Earnings Surge and Policy Tailwinds: Lifting Indian Equities After 2025’s Underperformance
Executive Summary
As we step into 2026, Indian equities stand at a pivotal crossroads. After a year of stark underperformance in 2025—where the Nifty 50 eked out just 10% gains while Asian peers like South Korea’s Kospi soared 22%—the stage is set for a robust rebound. Foreign investors fled in droves, pulling nearly ₹1.9 lakh crore amid a crumbling rupee and trade tensions, leaving domestic players to steady the ship. Yet, the fundamentals whisper of revival: corporate earnings are poised to accelerate from single-digit growth in 2025 to mid-teens in 2026, fuelled by resilient domestic demand and post-monsoon harvests.
Policy tailwinds add momentum. The Reserve Bank of India (RBI) has slashed its repo rate to 5.25%, signalling monetary easing to combat sticky inflation, while the government’s fiscal incentives—targeted tax breaks and infrastructure spending—The International Monetary Fund (IMF) projects India’s GDP to grow at 6.6% in 2026, outpacing global averages and cementing its status as the fourth-largest economy, having just overtaken Japan at $4.51 trillion. The World Bank echoes this optimism with a 6.5% forecast, highlighting India’s role in buffering deglobalization shocks.
Geopolitically, US-China frictions offer India a silver lining. As tariffs bite into Chinese exports, supply chains pivot towards the subcontinent, potentially boosting manufacturing and tech inflows. Sector-wise, technology could lead with agentic AI adoption, energy via green transitions, and finance through credit expansion. Regulatory horizons, including EU Green Deal alignments and US Trade Acts, promise both hurdles and opportunities.
For institutional investors in the USA, UK, and EU, this signals a tactical re-entry: allocate 10-15% to Indian mid-caps for alpha generation, hedging against a protracted US trade deficit. Key indicators to watch: Nifty earnings yield above 4%, rupee stabilisation at ₹85/USD, and FII inflows exceeding $20 billion in Q1. Risks linger—escalating US tariffs or delayed reforms—but the evidence leans towards a 15-20% equity upside, rewarding patient capital in this era of selective deglobalization.
Geopolitical Context: Navigating US-China Tensions and Deglobalization
The global chessboard in 2026 is redrawn by enduring US-China rivalries, casting long shadows over emerging markets. After a temporary truce in late 2025, where both powers de-escalated tariffs on tech and EVs, the underlying trade deficit—US$367 billion with China—fuels renewed protectionism. President Trump’s aggressive stance, including 60% tariffs on Chinese imports, accelerates deglobalization: supply chains fragment as firms “China-plus-one” to mitigate risks. For India, this is less curse than a catalyst. With forex reserves at $687 billion, the nation absorbed a 20% export surge in November 2025 despite headwinds.
India’s neutral stance—bolstered by the Quad alliance—positions it as a bridge. US-India trade talks, eyeing $500 billion by 2030, could unlock manufacturing hubs, echoing the UK’s post-Brexit pivot. Yet, challenges abound: China’s deflationary push and tech localisation erode India’s edge in low-cost assembly. The Federal Reserve’s hawkish tilt, with rates steady at 4.25% amid persistent inflation, tightens global liquidity, amplifying volatility for rupee-denominated assets.
Deglobalization’s burst—think sudden tariff hikes—could widen India’s trade deficit to 2.5% of GDP, but policy buffers like PLI schemes mitigate this. Investors eyeing the Cost of Living Crisis in the UK or NASDAQ volatility in the USA should note India’s low correlation (0.25-0.30) with US equities, offering diversification. In sum, while US-China brinkmanship rattles, it funnels $100-150 billion in FDI to India by year-end, per IMF estimates.