Following a period of heightened volatility, Indian stocks started the October series on a strong note, as bulls clawed back after a sustained stretch of losses that the market had not experienced since March.
The much-needed boost came after the RBI signaled confidence in the domestic economic outlook despite ongoing trade and tariff concerns and announced a slew of measures in its MPC meeting to boost liquidity in the system, triggering a sharp rally in banking stocks.
Though the central bank kept policy rates unchanged, the recent GST rate cuts and subdued inflation have created room for further incremental rate reductions, further boosting market sentiment.
On the growth front, the RBI revised its FY26 GDP forecast upward from 6.5% to 6.8%, driven by a stronger-than-expected Q1 FY26 real GDP print of 7.8% (vs. 6.5% expected). This indicates that external risks to domestic growth could be minimal and that the cumulative 100 basis point cut in the repo rate, along with earlier income tax cuts, could support growth.
Recent underperformance brought valuations to comfort zone
While the market’s initial reaction to these measures was positive, the extent of the rally depends on multiple domestic and global factors. The market had shown signs of strength in September, reacting to GST rate cuts.
However, the market failed to build the positive strength. This was due to the GST 2.0 impact likely to be visible in H2FY26, depreciation in the Indian currency, mixed trends in US policies, inventory overhang in the immediate quarter due to the GST rate cut, FII selling, and the possibility of earnings revival still one quarter away.
Both Nifty and Sensex closed in the red during the final eight trading sessions of September, losing 3.20% of their value over that period, and ended the month with a modest gain of just over 0.50%, marking their weakest September performance since 2014.
The recent sell-off further widened the gap between the Indian stock market and its Asian peers. The underperformance, however, has made valuations attractive, with Axis Securities noting that the Indian market is trading at a 49% premium to emerging markets, compared to a 97% PE premium in September 2024.
But market rally depends on trade, earnings, credit, and fiscal factors: Axis Securities
That said, the brokerage cautions that relative valuation stabilization does not necessarily translate into an immediate rally under the current scenario.
The brokerage highlights four key parameters, along with other developments that markets will track closely: progress on US trade deal negotiations; revival of the earnings growth cycle, likely to start from Q3FY26 onwards; revival in the credit growth cycle; and the transmission of fiscal and monetary benefits into consumption growth.
It remains confident in India’s long-term growth story, supported by a favorable economic structure, rising capital expenditure, and the consumption boost from the recent Union Budget and GST 2.0 reforms. These factors are projected to drive credit growth for banks, support double-digit earnings growth, and ensure that Indian equities can deliver strong double-digit returns over the next 2–3 years.
Against this backdrop, the brokerage foresees Nifty earnings posting robust growth, with a projected 13% CAGR over FY23–27 and expects financials to remain the largest contributors to FY26/27 earnings.
Following the Q1FY26 earnings season, the brokerage revised its March 2026 base-case Nifty 50 target to 25,500, valuing it at 20x on March 2027 earnings. “After Q1FY26, we observed a 3% cut in FY27 earnings. Based on expectations of an earnings upgrade starting from Q3FY26, we see upside risk to our target,” said the brokerage.
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