BNP Paribas Exane experts predict that India equity strategies in 2025 will be influenced by a range of domestic and international factors. On the one hand, there is growing evidence that the Indian economy has bottomed out; but on the other hand, the global economic environment is set to be less supportive than in 2024.
Our experts expect that strong domestic flows will likely continue to support the market, making up for any outflows from international investors. They also think that there is a low likelihood that valuation multiples will rerate in 2025.
“In a world of increasing tariffs, India’s relatively inward-focused economy is better positioned compared to more trade-dependent nations,” said Kunal Vora, Head of India Equity Research, BNP Paribas.
How does the local economy support India equities?
In the three years following the Covid-19 pandemic, the Indian economic enjoyed a prolonged recovery, driven by a combination of government capital expenditure, tax growth and healthy exports, according to BNP Paribas Exane experts.
In 2024, however, low money supply, declining credit growth and elevated household debt resulted in weak consumption, slow collection of general sales tax (GST), and subdued global demand which led to weak exports. Taken together, these factors weighed on corporate earnings.
But there were also signs of the Indian economy bottoming out in the third quarter of 2024. Credit growth, industrial production, steel production, auto sales and GST collections have picked up in recent months. Furthermore, the government expects capex spending to recover in 2025.
All of this points to an improvement in headline growth, with the National Statistics Office estimating that GDP will grow by 6.4% in the financial year 2025. This implies 6.7% growth in the second half of financial year, compared to 6% in the first half.
International and domestic trade flows
The Indian stock market remains resilient, due to strong domestic demand, while external events keep foreign flows into India subdued, with a recent preference for assets denominated in USD.
BNP Paribas’ economists believe that President Trump will implement most of the foreign, economic, and trade policies that he promised during his campaign. Tariffs are a key focus, and they are likely to boost prices in the US and dampen the economic environment, while the Fed is expected to maintain a hawkish stance, which is broadly negative for emerging markets, according to our experts.
The appetite for buying high valuation emerging markets, like India, should remain low unless there are signs of a strong recovery in economic growth.
However, the Indian stock market is less reliant on external capital than in the past, as domestic demand for stocks has grown rapidly in recent years, countering both foreign selling and increased supply in primary markets.
The bank’s experts see domestic institutions growing in importance, with systematic investment plans accounting for 60% of the flows from local institutions. Retail participation is also rising, driven by strong performance of small- and mid-cap stocks, increasing awareness of mutual funds, the ease of opening of digital trading accounts and attractive after-tax returns of equities over other asset classes.
Opportunities amid high valuations for India equities
From a valuation perspective, India trades at a higher level than other markets. Although Indian stocks have corrected slightly from the peak valuation, they still have a premium to most global markets, with the US being a notable exception.
Companies that are focused on the domestic economy are trading at a significant premium to their counterparts in other countries, and this is also true for sectors where the earnings growth outlook has deteriorated: the Indian MSCI Consumer Index in January traded at a price to earnings ratio of 44 times (on a next 12-month basis), compared to 15 times in China and 20 times in the US.
Earnings have provided strong support to the Indian market in recent years, as profits rose sharply from a low base in the period following the Covid-19 pandemic. With the post-pandemic uptick now over, our experts expect earnings growth to likely be moderate over the coming years.
High valuations for Indian stocks, with clouds ahead
In short, BNP Paribas Exane experts expect 2025 to be a year where the Indian stock market will continue to be supported by domestic flows, as well as a stable local macro-economic and policy environment. And from a valuation perspective, although the market is expensive, there is a low likelihood that multiples will rerate over the year.
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