Indian Stock Market Outlook: Earnings, Fed policy, other key factors that could influence investor sentiment in FY25

The Indian market is currently undergoing a corrective phase, impacted by the rise in the dollar index following Donald Trump's victory in the 2024 US Presidential elections, along with continuous outflows from foreign investors and the Middle East crisis.

While the last session was a positive one for the Indian markets after seven straight sessions of losses, analysts expect the consolidation phase to continue. In November so far, the benchmark has lost 3 per cent after an over 6 per cent decline in October.

The path ahead for FY25 presents a mix of challenges and opportunities. While subdued earnings in the first half have posed concerns, the anticipation of a recovery in the latter half, supported by strategic government spending and robust consumer demand, offers a positive outlook.

Investors should keep a close eye on global developments, especially the U.S. interest rate movements and geopolitical tensions while focusing on building a well-diversified portfolio that can weather uncertainties and capitalise on emerging sectoral trends, suggested experts.

Here's a look at key market drivers for the rest of FY25, as per market analysts:

Prospects for Government Spending and Earnings Growth

Rakesh Vyas, Co-Chief Investment Officer and Portfolio Manager at Quest Investment Advisors, emphasised that Indian companies' earnings growth has been subdued in the first half of FY25. However, many businesses are eyeing a recovery in the latter half, making the upcoming earnings trajectory crucial to watch. Vyas further noted that government capital expenditure has been slower in the first half but could pick up post-state elections, underpinned by robust tax revenues. He believes this, along with a favourable monsoon, could bolster rural income and subsequently drive consumer spending. He also cautioned that FII selling might persist due to portfolio rebalancing and profit-taking but said that this trend could moderate by the end of CY24 as Indian earnings growth remains appealing compared to other emerging markets.

Inflation and Interest Rates

The U.S. Federal Reserve's policy decisions and interest rate projections are pivotal for the market, according to Jathin Kaithavalappil, Assistant Vice President at Choice Broking. He pointed out that Q2 profits in India were modest, prompting investors to focus on blue-chip stocks and defensive sectors amid high equity valuations. Ravi Singh, SVP of Retail Research at Religare Broking Ltd., also highlighted that any rate adjustments by the Fed could impact interest-sensitive sectors, notably technology and finance. Furthermore, investors are looking forward to India’s 2025 Budget, which could shape market sentiment and economic growth forecasts, he said.

Global Market Influences & FPI Action

Apurva Sheth, Head of Market Perspectives & Research at SAMCO Securities, explained that although the U.S. Federal Reserve recently cut interest rates by 25 basis points, bond yields remain elevated at around 4.36%. This has been a significant factor causing Foreign Portfolio Investors (FPIs) to withdraw from Indian equities, said Sheth, adding that high valuations and underwhelming Q2 performance have also been among the deterrents. Sheth noted that U.S. bond yields will continue to be a major driver for global equity markets, influencing the cost of funds for U.S.-based FPIs investing in emerging markets like India.

Despite geopolitical tensions in regions such as Ukraine and the Middle East, equity markets have shown resilience. Sheth pointed out that the newly-elected U.S. President Donald Trump's stance against deploying U.S. military resources abroad might reduce the likelihood of further escalation in West Asia. This policy shift could lead to reduced U.S. involvement in the Ukraine conflict, potentially stabilising global markets, he added.

Sectoral Opportunities

Sujit Modi, Chief Investment Officer at Share.Market emphasised that the U.S. inflation report due on November 13 could influence the Fed’s policy, impacting global markets. The strengthening of the U.S. Dollar post-election results could lead to costlier imports, raising inflation and potentially leading to higher interest rates, which could affect FII flows into India.

Modi also highlighted potential tailwinds for sectors like metals and IT. Increased U.S. manufacturing could spur demand for metals, raising global prices, while India's participation in the China+1 strategy could boost metal exports. The IT sector may also see continued demand for outsourcing services due to reliance on U.S.-based clients.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.