Market Outlook – Mid Year 2025

Market Outlook – Mid Year 2025

As we reach the  halfway point of 2025, let’s take a quick check on the domestic economic indicators, sector-specific trends, and global pressures shaping our investment landscape.

The Macros

The Reserve Bank of India (RBI) recently trimmed the repo rate by 50 basis points to 5.5%, adopting a neutral stance aimed at fuelling private investment and economic growth. This accommodative monetary policy is driven by notably subdued inflation, with CPI dropping to a remarkable 75-month low of 2.8% in May 2025, primarily due to easing food prices. These conditions provide RBI ample headroom to maintain or even deepen its supportive stance, bolstering investor confidence and creating a fertile ground for equity markets.

The government’s disciplined fiscal management, achieving a fiscal deficit of 4.8% of GDP for FY25, underscores a commitment to capital expenditure and targeted investments in infrastructure. This can attract both domestic and foreign investor participation, enhancing the long-term sustainability of market gains.

Despite a global slowdown projected by the World Bank at 2.3% growth in 2025, India’s equity markets exhibit impressive resilience. Monetary tightening in major economies has triggered some foreign portfolio outflows, yet India’s robust domestic institutional investor base and steady FDI inflows, spurred by continued structural reforms and a stable macroeconomic backdrop, have significantly cushioned these impacts.

India’s GDP is also anticipated to grow by 6.5% in FY 2025-26, as per RBI projections. The quarterly breakdown of 6.5% (Q1), 6.7% (Q2), 6.6% (Q3), and 6.3% (Q4) suggests balanced growth risks, reinforcing positive investor sentiment.

Sectoral Opportunities

Several sectors are notably gaining traction, aligning well with structural investment themes:

  • Infrastructure: Accelerated by a significant 38.8% growth in government capital expenditure between FY20–24, infrastructure is a beacon for investment, driven by mega-projects like industrial corridors and smart cities.
  • Manufacturing: India’s manufacturing sector, reflected in a robust PMI reading of 58.4 in June 2025, is on track to reach $1 trillion by FY26. However, sluggish global demand remains a cautionary headwind.
  • Renewable Energy: With strong governmental backing, rapid capacity expansion positions renewables as key growth drivers. Investments in players like PFC and Amara Raja Batteries illustrate the significant opportunities emerging within this space.
  • Banking and Financial Services (BFSI): Fueled by lower interest rates, digitalization, and historically low NPAs at 2.3%, BFSI companies like HDFC Bank, Shriram Finance, AB Capital, Cholamandalam Finance, and Bajaj Finance represent solid investment propositions.
  • Auto Ancillaries: Benefiting from heightened US tariffs on competitors China and Vietnam, Indian auto ancillary manufacturers such as Gabriel, Fiem Industries, and Sharda Motors—are seeing robust export opportunities despite recent US tariff increases that may marginally compress margins.
  • Textiles: Rising export orders from the EU and USA due to global supply chain diversification reinforce strong growth. Nevertheless, tariff uncertainties with key markets warrant careful monitoring.

However this is not to say that it will be smooth sailing. These industries still face tangible challenges:

  • Manufacturing: Potential constraints from global trade slowdowns, geopolitical tensions, and weakening international demand pose risks despite robust domestic momentum.
  • Renewable Energy: Rapid scaling raises grid integration challenges and cost concerns, particularly if sudden policy changes or subsidy removals dampen EV adoption.
  • BFSI: Rapid credit growth, particularly in microfinance, heightens the risk of asset quality deterioration if economic conditions worsen.
  • Auto Ancillaries: Recent US tariffs could lead to substantial export earnings declines, highlighting the need for diversified markets.
  • Textiles: Persistent trade barriers could restrict export growth, especially if trade negotiations with the UK and US stall.

Global Geopolitics

International developments continue to exert considerable influence:

  • Supply Chain Disruptions: Ongoing conflicts, particularly the Russia-Ukraine and Iran-Israel wars, disrupt supply chains, impacting sectors reliant on imported materials.
  • Oil Price Volatility: Continued unrest in the Middle East keeps oil prices unpredictable, which significantly affects India’s import bill, inflation, and overall economic stability.
  • US Sanctions Risk: Potential punitive US tariffs on countries importing Russian oil, backed by Donald Trump, could dramatically reshape India’s trade strategies and market dynamics if implemented.
  • Tariff Uncertainty: The pending reinstatement of a 26% additional US tariff on Indian exports adds another layer of market volatility, emphasising the critical importance of timely and strategic trade negotiations.

Conclusion

To sum up the first half of the calendar year we can see that despite global uncertainties and sector-specific headwinds, India’s macroeconomic fundamentals remain robust, offering fertile ground for informed, strategic investment. By closely monitoring economic indicators, sectoral dynamics, and international developments, investors can effectively navigate volatility, strategically positioning portfolios to capitalize on growth opportunities while prudently managing risks.

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