Executive Summary
India ended 2025 with its weakest relative performance versus emerging markets since 1994—a three-decade low that has created a contrarian setup. Morgan Stanley's Chief India Equity Strategist identifies a convergence of policy catalysts that could reverse this historic underperformance. The 1.5 trillion rupee GST rate cut represents aggressive fiscal stimulus to boost consumption, while improving India-China relations and potential US trade deal progress address two major structural headwinds. The macro backdrop is shifting toward structurally lower interest rates as oil dependence declines and export growth diversifies the economy. Domestic mutual fund flows continue accelerating the household balance sheet shift toward equities, providing structural bid support. The February AI summit could address concerns about India's technology positioning. However, this recovery thesis faces execution risk on multiple policy fronts simultaneously. The combination of 15 months of relative underperformance, aggressive policy response, and structural economic evolution creates conditions for potential re-rating if growth surprises materialize. The risk-reward appears asymmetric given current positioning and policy momentum, though timing remains uncertain given global growth headwinds and geopolitical volatility.
Key Insights
what The Hosts said“India ended 2025 with its weakest relative performance versus emerging markets since 1994. That's right, three decades.”
what The Hosts said“The reduced reliance on oil and GDP, the growing share of exports, especially in services, beyond going fiscal consolidation, all indicate a smaller saving imbalance. This means structurally, lower interest rates ahead”
what The Hosts said“Systematic flows into domestic mutual funds are evidence of this trend”
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