Geopolitical Calm and Market Momentum

The Indian equity market is undergoing a dramatic shift, influenced by both domestic and international factors. After heightened tensions between India and Pakistan, the sudden ceasefire provided a much-needed boost to the Indian equity market. This was further supported by a 90-day truce between the United States and China, where both nations agreed to reduce tariffs by 115 percentage points, facilitating a flow of goods from China. This development helped lift the overhang on global growth. All these developments led to a strong rally, with the Indian stock market gaining more than three per cent in a single day on May 12, marking its highest rise in the last four years. Foreign investors had also been on a buying spree for 16 consecutive days between April 15 and May 9, before selling off shares worth `3,800 crore during the peak of these geopolitical tensions.

However, many may wonder if this rally is sustainable, given that the market has already surged by almost 14 per cent in just 23 trading sessions since the lows of April 7, 2025. There are a few key factors to consider. The ceasefire, while fragile, is likely to be sustainable, given that it is brokered by major global powers and India has a vested interest in maintaining peace to avoid the significant losses that could arise from continued conflict, which might impact its growth.

On the other hand, the 90-day truce between the U.S. and China may negatively impact Indian trade. As the tariff gap narrows, companies that shifted production to countries like Vietnam, India, or Mexico may reconsider and return to China. This could diminish the appeal of the ‘China Plus One’ strategy, which has been a significant driver of manufacturing diversification. While India may still maintain a competitive edge over certain countries like Vietnam due to higher ‘reciprocal tariffs,’ the re-opening of supply lines could result in a slowdown in demand for Indian products.

From a broader perspective, there is optimism regarding India’s geopolitical response and its potential to reduce perceived risk in the region. This reduction in risk may result in a potential re-rating of India’s valuation, especially as foreign investors, who remained cautious amid geopolitical concerns, could begin to pour in capital. The overall sentiment is also supported by the trajectory of earnings and macroeconomic fundamentals. After reporting weak results for the past two quarters and with already muted expectations for Q4FY25, the latest numbers have turned out better than anticipated. The March 2025 quarterly earnings have come in reasonably ahead of expectations. While volume growth remains subdued in the current quarter, this is a concern that could potentially be addressed in the upcoming quarters.

The reduction in crude oil prices, tax rebates, and the expected implementation of the 8th Pay Commission recommendations could help the consumption sector recover in the coming years. India’s macroeconomic environment remains strong, with low retail inflation, stable oil prices, and robust foreign exchange reserves. The central bank may also consider rate cuts, which would be positive for GDP growth. The positive earnings growth, combined with foreign institutional buying, suggests that the Indian market is well-supported.

In conclusion, while the market has seen significant gains recently, the worst is behind us. A strategic, staggered approach to portfolio building, taking into account these macroeconomic developments and sectoral growth potential, will be the right strategy moving forward.

RAJESH V PADODE
Managing Director & Editor