Momentum Restored: What’s Supporting the Market Rebound

You may be starting to see it in your own folio—the early signs of stability returning. After months of volatility, the market is showing more consistent momentum. Equity positions are beginning to recover, short-term rates are easing, and broader participation is quietly building underneath the surface.

This phase is not just a relief from turbulence—it’s a transition. Inflation has meaningfully come down, liquidity conditions have improved, and policy is becoming more growth-oriented. Together, these shifts are laying the groundwork for a more durable recovery.

In this outlook, we walk you through what’s changed, where the strength is building across debt, equity, and macro, and how to make sense of it within your portfolio context—so you stay aligned, not just optimistic.

1. Macroeconomy: Stability as the Strategic Anchor

Inflation at Multi-Year Lows, Enabling Growth OrientationHeadline CPI inflation has moderated to 3.2% in April 2025—the lowest since mid-2019—driven by a sustained decline in food and fuel prices, and a broader easing in core inflation. This downtrend, aided by favourable supply-side conditions and a soft global commodity cycle, has allowed the RBI to shift its focus toward supporting growth. With full-year inflation now projected at 3.7%, monetary space has widened meaningfully. Importantly, inflation expectations—especially among rural households—have also cooled, pointing to improved sentiment at the grassroots.

Growth Anchored in Domestic Demand and Investment RevivalDespite a fragile global environment, India’s real GDP is projected to grow at 6.5% in FY26. Rural consumption is benefiting from a strong Rabi harvest, improving FMCG volumes, and early signs of a favourable monsoon. On the urban side, rising discretionary spending, robust vehicle sales, and steady service activity are keeping demand resilient. Government-led capital expenditure continues to play a catalytic role—crowding in private investment and supporting construction, logistics, and core infrastructure. Early indicators such as steel and cement demand, order books, and import trends suggest that capacity expansion cycles are picking up pace.

External Stability Strengthens Macro ResilienceWith US$691.5 billion in forex reserves, India is well-insulated against external volatility. The current account remains in check—supported by record-high services exports and stable remittances. The capital account, while volatile in parts, is underpinned by strong gross FDI inflows, especially into manufacturing, digital services, and energy infrastructure. India has also emerged as a top greenfield investment destination globally, particularly within the Global South. These factors not only cushion the currency but reinforce global investor confidence in India’s macro fundamentals.

2. Equity: Broadening Participation and Early Cycle Signals

Market Momentum Building Gradually Across SegmentsIndian equity markets have moved beyond knee-jerk volatility and are showing signs of sustained participation. The BSE Sensex posted a 2.7% gain from May to June 20, while mid and small caps outperformed with gains of 6.1% and 10.5%, respectively. This broadening rally suggests deeper investor confidence and rotational flows toward undervalued and growth-oriented segments. Financials, capital goods, auto, and logistics have led the recovery—indicating exposure to both cyclical and structural themes.

Domestic Institutional and FPI Flows Remain ConstructiveDomestic institutional investors, including mutual funds and insurance companies, have remained steady net buyers to the tune of ₹1.24 lakh crore during May–June. This is supported by strong SIP flows and improving investor appetite for equities despite global uncertainty. Foreign portfolio investors have also returned—adding ₹24,966 crore during the same period—as macro data stabilises and policy clarity improves. The return of both DII and FPI flows lends resilience to market structure and supports forward valuations.

Improved Capex Indicators Support Equity AllocationsCore sector strength is beginning to reflect in listed company earnings and forward guidance. PMI Services remains strong at 58.8, while PMI Manufacturing continues to stay above long-term averages. Capital goods production and imports rose sharply in April (20.3% and 21.5%, respectively), pointing to a revival in private sector investment. Capacity utilisation in manufacturing stood at 75.5%, suggesting room for further output expansion. These shifts are expected to support earnings visibility, particularly in industrials, infrastructure, and select manufacturing themes.

Export Recovery and FTAs Add OptionalityExports rose 9.2% YoY in April, breaking a multi-month lull. Services exports remain a bright spot, with double-digit growth driven by digital, consulting, and financial services. The near-complete India-UK Free Trade Agreement (covering 99% of Indian exports to the UK) could add further momentum, particularly for pharma, auto components, and services. Despite global trade tensions, India’s export mix—more digital, less commodity—adds an element of defensiveness to earnings flows.

3. Debt: Supportive Cycle, Strong Banks, and Falling Yields

Rate Cuts Strengthen the Easing BiasSince February 2025, the RBI has cut the repo rate by 100 basis points—most recently by 50 bps in June—bringing it to 5.50%. This reflects a decisive shift in policy stance, supported by low inflation and global dovish cues. The central bank has also changed its stance from "accommodative" to "neutral," signalling data-dependent, yet supportive, flexibility in the months ahead.

Transmission Visible in Short-Term Market RatesMonetary transmission is already underway. 3-month CP and CD rates have fallen by 143 bps and 138 bps respectively since February, while T-bill yields have eased in tandem. This compression of spreads reflects improved market liquidity and lower risk premiums for corporate and NBFC issuers. Borrowers across the spectrum—corporates, SMEs, and consumers—are expected to benefit as lending rates gradually adjust downward.

CRR Cut to Release ₹2.5 Lakh Crore Into the SystemThe RBI’s decision to cut the CRR by 100 bps in four tranches (beginning September) will infuse ₹2.5 lakh crore of durable liquidity into the system by year-end. This move will not only ease funding pressure on banks but also lower marginal cost of funds, improving lending appetite and competitiveness. Combined with the rate cuts, this forms a two-pronged liquidity boost for the economy.

Banking Sector Well-Positioned to Support Credit GrowthScheduled Commercial Banks enter this easing cycle with healthy fundamentals. Gross NPAs are at 2.42%, capital adequacy at 16.43%, and return on equity at 14.14%. Liquidity buffers and profitability remain robust, enabling banks to take on incremental risk without compromising balance sheet quality. Credit-deposit growth has remained aligned, and risk appetite—especially in secured and infrastructure lending—is expected to rise in the coming quarters.