The Indian stock market has delivered an impressive performance over the past month. Between April 7th and May 6th, the broader market posted a robust 9% gain on a closing basis, with an intraday swing from low to high reaching as much as 14%. This sharp rally was catalysed by a global market surge following the April 9th announcement to suspend reciprocal tariffs.
India’s outperformance stands out, largely because it was already showing resilience during the tariff tensions. The country’s relatively low tariff structure, limited reliance on manufacturing exports, and strong focus on domestic consumption and services insulated it from the broader global impact. However, the sustained rally—despite cautious sentiment both globally and domestically—raises questions about its durability. As valuations stretch and external uncertainties persist, investors may need to weigh the risks of a potential pullback against the momentum-driven gains.
One could argue that the sharp market movement was a response to the temporary resolution of trade war uncertainties—a valid perspective. Positive developments include trade agreements between the US and the UK, the UK and India, and progress toward a US-India Free Trade Agreement (FTA). While these are encouraging signs, high tariffs remain embedded in the new deals, and the US-China trade relationship—the most critical—remains unresolved. New tariffs are expected to weigh on global growth.
For the rally to be sustainable, a corresponding rebound in earnings growth and business sentiment is essential. However, this remains uncertain. India’s Q4 FY24 earnings have been muted so far, with total PAT growth below 10%. FY25 earnings per share (EPS) growth is projected at just 5% year-on-year. As a result, India’s one-year forward P/E has risen to 20x—exceeding the 7-year average of 19x. To justify this premium, earnings growth would need to accelerate to 15%+, while consensus estimates for FY26 EPS growth remain in the 10–12% range.
In the medium term, the market’s positive bias could persist if earnings upgrades materialize. This is plausible, supported by falling inflation, potential rate cuts, and rising external demand as India positions itself as an alternative supplier to the US and Europe amid the US-China trade rift. India stands to be a major beneficiary of this shift. However, Q1 FY26 corporate results will be critical in confirming this trend. So far, signals are mixed, and the global outlook remains cautious. Both domestic and international institutions have trimmed India’s FY26 GDP growth forecast to 6–6.5%.
Beyond cyclical global headwinds, a key short-term concern is the 90-day concessional window during which significant progress must be made to redefine global trade dynamics. Weak Q1 economic data from the US has raised concerns about how companies will manage supply chains amid high transaction costs, pricing pressures, and long-term contract uncertainties. Markets typically dislike ambiguity and tend to retreat during periods of geopolitical and financial instability.
The recent optimism is rooted in the belief that the worst of the trade war is over and that global institutions will maintain operational stability. However, rising inflation—driven by inefficiencies from protectionist trade policies—remains a risk.
India’s standout performance in the past month has been supported by renewed interest from Foreign Institutional Investors (FIIs), who now view India as a relative safe haven. The US, perceived as the most affected by the trade war, has seen a weakening dollar, which has fuelled risk-on sentiment for emerging markets. India appears to be decoupling from the US-China fallout. The INR has appreciated from 88 to 85.4 over the past three months, aided by improved FII inflows, RBI intervention, and reduced fiscal outflows due to lower crude prices.
Interestingly, FIIs remain bullish on India despite rising Indo-Pak tensions, suggesting limited concern about escalation. In contrast, retail investors have been net sellers, likely due to scepticism about the rally’s sustainability. This divergence is notable: while FIIs are buying aggressively, retail investors are booking profits, especially after the market recovered over 50% of the losses from the September 2024 to April 2025 consolidation phase in under a month.
First published in Mint
