liquidity has improved, valuations have reset, earnings are entering a margin-led recovery, and credit conditions are easing, as evident from loan book growth. While currency volatility and external shocks remain key risks, the overall environment is shifting from muted growth to selective re-acceleration.
2026 is unlikely to be a year of broad-market euphoria globally, but one in which India could stand out through selective risk-taking — particularly in the smallcap and midcap space — with industries across financials, consumption, exports and infrastructure likely to be rewarded.
Global context matters: India shifts from turbulence to stabilisation
While 2025 was a blockbuster year globally — China rallied 30 per cent and the Nasdaq surged over 16 per cent — Indian indices underperformed sharply by 15–30 per cent, with smallcaps faring the worst. This was driven by currency anxieties, profit-booking by foreign investors and elevated valuations. In 2025, the rupee depreciated by around 8 per cent, making the underperformance even more glaring.
Also Read
 "Reserve Bank of India, RBI")
 "Lending")
 "Auto sales continue to slide in Dec, likely to remain subdued for some time")
 "RBI, Reserve Bank of India")
 "Navneet Munot, managing director (MD) and chief executive officer (CEO), HDFC AMC")
As global yields stabilise and financial conditions ease, India’s relative performance gap could narrow significantly. The domestic reset of 2025, while uncomfortable, may actually create the conditions for a more sustainable 2026–27 expansion.
After two volatile years marked by tight financial conditions, earnings downgrades, global uncertainty and domestic liquidity stress, India steps into 2026 with a fundamentally different macro backdrop. The correction phase of 2024–25 is giving way to stabilisation, supported by improving liquidity, normalising valuations and clearer earnings visibility. Market tone should shift from defensive positioning to cautiously constructive opportunity.
1. Monetary easing as the key catalyst
The Reserve Bank of India’s policy pivot has been central to this transition. The banking system was in deficit in 2024, and the RBI had increased the cash reserve ratio and risk weightages, leading to a liquidity shortfall. In 2025, the cash reserve ratio was cut by 100 basis points and risk weightages were reduced, improving banking system liquidity, which is crucial for growth in MSME segments. In addition, interest (repo) rates have been cut by a cumulative 125 basis points, easing strain across the financial system and increasing consumer affordability.
Loan growth, which had slipped to around 9 per cent in May 2025, has rebounded to nearly 11 per cent, with corporate credit demand finally showing sustained improvement. Historically, credit-cycle recoveries have led broad equity market rebounds, and 2026 appears to be following that pattern.
2. Valuations normalise, opportunities broaden
Largecaps now trade around 21 times FY27 earnings, closely aligned with the five-year average and far healthier than in 2024–25. The deeper reset, however, is visible in smallcaps. After underperforming both global peers and domestic largecaps through 2024–25, a substantial portion of the smallcap and midcap universe now offers reasonable valuations relative to earnings visibility. This mirrors earlier cycles where smallcaps outperformed once macro pressures stabilised.
Earnings growth estimates fell by 10–12 per cent in FY25. For FY26, the decline has finally been arrested, with the second quarter of FY26 witnessing overall growth of 9 per cent, 34 per cent and 34 per cent in largecap, midcap and smallcap segments, respectively, on a year-on-year basis. India is at an inflection point for earnings growth, which so far has been driven by margin improvement, but cuts in GST and taxes should also support top-line growth. Our estimates for FY26–28 are around 15–17 per cent, compared with single-digit growth in FY26.
3. Consumption and margins enter a rebound cycle
GST simplification and indirect tax reductions have quietly strengthened demand elasticity, reducing effective prices for mass-market goods by 5–10 per cent. Combined with softer input costs and efficiency gains, this sets up FY26–27 for a margin-led earnings recovery, even if volumes remain moderate. Company-level commentary across autos, industrials, construction and engineering is noticeably more constructive than headline macro data suggests.
4. Currency and external risks remain the main constraints
Despite domestic improvement, the rupee remains India’s most visible macro vulnerability. The 8 per cent depreciation in calendar year 2025 reflected current account deficit pressures, reduced discounted Russian crude and lumpy foreign outflows. A positive development is the widening of the US–India 10-year yield spread, currently at around 240 basis points, which historically precedes renewed foreign institutional investor inflows. Still, crude prices, tariff risks from the US and the timing of global rate cuts remain key external swing factors. That said, a weaker currency could support exports and make India more attractive to foreign investors.
5. Where the opportunities are emerging
Banks and financials stand out as early-cycle leaders, benefiting from easing rates, improved liquidity and stabilising net interest margins. Lower funding costs also strengthen the outlook for non-banking financial companies, supporting both spreads and credit demand.
Export-linked manufacturing stands to gain from global demand stabilisation and a more competitive currency, though tariff risks persist. Domestic consumption is set for a gradual revival, supported by lower prices, easing credit costs and improving rural sentiment. Infrastructure and industrials continue to benefit from the government’s sustained capital expenditure thrust.
Disclaimer: The information and opinions expressed above do not constitute investment advice to buy, sell or hold any securities, or to invest or divest from a particular sector. Readers should consult an appropriate Sebi-registered intermediary before making investment-related decisions. The opinions expressed are the personal views of the author and may differ from those of other authors at ASK Asset and Wealth Management.
The writer is CIO and head – equity advisory, ASK Private Wealth
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
 "wealth management")
 "media, news")
 "Sindhu Gangadharan")
 "India, new zealand")
 "Artificial Intelligence")
