Expert View: Elevated India's Debt-to-GDP Ratio a Key Macro Risk
Mumbai, December 12, 2025 – India's elevated debt-to-GDP ratio poses a significant macroeconomic risk, potentially limiting the government's fiscal flexibility for crucial infrastructure development, according to Niharika Tripathi, Head of Products and Research at Wealthy.in. In a recent interview, Tripathi highlighted this concern alongside other factors, such as a weakening rupee, rising crude oil prices, and potential shortfalls in tax collections, all of which could impact the Indian equity market.
Tripathi's assessment comes at a time when Indian equities are perceived to be in a late-cycle phase, characterized by headline indices trading near their peak levels with some consolidation. While the overall macroeconomic and earnings environment remains supportive, she suggests that valuations are no longer cheap, making the market increasingly sensitive to incremental triggers. Large-cap stocks are consolidating, while mid and small-cap stocks have experienced sharper corrections followed by selective recoveries.
Globally, equity markets have benefited from optimism surrounding artificial intelligence and technology, coupled with expectations of easing monetary policies. This has fueled broad-based gains and increased valuations across various markets.
However, India's growth outlook for the fiscal year 2026 remains robust, with projections in the mid-7% range. This growth is expected to be driven by strong domestic demand and investment, which supports the earnings narrative for cyclical and financial sectors. Inflation has remained benign and is projected to stay below target through fiscal year 2026, providing the Reserve Bank of India (RBI) with room to implement a 25 basis-point rate cut, which is generally favorable for valuations and duration assets.
Looking ahead, Tripathi believes that earnings will be the most critical driver for the market. Investors are seeking a broader improvement in profitability that extends beyond a select few large financial and industrial companies. Any significant upward revisions to fiscal year 2026 or 2027 earnings estimates would be positively received. Policy decisions and liquidity conditions will also play a significant role. Further rate cuts by the RBI and consistent domestic investment flows are expected to be influential.
Despite the positive outlook, the elevated debt-to-GDP ratio remains a key concern. According to Tripathi, the ratio, currently around 81%, could constrain the government's ability to invest in infrastructure, which is crucial for long-term economic growth.
Furthermore, external factors could pose risks to the Indian stock market. A weaker rupee could increase import costs and potentially fuel inflation, while a spike in crude oil prices could negatively impact the country's trade balance and put pressure on the fiscal deficit. Lower-than-expected tax collections could further strain government finances and limit its ability to stimulate the economy.
In related news, Foreign Portfolio Investors (FPIs) have sold ₹18,000 crore worth of Indian stocks in December, while Domestic Institutional Investors (DIIs) have stepped in with double the buying. Additionally, flexi cap funds experienced the highest inflow in November amidst stock market volatility. Emkay Global has set a Nifty 50 target of 29,000 for the next year, identifying two key factors as catalysts.
