NewsGlobalIndia Poised for Market Recovery Despite Worst EM Performance Since 1994: Morgan StanleyIndia Poised for Market Recovery Despite Worst EM Performance Since 1994: Morgan Stanley
Morgan Stanley sees India positioned for strong market recovery despite worst emerging market performance since 1994. Key catalysts include coordinated RBI-government policy support worth ₹1.50 trillion in GST cuts, potential India-US trade deal, and February 2026 policy reforms. With foreign investors at cycle lows, the bank favors lenders, discretionary consumption, and industrials for the expected growth surprise.
*this image is generated using AI for illustrative purposes only.
Morgan Stanley has identified India as positioned for a significant market recovery, despite the country experiencing its worst relative performance versus emerging markets since 1994. The investment bank's analysis suggests that current market discomfort may present profitable opportunities for early-moving investors.
Macro Policy Shift Creates Growth Momentum
The most significant development is India's transition from a restrictive to reflative policy stance. Both the Reserve Bank of India and the government have begun coordinating efforts to revive growth momentum through multiple channels.
| Policy Support Measures: | Details |
|---|---|
| RBI Actions: | Bank deregulation, CRR reductions, surplus liquidity support |
| Government Measures: | Front-loaded capex, ₹1.50 trillion in GST rate cuts |
| Focus Area: | Mass consumption boost rather than balance-sheet repair |
| Historical Context: | First time both fiscal and monetary levers pulled together |
This coordinated approach differs from India's previous growth phases, which typically relied on either fiscal or monetary support alone. The combination is expected to improve credit transmission and lower the cost of capital significantly.
Earnings Recovery and Foreign Investment Positioning
Despite consensus caution on earnings, leading indicators suggest positive estimate revisions in coming months. Foreign portfolio investor exposure remains near cycle lows, historically limiting downside while amplifying upside potential when growth surprises emerge.
The current positioning creates favorable conditions for sentiment shifts, with the bar for positive surprises relatively low given light institutional exposure.
Policy Reforms and International Relations
The February 2026 Union Budget presents multiple reform opportunities that could enhance India's capital attractiveness:
- Correcting inverted duty structures
- New production-linked incentive schemes
- Capital market reforms including buyback taxation fixes
- Broadening FPI definitions for more investor classes
- Making GIFT City fully tax-free
Additionally, external factors are becoming more favorable. A potential India-US trade deal could reduce US tariffs on Indian goods, while improving China relations and Beijing's "anti-involution" push are easing external headwinds.
AI Investment Opportunities and Market Risks
The February 2026 India AI Impact Summit could establish a credible AI investment narrative around Indian talent, services, and infrastructure - areas where global investors are actively seeking opportunities beyond US markets.
However, supply-side risks remain. Strong primary issuances in 2025 are likely to continue, and any concentration of IPOs or block deals could create short-term share price volatility despite broader positive trends.
Sector Positioning for Recovery
Morgan Stanley identifies specific sectors positioned to benefit from improving conditions:
| Preferred Sectors: | Investment Rationale |
|---|---|
| Lenders: | Direct beneficiaries of improved liquidity and deregulation |
| Discretionary Consumption: | Benefit from demand revival and GST rate cuts |
| Select Industrials: | Positioned for growth momentum recovery |
These sectors represent the most direct beneficiaries of the coordinated policy support and improving macro environment that Morgan Stanley expects to drive India's market recovery.
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