Indian equities have witnessed a significant correction in recent months, and Neelkanth Mishra

Axis Capital’s Chief Economist Cautions on Market Volatility

Highlights:

• Neelkanth Mishra anticipates a further 10% correction in Indian stock markets.
• Corporate earnings growth slowdown remains a major concern.
• Market valuations remain volatile amid global uncertainties.
• India’s long-term economic outlook remains positive, with GDP expected to recover to 7%.

Stock Market May Face More Pressure as Headwinds Persist

The Indian stock market has witnessed heightened volatility over the past few months, with sharp corrections following a prolonged bull run. According to Neelkanth Mishra, Chief Economist at Axis Bank and Head of Global Research at Axis Capital, the market may still have room for another 10% correction, given the current macroeconomic uncertainties.

Speaking at Moneycontrol’s Global Wealth Summit 2025 in Mumbai, Mishra pointed out that despite India’s strong economic fundamentals, structural slowdowns and weak corporate earnings continue to weigh on investor sentiment. While the market capitalization remains high, nominal GDP growth is struggling to keep pace, raising concerns over stretched valuations.

Market Valuation Risks and Triggers for Further Downside

Mishra outlined several key factors contributing to market volatility, which could trigger a further correction:

1. Nominal GDP Growth vs. Market Capitalization

• India’s GDP growth rate is expected to recover, but the market capitalization remains stagnant, causing concerns about valuation mismatches.
• The Indian market is currently trading at historically high multiples, making it vulnerable to corrections if earnings fail to meet expectations.

2. Weak Corporate Earnings Growth

• One of the biggest reasons for market correction in the past six months has been a slowdown in corporate earnings.
• Several headwinds, including slow urban wage growth, weak consumer demand, and high base effects, have negatively impacted India Inc.’s earnings projections.

3. High Market Cap-to-GDP Ratio Uncertainty

• Mishra explained that there is no fixed “ideal” market-cap-to-GDP ratio, and markets will continue to trade within a dynamic range.
• Valuations could fluctuate significantly based on economic conditions, global trade policies, and monetary policy decisions.

4. Volatility in Earnings Multiples

• Indian markets have recently traded at record high valuations, and a correction is inevitable as fundamentals catch up.
• Mishra noted that multiples will remain volatile in the coming months, especially amid rising global interest rates and geopolitical uncertainties.

Economic Growth to Rebound Despite Near-Term Challenges

While Mishra highlighted concerns about market overvaluation and earnings slowdown, he remains optimistic about India’s long-term growth prospects.

• GDP Growth to Rebound:

  • India’s GDP growth is expected to return to near 7% levels once current macroeconomic headwinds ease.
  • This would provide a strong foundation for corporate earnings recovery and stock market stability.

• Corporate Profits to Align with Nominal GDP Growth:

  • Over the next 5-6 years, corporate profits are unlikely to lag nominal GDP growth, helping support higher market valuations.
  • This suggests that while short-term corrections are expected, the long-term trend remains positive.

How Should Investors Navigate Market Volatility?

With the possibility of a 10% market correction, investors must adopt a strategic approach to safeguard their portfolios. Mishra suggested that investors should focus on quality stocks and take advantage of market dips to build long-term positions.

1. Monitor Economic Indicators Closely

• Investors should track key economic data such as GDP growth, inflation rates, corporate earnings, and consumer spending trends.
• These indicators will help assess market stability and future growth potential.

2. Sector-Specific Investment Strategy

• While some sectors may experience short-term volatility, others could offer stable returns amid corrections.
• Defensive sectors like pharmaceuticals, FMCG, and utilities tend to perform well during market downturns.
• Growth-oriented sectors like infrastructure, manufacturing, and renewable energy could present long-term opportunities.

3. Avoid Overvalued Stocks

• Given the expected valuation correction, investors should avoid stocks with excessive P/E multiples and focus on companies with strong fundamentals.
• Companies with robust earnings growth, low debt, and competitive advantages are likely to outperform in the long run.

4. Maintain a Long-Term Investment Perspective

• Despite short-term volatility, India’s long-term growth story remains intact, making it an attractive destination for investors.
• Investors should stay invested in fundamentally strong businesses while using market corrections to accumulate quality stocks.

Conclusion: A Period of Market Adjustment Before Long-Term Growth

The Indian stock market is at a crucial turning point, with short-term corrections expected due to valuation concerns and macroeconomic headwinds. However, as India’s economic fundamentals remain strong, these corrections could present buying opportunities for long-term investors.

While volatility will likely persist in the coming months, Mishra’s analysis suggests that investors who focus on quality stocks, monitor economic trends, and adopt a patient approach will be well-positioned to navigate market fluctuations successfully.