The Indian stock market has been uncharacteristically dim this year says Fundcalibre’s Darius McDermott, flickering rather than on fire. Despite an impressive run of positive economic developments, investor enthusiasm has cooled.
But as the country celebrated Diwali yesterday, the festival of lights, Darius tells us in this timely analysis why it feels timely to remember that India’s growth story is far from running out of spark.
A glowing economic backdrop
The macroeconomic picture is strong. The Reserve Bank of India has already cut interest rates by 100 basis points in 2025, taking them to 5.5%, while the government has sweetened the fiscal environment with income-tax reductions in February’s Budget and a long-awaited simplification of the Goods and Services Tax. These steps have boosted both corporate confidence and household spending power.
Infrastructure investment continues at pace, underpinning employment and long-term productivity. The agricultural sector is also shining, supported by another successful monsoon, rainfall has reached 108% of the long-run average, which will brighten prospects in rural areas. Inflation is a low 2.1% year-on-year as of August, and foreign exchange reserves of more than $700 billion underscore the economy’s resilience.
By most measures, India’s fundamentals look enviable. So why hasn’t the market followed suit?
Part of the caution stems from residual worries about growth. GDP slowed to 5.4% in the third quarter of 2024, sparking fears of a cooling economy. But that weakness was largely transitory. Growth rebounded to 7.4–7.8% in the first two quarters of 2025, before the effects of monetary easing and tax cuts had fully filtered through. The Reserve Bank of India has since raised its GDP forecast, and foreign direct investment has jumped 33% in the first four months of this fiscal year to a record $37.7 billion.
These numbers paint a picture of an economy gaining speed, just in time for the all-important festival and wedding season, traditionally a period of strong consumption.
External noise, internal strength
Another reason for hesitation lies beyond India’s borders. Donald Trump’s re-imposition of tariffs has rattled headlines, but not the foundations of the economy. Exports to the US account for only about 2.5% of India’s GDP. Unlike China’s export-driven model, India’s growth is powered by domestic demand, urbanisation, and the ongoing shift toward a more formal, digital economy.
Meanwhile, global capital has flowed into AI-themed opportunities in Taiwan, Korea and China. Some foreign investors have trimmed Indian positions to fund that rotation. Yet local investors have kept the faith: domestic inflows reached a nine-month high in July 2025, demonstrating continued confidence in their home market.
Valuations: ready to reignite
Valuations, often cited as a concern, now look far more attractive. Price-to-earnings ratios have fallen back to their five-year average, and price-to-book levels are nearing one standard deviation below it, levels difficult to justify given the country’s improved outlook and strong corporate governance.
For investors seeking to tap into the next phase of India’s growth story, there are several high-quality options run by managers with deep, on-the-ground expertise. The UTI India Dynamic Equity Fund benefits from a large investment team based in Mumbai, offering a distinct edge in identifying opportunities across the market. The Goldman Sachs India Equity Portfolio provides a well-diversified, all-weather approach, backed by an experienced Asia-based team, while the Chikara Indian Subcontinent Fund takes a high-conviction, index-agnostic stance, focusing on structurally growing sectors led by shareholder-aligned management teams.
This Diwali, as homes across India are illuminated, investors might also find reason to light a lamp for the nation’s equity market. The disconnect between economic reality and market performance looks temporary. As global investors eventually take profits from AI-heavy markets and refocus on structural growth stories, India, the third-largest weighting in emerging-market indices, should once again shine brightly.
By Darius McDermott, managing director at FundCalibre
