Citigroup (Citi) has downgraded Indian equities from "overweight" to "neutral," citing concerns over high valuations and a perceived lack of exceptional earnings growth. This marks a shift from Citi's "overweight" rating in February, when the brokerage firm projected the Nifty 50 could potentially reach 26,000 by the end of 2025, due to more attractive valuations at the time.

Citi noted that India's earnings growth no longer appears exceptional, especially when viewed alongside its still-elevated valuations. With a 12-month forward price-to-earnings ratio of 23x, India remains the most expensive major market, exceeding both its historical average and regional peers.

Despite the downgrade, Citi remains positive on India's macroeconomic fundamentals, projecting it to be the fastest-growing major economy in 2026. The brokerage also sees potential support from improved foreign inflows if U.S. trade ties strengthen and consumption recovers. However, the current high valuations have led to a recalibration of expectations in the near term.

While downgrading India, Citi has upgraded China and South Korea to "overweight" in its regional strategy. These markets are gaining favor due to better earnings-per-share revision trends and more reasonable valuations. China's tech sector, in particular, has seen renewed investor interest, with the segment rallying over 20% this year.

Citi had earlier acknowledged India's potential to outperform if global tariff risks returned. The brokerage believed tax cuts announced under the Union Budget would boost consumer sentiment and demand. Recent data also hinted toward a strong pickup in government capital expenditure, especially after a lull in the first half of FY25. Additionally, the Reserve Bank of India (RBI) had just initiated its rate-cut cycle with a 25 basis points reduction. Economists at Citi anticipated further policy easing in the months ahead.