Monthly Market Outlook - Prateek Agrawal
Friday, January 2, 2026
By Prateek Agrawal, MD & CEO, MOAMC
Indian stock market had a difficult year in 2025 and was among the relatively weaker performing market in the year. However Indian market may be turning around things seem to be turning around slowly. We have seen some improvement in our position across certain global performance tables.
INR has depreciatedINR has depreciated quite sharply in the past period. The depreciation of INR may support margins of India Inc. Export oriented businesses make extra margins as Indian costs get lower in USD. Moreover, with most items priced in USD on landed cost basis, a currency depreciation may increases the attractiveness of most domestic businesses also. Imported items may become more expensive and which could lead to demand reduction, leading to a more balanced global trade. Moreover, INR depreciation has supported predominantly Indian value addition businesses like cotton textiles and shrimps. While our exports are seeing an additional levy of 25% vs the world, we have seen an INR depreciation of 17% from the beginning of the year. With low inflation in India and in combination with some price increases in the US, Indian businesses are able to mostly continue to function, albeit at a lower margin.
Depreciation of currency causes markets to retract initially as foreigners try to preserve USD value of their investments but over time, it may contribute to improved market sentiment. Turkey and Pakistan have seen weak currencies but have seen strong stock markets. We have witnessed sharp FPI outflows in the past. As the currency stabilizes at new level, flows could improve gradually.
FPI activity appears to be improving2025 saw sustained FPI outflows. However, with relative valuations having adjusted and with prospects of currency stabilizing at new levels after depreciation, and with cost of capital going down in the west, FPI activity has been less negative and we have seen a few consecutive days of buying.
Domestic flows may improve if sentiment improvesIndian domestic flows into MFs have remained positive but have averaged below the peak seen during last Sep to Jan period. This has happened even though economy has grown and inflation remains low. While one factor is increased investment into precious metals, we sense lower equity investments on account of poor performance of equities. We believe market construct is very light and low market volumes point to the same. Investors could come back strongly as sentiment improves and markets get a direction.
Economy is managing higher US tariffsWhile a deal with the US remains elusive, India is using the crisis period to its advantage by pursuing FTAs and Preferential Trade Agreements with EU, UK (finalizing), Canada, EFTA, South Africa, Eurasia, Israel, Mercosur, and a deal with Mexico to counter recent tariff hikes. Discussions also involve reviewing pacts with ASEAN & South Korea, while strengthening ties with Oman (new FTA) and exploring deals with Peru, Japan, Russia, and blocs like SACU, which includes South Africa, to potentially boost global trade outreach.While it is still early days, Indian exports seem to be holding up well, supported by spaces which, as yet, don’t attract US duties, such as electronics. Shrimps have found alternative markets. This may suggest that, in the event of a trade deal with the US, as India potentially reclaims its traditional markets, exports may see a jump.
GDP growth seem to be holding up quite well too. Q2 FY2026 (July-Sept) GDP was 8.2%, driven by services and manufacturing, leading forecasters like ADB and RBI to raise FY26 growth projections to over 7% for the whole year.
RBI has cut rates and has indicated the possibility of more rate cutsRBI cut repo rates by 25bps in its last policy. Given the continued comfort on inflation front and rates cuts by western central banks, there may be further cuts in the future. Rate cuts over time could reduce cost of capital potentially providing a tail wind for growth investing.
A fair US trade deal, if it happens, may support sentimentWhile the direct impact of US duties has been manageable, it has affected investing sentiment. US is the significant allocator of flows globally and absence of deals may mean that India is less favoured nation, potentially impacting investing sentiment.
A positive deal if it happens, may would change that and money on the side-lines may come in, possibly induced by strengthening INR. This could set in motion a favourable cycle of flows potentially supporting the secondary market strength, FPI flows aiding forex reserves allowing RBI which in turn may further support sentiment and flows from the domestics.
Calendar 2025 been tough for equity markets. However, every tough period can potentially increase the probability of a better next period. As we get into 2026, there is some hope. This hope stems from improved relative and absolute valuations -
- Potentially improved money supply globally and lower cost of capital if central banks cut rates,
- Positive developments in trade relations with EU, the US and others given the importance of Indian market
- Good earnings growth outlook on a low base from last fiscal
- Lower crude prices which could be helpful for the Indian economy
- Improved investor sentiment, potentially leading to better FPI and domestic flows and resultant broader market participation
- High growth spaces are sustaining relative out-performance in earnings growth. More growth areas like circular economy, data centres etc. are emerging. Since we believe markets follow earnings growth, we continue to believe that this is time for alpha.
Source - Motilaloswal website
