Navigating Volatile Markets and the Road Ahead for Indian Investors
Happy New Year 2026!
As we step into 2026, the Indian investment landscape is undergoing a significant transition. While 2025 was rocky for markets, 2026 has had a very tough start with the slide in the markets in Jan. However, after 18 months of navigating global trade headwinds and domestic liquidity constraints, the tide is turning. We will try to outline the challenges of 2025 and will share our outlook for the coming year. 2026 continues to be a year to build portfolios for long term outperformance. We also share our views on gold silver.
Sept 24 to Jan 26 Retrospective: A Period with External and Internal Shocks
The past six quarters have been a period of normalization for the Indian markets. Following the stellar earnings growth of 20% from 2020 to 2024, the High Base Effect has reduced earnings growth to mid-single digits last year, leading to a valuation reset. This is normal and is part of the long-term investing cycle. The tariff uncertainty has added to the mix.
The market performance from Sept 24 till Jan 2026 reflected this divergence:
- Nifty 50:+1% (Flat Large-Cap Index)
- Nifty 500:-3% (Broader market struggle)
- Nifty Midcap 150:-13%
- Nifty Smallcap 250:-20% (correction at an overall level with median individual stock corrections of well over 20%). Direct stock and PMS portfolios reflect this pain.)
Key Headwinds:
With the benefit of hindsight, we list below some of the key reasons for the subdued Indian market performance recently.
- The Tariff “Bazooka”: In 2025, the U.S. imposed steep reciprocal tariffs reaching 50% on Indian goods (citing Russian oil purchases and trade imbalances). This heavily impacted export-linked sectors like textiles, gems & jewels, and auto components.
- The AI Loser Trade: Foreign investors pivoted away from India, reallocating capital to North Asian markets (China, Korea, and Taiwan) as they are perceived to be direct beneficiaries of the global AI boom.
- Credit & Currency: With heavy outflows led by FIIs and the lack of meaningful foreign direct investment, the currency started getting hit. The Central Bank allowed the currency to find its own level around ₹92/$.
- Primary Market Overhang: 2025 saw a record-breaking plethora of IPOs, raising over ₹1.76 lakh crore. This surge, alongside significant promoter selling (offer for sale), drained secondary market liquidity. Investors shifted focus to “new paper,” creating a supply-demand mismatch that weighed on the valuations of existing listed stocks.
The Turning Point: Policy Support and Structural Reforms
To counter these shocks, the RBI and the government have started working in tandem, and they have shifted into an aggressive support mode for growth.
- Monetary Easing: A substantial 125-basis-point interest rate cut and liquidity infusions via OMOs are currently easing the credit crunch. As we write this, we have seen green shoots on the credit growth front.
- Income Tax cuts: The 2025 budget cut personal income tax, which means that individuals earning less than 12 lakhs per year do not have to pay income tax. This has increased disposable income for those in the 6 to 12 lakh per annum income segment.
- GST Reset Plus Pay Commission: The implementation of GST 2.0 has simplified tax structures and has increased consumer durable and automobile sales, while the 8th Pay Commission is also set to unleash additional urban consumption.
- The “China+1” Trade Deals: India has successfully completed Free Trade Agreements (FTAs) across regions, including the UK, the European Free Trade Association (EFTA), the UAE, Oman, and New Zealand, ensuring India remains a critical node in global supply chains.
Gold and Silver Performance
Both gold and silver have delivered stellar performance over the last 18 months. Reflecting the increased geopolitical uncertainty as well as the shift away from the dollar by central banks across the world, their prices have gone up steeply. Expectation of increased usage of silver for industrial purposes has further increased the silver prices.
It is also important to understand that gold and silver prices are also volatile. In the past, when silver hit a high in 1980, it took 26 years for international prices to recover back to the same level.
One must also avoid the recency bias of increasing allocation to assets that have performed well recently. For example, those who have invested large amounts in small-cap equities in 2025 (after a strong performance in 2024) would have seen poor immediate performance. While precious metals have gone up rapidly, we continue to advocate an asset allocation- based approach with precious metals forming 5 to 10% of most asset portfolios.
Outlook for CY 2026: Why Reversal Is Likely over the Long Run
We believe the stage is set for a durable rebound over the long run:
1. Earnings Rebound: With the “high base” of previous years now adjusted, FY 2026 earnings are projected to grow by 14%, one of the highest rates globally.
2. Nominal GDP Growth: As inflation stabilizes and demand picks up, Nominal GDP (Real Growth + Inflation) is expected to return to double digits, boosting corporate top lines.
3. Consumption-led Growth—As outlined above, GST cuts, income tax cuts, and interest rate cuts will stimulate earnings growth in the consumption-sensitive segments.
4. Manufacturing & Service Engines: Electronics exports (up 40% in late 2025) and continued growth in Global Capability Centers (GCCs) continue to provide a structural cushion against trade volatility.
Risks to Watch
Trade Uncertainty: Further escalations in global protectionism or “green tariffs.”
Geopolitical Volatility: Ongoing shifts in the Middle East and Eastern Europe affecting energy prices.
Sticky Inflation: Potential supply-chain disruptions keeping interest rates higher for longer than expected.
The Strategy: 2025 was a year for patience and “time correction.” This was particularly painful for new investors who started in 2024 expecting very high returns. 2026 will continue to be a year to build portfolios. With valuations now more attractive, policy support in full swing, and the expected resolution of trade and tariff disputes, we remain positive on the Indian markets for the long term.
What we should be doing as investors
The long-term equity market returns in India from 1992 are 12%. Set against the backdrop of 4 to 6% post-tax FD returns, this generates phenomenal value for investors. For this huge outperformance over time, the price we pay is short-term volatility. Our ability to absorb this volatility will decide whether we are able to reap the benefits of long-term investing. Let us aim for the following:
- Moderate Return Expectations: A lot of investors have entered the market post- Covid. The period from April 20 to July 24 saw exceptional returns on the back of strong earnings growth. It is time to moderate expectations in the short run. In the long run, the equity markets mirror earnings growth, and India is well poised. Trying for extremely high returns over every time period and for every scheme is counterproductive to wealth creation.
- Avoid Panic: Geopolitical uncertainty is not new. However, social media has amplified the level of transmission and anxiety. The world (and the markets) has weathered various challenges and emerged stronger. In our three decades of investing, this has been the norm.
- Avoid chasing recent winners—Blindly chasing the last year’s winners is detrimental. For e.g., small caps did very well in 2024 but have done badly in 2025. Similarly, certain schemes do well in a calendar year. Money flows to them and is accompanied by a reversal in performance. A diversified portfolio based on asset allocation and avoiding recency bias aids long-term wealth creation.
Stay Calm, Stay Invested!
Happy Investing!
