Wall Street predicts rebound in Indian markets after tough year

Core Viewpoint - Major financial institutions like Citigroup and Goldman Sachs anticipate a rebound in India's markets in 2026 as earnings stabilize and policy support is implemented [1][22]. Market Performance - India's markets have underperformed significantly, with stocks lagging peers by the widest margin in over 30 years and the rupee being the worst performer in Asia [2][22]. - The MSCI India gauge has increased by 8.2% this year, but still trails the broader emerging market benchmark by the largest gap since 1993 [8][22]. Economic Indicators - India's GDP grew by 8.2% in the September quarter compared to the previous year, although the IMF has revised its growth forecast for the next financial year down to 6.2% from 6.4% due to US tariffs [10][22]. - Corporate earnings for the top 100 firms rose by 12% in the September quarter, marking the first quarter without an estimate cut in many periods [11][22]. Currency and Bond Market - The rupee, which hit a record low in November and is down 4.3% this year, may be nearing a near-term floor, with ING Bank identifying it as having the most rebound potential in the region [10][22]. - Sovereign bonds have returned only 2.1%, significantly lagging behind the 8% gain for broader emerging market debt, primarily due to a weaker rupee and expectations of an end to the rate-cut cycle [16][22]. Investor Sentiment - There are early signs of improved sentiment due to growth-supportive measures and a pause in earnings downgrades, with investors considering a rotation out of the artificial intelligence trade [3][9][22]. - Global funds have started to return after pulling over $16 billion from equities earlier this year, with recent inflows of $1.7 billion indicating potential for a larger reversal if conditions improve [19][22]. Central Bank Actions - The Reserve Bank of India has cut policy rates by 100 basis points and engaged in record government debt purchases to ease liquidity pressures [15][22]. - Traders are anticipating another rate cut on December 5, which could lead to significant bond purchases and a potential drop in yields by about 25 basis points [18][22].