Indian equity markets are positioned for a stronger performance in 2026, driven primarily by improving domestic corporate earnings, according to market expert Sudip Bandyopadhyay. Speaking in an interview with ET Now, he outlined the factors supporting this optimistic outlook while highlighting the critical role of foreign institutional investor (FII) participation for a sustained market rally.

Corporate Earnings Show Strong Recovery

Bandyopadhyay noted a significant improvement in corporate earnings performance following a weak start to 2025. The market expert highlighted that Q2 numbers exceeded expectations, with even stronger projections for the upcoming quarters.

The earnings recovery stems from multiple policy and economic factors. Bandyopadhyay attributed the improving outlook to GST rationalization, income tax relief announced in the previous Budget, expectations around pay commission revisions, and a notable pickup in consumption demand during the festive and winter season. He emphasized that the previously anemic consumption that weighed on earnings has started to revive, which should translate into healthier corporate performance in the second half of the financial year.

FII Return Critical for Sustained Rally

Despite the positive domestic earnings trajectory, Bandyopadhyay cautioned that domestic factors alone may not be sufficient to trigger a sustained market uptrend. He stressed that while corporate earnings will improve, the real market momentum will come when FIIs start buying back into Indian equities.

Currently, FIIs have remained net sellers due to several concerns:

• Valuation concerns compared to other Asian markets
• Global geopolitical risks
• Absence of clarity on India-US trade deal
• India's relatively higher valuations versus regional peers

Policy Reforms Could Boost Investor Sentiment

Looking ahead to potential policy triggers for a broader market rally, Bandyopadhyay identified specific tax reforms that could significantly improve investor sentiment. He suggested that rationalization of capital gains tax and securities transaction tax (STT) could particularly benefit foreign investors, as these taxes complicate returns and reduce post-tax gains compared to other markets.

Macro Risks and Wealth Concentration Concerns

Addressing recent concerns about billionaire wealth shrinkage, Bandyopadhyay dismissed this as a sign of deeper economic distress. He explained that such calculations depend on time periods and listed market performance, with sectoral underperformance naturally impacting promoter wealth, citing IT and select real estate segments as examples.

However, he flagged ultra-low inflation as a key macro risk. While falling inflation may appear positive, Bandyopadhyay warned that persistently low or negative inflation could hurt nominal GDP growth and rural incomes, eventually impacting consumption. He emphasized that the economy needs healthy inflation of around 3-4%, requiring coordinated monetary and fiscal policy efforts.

Outlook for 2026

Bandyopadhyay remains constructive on India's long-term outlook, emphasizing that the combination of improving earnings, policy clarity, and the return of foreign capital will be crucial for markets to transition from the current selective, range-bound phase to a sustained rally in 2026. The market expert's analysis suggests that while domestic fundamentals are strengthening, international investor confidence remains the key catalyst for broader market momentum.

Indian equity markets are set to commence Friday's trading session on a positive note, supported by encouraging macroeconomic data and stable domestic fundamentals. Gift Nifty trading at 29,330 levels signals a gap-up opening of approximately 40 points, though analysts anticipate subdued trading volumes and relatively muted market activity.

GST Collections Show Mixed Performance

December GST collections presented a mixed picture for the Indian economy. The following table summarizes the key GST performance metrics:

Karthik Mani, Partner, Indirect tax at BDO India, explained that the net GST collections for December showed a month-on-month decline of approximately 4.3%, attributed primarily to a significant increase in refunds issued and a marginal drop in gross GST collections on domestic transactions.

Import Collections Offset Domestic Shortfall

While GST collections on imports demonstrated an uptick in December, this increase proved insufficient to compensate for the shortfall in domestic collections. The domestic collections were impacted by both increased refunds and reduced gross collections. Despite these challenges, gross GST collections on domestic transactions remained largely flat on a year-on-year basis, indicating some improvement in economic activity despite the impact of major rate cuts implemented in September.

Market Outlook and Investor Sentiment

Foreign portfolio investors remain a key focus area for market participants. After being net sellers of over ₹1.6 lakh crore in Indian equities, experts believe FPIs are likely to return as buyers, driven by India's macroeconomic stability and attractive valuations.

Ponmudi R, CEO of Enrich Money, noted that Indian equity markets are positioned to begin the second trading session of 2026 on a cautiously positive and stable note. With international markets reopening gradually, overseas cues remain limited, keeping early trading largely influenced by domestic factors.

Earnings Season Expectations

As the Q3 earnings season approaches, investors are strategically positioning for resilient results, particularly in consumer-oriented sectors. The positioning is supported by:

• GST rationalization tailwinds
• Robust festive-season demand
• Steady domestic institutional inflows
• Continued support offsetting aggressive foreign investor selling

Most Asia-Pacific markets remain closed, though Korea's Kospi showed marginal gains in early trading. The focus on domestic factors and upcoming earnings results is expected to drive market direction in the near term, with analysts suggesting the next few months will provide clearer indications of normalized monthly GST collection patterns following the rate adjustments.