In early 2026, Indian markets present a complex picture: valuations remain high, but opportunities exist for discerning investors. Prateek Agarwal, MD & CEO of Motilal Oswal AMC, suggests 2026 may see a selective recovery in Indian equities, driven by improving earnings, easing valuations and a potential return of foreign investors.
Valuations Under Scrutiny
While still above historical averages, Indian stock market valuations appear reasonable when adjusted for projected growth and earnings, and even look cheaper than those in the U.S. when considering market capitalization to GDP. One report noted India's total market capitalization to GDP is currently at 137%, but moderates to around 125% when considering the projected nominal GDP for FY26. Despite this, Indian stocks are more expensive than regional peers like China and Korea.
Factors Supporting Market Resilience
Several factors support a positive outlook. India's GDP growth has remained resilient, driven by manufacturing and services. The Reserve Bank of India (RBI) has initiated a rate cut cycle, which historically supports economic activity. Weaker crude prices, despite global sanctions, could save India billions in import bills, directly supporting fiscal health.
Potential Catalysts for Foreign Investment
Foreign Portfolio Investors (FPIs) were significant sellers in 2025, contributing to the market's underperformance. A potential normalization of trade relations with the U.S. could act as a sentiment booster and encourage FPI inflows. Lower global bond yields, combined with a stable rupee, would create a positive environment for the market.
Sectors to Watch
Agarwal is particularly bullish on "new India" themes such as defense, renewables, and electric vehicles. These sectors are expected to deliver strong earnings growth over the long term. Public sector banks also continue to offer value, supported by attractive valuations and improved balance sheets. Consumption momentum appears healthy, especially in under-penetrated categories like travel, tourism, telecom, durables, and luxury goods.
Risks and Considerations
Despite the optimism, risks remain. The Indian Rupee (INR) has depreciated, which, while potentially supporting export-oriented businesses, could also make imports more expensive. Tighter liquidity conditions and potential global events could also weigh on market performance.
Investment Strategy
Given the potential for volatility, experts recommend a diversified investment portfolio that balances traditional and alternative asset classes. Strategic asset allocation is crucial for preserving capital in an uncertain market environment. Investors should focus on bottom-up stock picking, identifying companies with strong fundamentals and long-term growth potential.
Sensex Performance
On January 2, 2026, the SENSEX rose to 85668 points, a 0.56% increase from the previous session. The index has climbed 0.66% over the past month and is up 8.14% compared to the same time last year.
In conclusion, while Indian markets may still be considered expensive, the underlying economic fundamentals and potential for earnings growth offer defensible opportunities for investors in 2026. Selective investment in emerging sectors, combined with a diversified portfolio and a focus on long-term growth, will be key to navigating the market successfully.
