The Nifty 50 has demonstrated remarkable resilience in the first half of calendar year 2025 (H1CY25), gaining approximately 8% year-to-date (YTD). This upward trajectory has continued despite global headwinds, tariff-related uncertainties and volatile crude oil prices. As the Indian stock market looks ahead to the second half of the year (H2CY25), several key risks could potentially derail this rally.

1. Tariff-Related Uncertainty

While markets have largely adjusted to existing trade agreements, the potential for unforeseen developments remains a concern. US President Donald Trump's administration is considering new trade agreements, which could introduce volatility. A trade war could disrupt global supply chains, making Indian exports less competitive. The imposition of tariffs could increase prices in the US, dampening the global economic environment.

2. Geopolitical Tensions

Geopolitical risks continue to cast a shadow over the global economy. Conflicts, such as the Russia-Ukraine war and tensions in the Middle East, can lead to fluctuations in crude oil prices and decrease investor confidence. The Indian stock market is increasingly responsive to global events, with geopolitical tensions generating spikes in volatility indices and instilling fear in both domestic and foreign markets. Such events can impact oil-sensitive sectors like aviation, logistics, and chemicals, leading to sharp market corrections.

3. Global Economic Slowdown

Concerns about a global economic slowdown could also impede the Indian stock market's progress. Inflationary pressures and restrictive monetary policies in developed countries, such as the US, UK, and Germany, have contributed to slower GDP growth in these regions. This, in turn, can impact India's export-driven industries, including IT services, pharmaceuticals and textiles. Reduced global demand could lead to revenue declines for Indian exporters, affecting company stock prices and overall investor sentiment.

4. Foreign Capital Outflows

Foreign Institutional Investors (FIIs) have been key drivers of the Indian stock market, but significant foreign fund outflows have been observed. Higher US bond yields and a stronger US dollar can reduce India's investment appeal, leading to currency depreciation and FII outflows. Persistent FII selling can create market volatility and negatively impact investor portfolios.

5. Valuation Concerns

While the Indian stock market has delivered strong returns, valuation concerns remain. India's market capitalization-to-GDP ratio suggests that the market may be overvalued. Apprehensions about premium valuations, particularly in small and mid-cap stocks, could lead to market corrections. Despite recent corrections that have caused valuations to pull back, Indian stocks remain relatively expensive compared to other emerging markets.

H2CY25 Outlook

Despite these risks, several factors support a positive outlook for the Indian stock market in H2CY25. Expectations of improved corporate earnings, supported by lower credit costs and easing inflation, could drive market growth. Gradual consumption recovery, led by improvements in employment trends and a revival in lending, may also contribute positively. Strong domestic demand, government-led capital expenditure, and steady sectoral growth, particularly in banking and infrastructure, are expected to support investor confidence. Emkay Institutional Equities projects the Nifty to reach 25,000 by December 2025, with FII selling expected to decrease.