Indian equities staged a strong recovery over the past two weeks as investors looked beyond global uncertainties, ranging from geopolitical risks to inflation concerns, and focused on improving domestic fundamentals. The rally was supported by moderating crude oil prices, resilient Q1FY27 earnings, renewed foreign inflows, a strengthening rupee, and a reassuring policy outcome from the RBI. Together, these factors helped restore confidence across sectors and reinforced expectations of a more stable macroeconomic environment. Expectations of renewed diplomatic engagement between the US and Iran, coupled with efforts to stabilize the Strait of Hormuz, eased fears of prolonged supply disruptions. As a major oil-importing nation, India stands to benefit considerably from softer crude prices through lower inflationary pressures, improved corporate margins, and a more stable external account. The sharp gap-down correction in crude oil prices signals a sustained downtrend, potentially offering further support to domestic equities.
FII flows
After months of caution, FIIs returned to India as the excessive AI-led rally began to bring greater parity to the performance of non-AI markets, with investors showing renewed interest in portfolio diversification. Meanwhile, better-than-expected Q1FY27 corporate earnings have strengthened confidence in India and indicate the possibility of improved future earnings as the global inflationary environment subsides. Valuations also remain attractive from a long-term perspective. Q1FY27 results have generally exceeded expectations, with small-cap companies emerging as the strongest performers relative to large- and mid-cap peers. Sectoral leadership came from IT as a value buy, autos and consumer durables supported by volume growth guidance, and banks backed by lending growth and below-average valuations. Despite the positive momentum, some concerns continue to weigh on the market. Elevated U.S. bond yields are among these concerns, raising questions about the durability of capital flows into emerging markets.
However, these risks were partly offset by improving macroeconomic indicators and policy clarity. The RBI’s MPC maintained the repo rate at 5.25% and retained its neutral policy stance, largely in line with market expectations. More importantly, the central bank delivered a constructive assessment of the domestic economy by marginally upgrading its FY27 GDP growth forecast to 6.7% from 6.6%, while lowering its FY27 inflation forecast to 5.0% from 5.1%. This reflected confidence in the resilience of domestic demand despite global uncertainties. Compared with the previous policy review, the latest RBI communication was incrementally more optimistic. While maintaining a data-dependent approach, the central bank acknowledged stronger economic momentum and a better inflation trajectory. The revised projections also suggest that growth is holding up better than previously anticipated, while inflation pressures, although still present, are becoming more manageable.
The market interpreted this combination of lower crude prices, easing inflation concerns, and an improved growth outlook as supportive for corporate earnings. Realty and auto stocks are expected to benefit from festive demand and favourable financing conditions, while energy and heavyweight stocks are attracting buying interest as investors position themselves for potential margin improvements in a lower-oil-price environment. In essence, the recent rally was driven by a meaningful shift in the macro narrative. This week, the market started with higher-than-usual volatility due to the implementation of the new F&O closing price system, CAS. However, the system has since stabilized and is likely to become more effective as volumes normalize. While geopolitical risks and global yield movements remain important variables, the market increasingly appears focused on India’s strengthening economic fundamentals and improving growth-inflation balance, laying the groundwork for sustained investor optimism.
The author Vinod Nair is the head of research at Geojit Investments Limited.
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