Indian equities are expected to reverse their historical underperformance against emerging market counterparts in the upcoming year, driven by government policy initiatives, as outlined by Morgan Stanley.
According to strategists Ridham Desai and Nayant Parekh, the BSE Sensex is projected to have a 13% upside by the end of next year in a base-case scenario. The lagging performance of Indian stocks this year is anticipated to transition into considerable gains in 2026, primarily fueled by domestic recovery efforts.
With a market capitalization of $5.4 trillion, India’s equity market has been notably underrepresented in technology stocks compared to its peers. This year, the Sensex has struggled amidst a significant rally in Asian and emerging markets, heavily influenced by stocks associated with artificial intelligence. MSCI Inc’s local stock gauge is currently underperforming a broader emerging-market index by its largest margin since 1993.
Next year is characterized as a macro investment year for stocks, marking a shift from the stock-picking approach anticipated in 2025, the strategists noted. They forecast that India will experience a positive growth surprise in the coming months, projecting a 17% compound annual growth rate for Sensex earnings through the fiscal year ending in March 2028. This growth is expected to be supported by a reflation strategy from the central bank and government, which includes reducing borrowing costs, cutting the cash reserve ratio, and providing liquidity injections.
Despite its relatively weaker performance, the Sensex has risen over 8% this year and is close to its all-time highs.
Morgan Stanley’s outlook aligns with forecasts from Goldman Sachs Group Inc, Societe Generale SA, and HSBC Holdings Plc, all of which predict a rebound for Indian equities. The strategists recommend favoring domestic cyclicals over defensive and external sectors, maintaining an overweight position on financials, consumer discretionary, and industrials, while underweighting energy, materials, utilities, and healthcare sectors.
More insights are available on bloomberg.com.
Published on November 18, 2025.
