Posted on March 21, 2025 | Market Insights
The Indian stock market has been a rollercoaster in recent times. After a euphoric run-up in 2023 and early 2024, where the Sensex and Nifty hit record highs (85,978 and 26,277 respectively in September 2024), a sharp correction followed. By March 2025, a $1 trillion selloff had wiped out gains, driven by foreign institutional investor (FII) outflows exceeding $15 billion, high valuations (P/E ratios of 23-28 against a historical average of 20), and global uncertainties like U.S. monetary policy shifts. As we look ahead to the financial year 2025-26 (April 2025 to March 2026), the question looms: can the Indian stock market turn profitable again?
The Case for Optimism
Despite the gloom, there are glimmers of hope. Analysts project the Sensex could climb to 84,000–93,000 by December 2025—a potential 11.6% to 23.5% rise from its current level of around 75,301 (as of mid-March 2025). The Nifty 50, hovering between 22,000–22,500 now, might see similar upside, possibly nearing 25,000–27,000 by FY26’s end. What’s driving this cautious optimism?
- Earnings Revival: Corporate earnings, which faltered in Q2 FY25 (flat growth year-on-year for Nifty 500 companies), are showing signs of recovery. Q3 FY25 results for BSE 500 firms reported 5% sales growth, 11% EBITDA growth, and 18% profit-after-tax growth. If this momentum holds, FY26 could see earnings growth of 13%–16%, bolstered by sectors like technology, financial services, and renewables.
- Government Push: The Union Budget for FY25-26, presented on February 1, 2025, emphasized capital expenditure (up 12% from last year) and tax cuts to boost consumption. Increased spending on infrastructure and housing (e.g., Pradhan Mantri Awas Yojana) could lift related industries, while a consumption fillip might revive discretionary spending—a boon for consumer goods and retail stocks.
- Domestic Resilience: With FII ownership at a 12-year low of 16%, domestic investors have stepped up. Equity mutual fund inflows hit a 45-month streak by late 2024, with monthly SIP flows crossing $2.5 billion. This local liquidity could cushion against global shocks, providing a stable base for market recovery.
The Risks to Watch
Profitability isn’t guaranteed, though. The market faces headwinds that could derail this trajectory:
- Global Volatility: U.S. President Donald Trump’s second term, starting January 2025, promises tariffs on China, Canada, and Mexico. While India might benefit as a “China+1” alternative, escalating trade tensions could spike oil prices (India imports 85% of its crude) and stoke inflation, pressuring the Reserve Bank of India (RBI) to delay rate cuts from its current 6.5% repo rate.
- Valuation Concerns: Even after the correction, large-cap valuations (P/E ~22) are fair, but mid-caps (P/E ~43) and small-caps (P/E ~34) remain pricey compared to historical norms. Without robust earnings growth, further downside risks linger—some analysts warn Nifty could dip below 22,260 if FII selling persists (₹1.5 lakh crore exited since October 2024).
- Domestic Slowdown: India’s GDP growth was revised down to 6.6% for FY25 by the RBI, reflecting slower public capex and urban demand. If consumption doesn’t rebound as hoped, sectors like auto and FMCG—key market drivers—could underperform, dragging indices lower.
Sectoral Bright Spots
For investors eyeing profits, selective bets might outperform broad market plays. Private banks, trading at reasonable valuations with double-digit credit growth potential, look promising. Technology, riding digital transformation and global outsourcing trends, could shine if U.S. rate cuts (projected at 3.5%–3.75% by end-2025) ease borrowing costs. Renewables and manufacturing, buoyed by government incentives and the “Make in India” push, also offer growth at a reasonable price.
Strategy for FY25-26
The Indian stock market in FY25-26 won’t be a one-way street. Volatility will test nerves, but opportunities exist for the disciplined investor. Diversify across large-caps for stability and quality mid/small-caps for growth. Focus on fundamentals—companies with strong balance sheets and competitive edges—over chasing momentum. With valuations now more palatable (large-caps 5%–10% below five-year averages), a bottom-up stock-picking approach could yield 10%–15% returns, aligning with conservative analyst forecasts.
Final Thoughts
Can the Indian stock market be profitable in FY25-26? Yes, but not without hurdles. Its fate hinges on earnings momentum, policy execution, and global stability. For now, it’s a glass half full—neither a runaway bull nor a prolonged bear. Investors who stay vigilant and adaptable could find FY25-26 rewarding. What’s your take on the market’s prospects? Drop your thoughts below