Key Takeaways
- Indian equity valuations have slid to 19‑20× P/E, the deepest multi‑cycle lows versus gold.
- US‑India tariff cuts and progress on the India‑EU FTA could lift export‑driven earnings from FY27 onward.
- Broad market breadth remains thin—only ~46% of stocks above their 50‑day MA—but sentiment indicators suggest pessimism is waning.
- Domestic institutional inflows, record SIP contributions, and a $709 bn reserve cushion improve the risk‑reward profile.
- Short‑term volatility may persist around policy events, yet macro fundamentals (low inflation, strong PMI) support a gradual rally.
You missed the fine print in February, and that could cost you big.
While the Nifty 50 and Sensex inched up just over half a percent this month, the real story lies beneath the surface. A convergence of easing valuations, strategic trade wins, and resilient macro data has set the stage for a potential breakout that most market participants haven’t fully priced in yet.
Why Indian Equities Valuations Are at Multi‑Cycle Lows
The average price‑to‑earnings (P/E) multiple for the Nifty 50 now hovers around 19‑20×, a stark contrast to the 30‑plus multiples seen during the 2021‑22 bull run. A low P/E suggests that investors are paying less for each unit of earnings, effectively increasing the upside potential if earnings recover.
Compared to safe‑haven assets, equities are currently cheaper than gold and silver on a risk‑adjusted basis. This relative cheapness is a classic contrarian signal: when earnings growth expectations improve, the price can re‑rate quickly, delivering outsized returns.
How the US‑India Trade Deal Reshapes Export Dynamics
The newly signed US‑India agreement slashes tariffs on Indian goods from 50% to 18%. For export‑oriented sectors—textiles, pharmaceuticals, and engineering services—this translates into immediate margin expansion and a stronger competitive position in the US market.
Combine that with the progressing India‑EU free‑trade talks, and you have a dual‑front boost to foreign demand that could lift corporate earnings trajectories starting FY27. Historically, similar trade liberalisations have added 3‑5% to sector‑wide earnings growth within two years.
Sector Breadth: What the 50‑Day and 200‑Day Moving Averages Reveal
Technical breadth remains a concern. Only 46.5% of stocks sit above their 50‑day moving average (MA) and just 36% above the 200‑day MA. The moving average is a lagging indicator that smooths price data, helping investors gauge the prevailing trend. When a minority of stocks trade above these levels, the market is said to have “narrow participation,” implying that gains are concentrated in a few large caps.
However, sentiment surveys show that the depth of pessimism is receding. A gradual rise in the proportion of stocks above these averages would signal that the rally is broadening, reducing the risk of a sharp correction.
Macro Resilience: Inflation, PMI, and Fiscal Policy Signals
Headline CPI inflation stood at 1.33% in December, well beneath the Reserve Bank of India’s comfort zone, keeping a final rate cut on the table. Low inflation preserves consumer purchasing power and supports corporate profit margins.
The HSBC Flash Composite PMI registered 59.5, indicating robust expansion in manufacturing and services. A PMI above 50 signals growth; a reading near 60 points to a healthy acceleration, which often precedes higher corporate earnings.
Industrial production surged 7.8% YoY, the strongest in two years, driven by capital goods. This real‑economy momentum underpins earnings expectations, reinforcing the case for equity upside.
Capital Flows and the Role of Domestic Investors
Domestic institutional investors have been net buyers, while systematic investment plan (SIP) inflows hit record levels. SIPs are automated, regular purchases of mutual fund units, which provide a steady demand floor for equities, especially during volatile periods.
Foreign exchange reserves climbed to a historic $709 bn, bolstered by gains in gold and non‑dollar assets. A strong reserve buffer reduces sovereign risk, making Indian markets more attractive to overseas fund managers seeking diversification.
Investor Playbook: Bull vs. Bear Cases
Bull Case: Valuations remain at multi‑cycle lows, earnings rebound as trade deals materialize, and macro data stays supportive. Anticipate a 12‑15% upside for the Nifty 50 over the next 6‑12 months, with mid‑cap and small‑cap stocks catching up as breadth improves.
Bear Case: Persistent geopolitical tensions (e.g., US‑Iran), a stronger dollar eroding foreign earnings, and policy missteps (e.g., further tax hikes) could keep volatility high and delay breadth expansion. In this scenario, expect a muted 3‑5% return and heightened sector rotation toward defensive stocks like utilities and consumer staples.
For investors willing to navigate short‑term bumps, the combination of cheap valuations, trade‑driven earnings upgrades, and resilient macro fundamentals creates a compelling entry point into Indian equities.