Markets Rally on Border Calm, Strong Earnings, and FII Inflows

Border De-escalation Sparks Market Euphoria

Investor sentiment witnessed a dramatic turnaround on May 12, with the Nifty 50 jumping over 2.5% in early trade, buoyed by a calming of geopolitical tensions between India and Pakistan. Last week’s fears of a protracted armed conflict had rattled markets, briefly halting a three-week winning streak. But over the weekend, India’s decisive counterattacks on Pakistan’s air bases and defence infrastructure, followed by a visible de-escalation along the border, reassured investors. This easing of hostilities injected a strong dose of confidence, driving a sharp market rally across the board.

Highlights:

• Nifty 50 surged over 2.5% as India-Pakistan tensions eased.

• Last week’s brief correction driven by geopolitical nervousness now reversed.

• India’s strong military response followed by border calm reassured investors.

Corporate Earnings Signal Robust Recovery

Investors received a further confidence boost from India Inc’s Q4 earnings, which have thus far outperformed expectations. Of the 472 companies that have reported results, net profit has grown 12.4% quarter-on-quarter, marking the best sequential performance in eight quarters. On a year-on-year basis, net profit growth stood at 10%, the highest in two quarters. Revenue expansion was visible both on QoQ and YoY metrics, with operating margins clocking in at 21.35% despite mild deceleration.

Analysts now forecast FY26 earnings growth at 12%, which pegs Nifty 50 valuations at a reasonable 18.4x forward earnings, offering a balanced investment climate—not overheated, yet not undervalued.

Highlights:

• Net profit surged 12.4% QoQ and 10% YoY, marking earnings resilience.

• Operating margins remain healthy at 21.35%, despite slight cooling.

• FY26 earnings growth estimated at 12%, keeping valuations attractive.

Foreign Portfolio Investors Make a Strong Comeback

The market momentum is further reinforced by the aggressive return of foreign portfolio investors (FPIs), who have pumped in $5.8 billion into Indian equities since mid-April. This marks four consecutive weeks of strong net inflows, positioning India alongside Taiwan and Brazil as the top emerging market destinations for global capital.

According to Elara Capital’s Global Liquidity Tracker, India witnessed $326 million in net inflows last week, following $724 million the previous week. Notably, $257 million flowed into India-dedicated funds, a clear indicator of renewed foreign institutional conviction. The trend is further accentuated by a visible tactical rotation out of China and into India, as global investors seek diversification away from dollar-heavy US markets and into growth-centric economies.

Highlights:

• FIIs poured $5.8 billion into Indian equities in the last four weeks.

• Net inflows of $326 million last week and $724 million the week prior.

• $257 million went into India-focused funds, suggesting long-term conviction.

Sectoral Winners: Trade Optimism and Defence Prospects

Beyond earnings and capital flows, market optimism is also being fueled by the prospects of new trade deals. Companies poised to benefit from the upcoming Free Trade Agreement with the UK were among last week’s standout performers. If trade pacts with the US and EU also materialize, sectors such as manufacturing, pharmaceuticals, electronics, auto, and select industrials could witness significant upside.

While textiles have already had their momentum-driven rally, the defence sector may remain in the spotlight. There’s growing consensus that India will continue ramping up defence spending, with indigenisation remaining a dominant policy theme. However, valuations in the sector are already steep, and actual upside will depend heavily on execution capacity rather than narrative.

Highlights:

• Trade optimism boosts select manufacturing, pharma, electronics, and auto stocks.

• Defence stocks could rally on expectations of higher capital allocation.

• Execution challenges remain key as valuations stretch in the defence sector.

Valuations, Discipline, and a Measured Approach

Despite the swift rally, analysts caution that some optimism may already be priced in. That said, the current backdrop—a combination of easing geopolitical risks, strong earnings, FII support, and trade optimism—provides a compelling case for sustained market buoyancy. However, investors are advised to avoid aggressive chasing. Instead, a stock-specific approach with valuation discipline remains essential to navigate this exuberant yet fundamentally grounded uptrend.

Highlights:

• Some near-term optimism may be priced in; market remains structurally strong.

• Stock-specific strategy and discipline remain crucial amid valuation re-ratings.

• The rally is fundamentally supported, but execution and moderation are key.