India's Economic Silver Lining: Recovery Hopes Amid Market Volatility

Goldman Sachs suggests that the worst phase of India's economic slowdown and earnings decline is probably over, though market volatility may persist. Factors like high domestic investment in small- and mid-cap stocks and global uncertainties, including tariffs, contribute to ongoing market fluctuations.

According to Goldman Sachs, India's economic downturn and earnings decline could be easing, but market volatility is expected to remain for now. High levels of domestic investment in small- and mid-cap stocks, coupled with global uncertainties such as tariffs, are key factors behind continued market fluctuations.

In a recent analysis, Goldman Sachs expressed that the most challenging phase in economic growth and earnings trends appears to be over, with prices seeing significant corrections. The firm maintains a 'Market Weight' recommendation for India within emerging markets and advises investors to target stocks displaying robust earnings potential and quality growth.

The report points to a 10% correction in the NIFTY 50 index since its peak in September 2024, driven by a slowdown in earnings growth, weaker macroeconomic conditions, and significant reductions in valuation multiples across various sectors. Earnings per share projections for FY26 have been adjusted downwards by 7% on average. Goldman Sachs attributes the slowdown to cyclical elements influenced by policy measures such as strict credit regulations, cautious monetary policies, tight liquidity due to foreign exchange outflows, and fiscal tightening.

Despite the current challenges, the report highlights potential recovery avenues through recent policy adjustments, including income tax relief and RBI's policy rate cuts, projecting a real GDP growth improvement to 6.4% in the latter half of 2025. However, Goldman Sachs warns of persisting risks, notably potential U.S. tariffs on Indian goods, affecting trade and economic expansion. They advise caution as volatility and external pressures could continue to impact India's economic outlook.

(With inputs from agencies.)