Five Critical Factors to Impact Indian Stock Market in FY26

The Indian stock market faced a tumultuous journey in FY25, marked by economic volatility and external factors that affected domestic sentiment. Despite a modest gain of 5.34 percent at the end of FY25, the market experienced significant sell-offs in the second half of the year. Factors such as stretched valuations, weak earnings, heavy foreign capital outflows, and global uncertainty due to rising US bond yields contributed to this downturn. As India enters FY26, several factors will dictate the market’s direction in the upcoming financial year.

In FY25, the Nifty 50 index reached an all-time high of 26,277.35 on September 27, only to fall into a prolonged downward spiral for the next five months. The Nifty 50 closed March 2025 with a 6 percent gain after enduring its longest monthly losing streak in history. Despite this mixed performance, analysts remain optimistic about FY26, citing several factors that could shape the stock market landscape.

• FY25 stock market performance marked by fluctuations, with Nifty 50 reaching an all-time high before entering a downward spiral.

• Modest 5.34 percent gain in FY25 despite challenges from global and domestic factors.

1. Earnings Trajectory

The trajectory of earnings for Indian companies is expected to be one of the primary drivers of stock market performance in FY26. The financial year FY25 was marked by weak earnings across multiple sectors, attributed to sticky inflation, limited government expenditure, and geopolitical factors. However, analysts are hopeful that earnings will revive in FY26, with significant improvements expected from Q1FY26. Experts believe that healthy earnings from key sectors, such as financials, automobiles, IT, and FMCG, will help improve market sentiment and provide the much-needed catalyst for growth.

• Weak earnings in FY25 due to inflation and geopolitical instability.

• Earnings revival expected in Q1FY26, with positive contributions from major sectors like IT, automobiles, and FMCG.

2. Growth-Inflation Dynamics

India’s economic growth remains a critical factor that will influence the stock market. The Gross Domestic Product (GDP) growth rate for FY25 is projected at 6.5 percent, with estimates of 6.4 percent growth in FY25 and 6.7 percent growth in FY26 by the Reserve Bank of India (RBI). With inflation on the decline, analysts are optimistic about the overall economic health of the country in the upcoming year.

Rising real GDP growth coupled with benign inflation is expected to strengthen investor confidence. The RBI has projected CPI inflation to be at 4.8 percent in FY25 and 4.2 percent in FY26. However, concerns over the monsoon season and global uncertainties, such as trade disruptions and financial volatility, could pose risks to these expectations.

According to Tanvi Kanchan, head of strategy at Anand Rathi Shares and Stock Brokers, India’s economy is well-positioned for growth, with real GDP growth projected at 6-8 percent over the next five years. Inflation is expected to stay in the 4-5 percent range, ensuring healthy nominal GDP growth of 11-12 percent. However, the market must remain cautious of external challenges.

• GDP growth projected to be 6.5 percent for FY25, with inflation under control.

• Benign inflation (expected at 4.8 percent in FY25 and 4.2 percent in FY26) will provide a favorable environment for the market.

• Global uncertainties and weather-related risks could disrupt domestic growth expectations.

3. The Trump Factor

One of the most unpredictable variables influencing the Indian stock market is former US President Donald Trump’s tariff policies. These policies, which have already caused significant disruptions in global trade, could contribute to further global economic slowdowns. While India is among the nations least affected by these policies, a trade war between the US and its trading partners could still have ripple effects on the Indian economy, especially in sectors that are sensitive to global supply chains and international trade.

India’s market will have to navigate the uncertainty caused by Trump’s policies, which could also heighten inflationary pressures and introduce new market risks.

• Trump’s tariff policies could slow global economic growth and impact India’s stock market.

• Trade wars and inflation risks may result in increased market volatility.

4. The US Federal Reserve’s Impact

The actions of the US Federal Reserve (Fed) will play a key role in shaping market sentiment both globally and within India. The Fed has indicated the possibility of two rate cuts in the coming year, signaling its focus on supporting growth. However, it also expressed caution regarding Trump’s policies, emphasizing that future decisions will be data-dependent.

The Fed’s rate trajectory, along with its comments on US economic growth and inflation, will influence global bond yields and the value of the US dollar. As the US interest rates affect capital flows, Indian markets may witness increased volatility due to fluctuations in foreign investments, currency values, and bond yields.

• The US Federal Reserve’s decisions on interest rates and growth projections will have a significant impact on global and Indian markets.

• Bond yields and the US dollar will likely experience volatility as the Fed adjusts its stance.

5. Global Factors: Middle East, China, and Trade Wars

In addition to domestic factors, global situations will play a crucial role in determining the Indian stock market’s performance. The evolving political landscape in the Middle East, particularly rising tensions, could lead to higher crude oil prices, which would impact India’s inflation and trade balance, given the country’s dependence on oil imports.

The Chinese economy will also be a key factor to monitor. If China experiences strong economic growth in FY26, this could lead to capital outflows from Indian markets as investors seek better opportunities. Moreover, trade wars, especially those sparked by Trump’s tariff moves, could increase global uncertainty, impacting Indian stock prices.

• Geopolitical risks like tensions in the Middle East may lead to higher oil prices.

• Strong growth in China could result in foreign capital outflows from India.