Morgan Stanley sees India equities set for strong 2026

What Morgan Stanley is saying now

Morgan Stanley believes the Indian economy may be close to a fresh growth cycle, supported by policy measures, strong domestic demand, and a revival in corporate earnings. In its India Equity Strategy Playbook, the firm said Indian equities are “poised for a strong year ahead,” even as valuations and sentiment are near extremes. The brokerage framed the current phase as a turning point after a “six-quarter mid-cycle slowdown” in earnings. It also argued that India’s macro backdrop has improved meaningfully since the post-pandemic tightening cycle.

The firm’s optimism is tempered by external uncertainties, especially geopolitics, oil-related risks, and uneven global demand. Still, Morgan Stanley said India could be a “big gainer” in a multi-polar world, with manufacturing’s share in GDP expected to rise over the coming decade. The overall message across its notes is consistent: domestic policy support and improving earnings visibility could support a better equity-market phase, but the key risks are largely external.

Turning point in earnings after a six-quarter slowdown

A central pillar of Morgan Stanley’s bullish view is the earnings cycle. The brokerage said earnings growth is turning after a six-quarter mid-cycle slowdown and should accelerate as reflationary policies gain traction. It linked the anticipated improvement to a combination of RBI and government actions that aim to lower financing costs and improve liquidity conditions.

Morgan Stanley also argued that earnings could grow faster than nominal GDP for an extended period. It estimated India’s profit-to-GDP ratio at about 10–11%, below the 14–15% levels seen at prior cycle peaks, implying room for further expansion without the same level of macro stress seen in earlier peaks. It also highlighted operating leverage, noting manufacturing capacity utilisation moving closer to 75–80% in several sectors from around 65–70% for much of the last decade.

Policy tailwinds: rate cuts, liquidity and bank deregulation

Morgan Stanley expects policy support to remain an important driver of growth. It cited reflationary policies from the RBI and the government, including rate cuts, liquidity infusion, and bank deregulation. In another note, it described coordinated RBI-government policy support worth ₹1.50 trillion in GST cuts, and suggested this focus is aimed at boosting mass consumption rather than balance-sheet repair.

The brokerage also said India’s “hawkish macro set up post-Covid” has unwound, which in its view reduces the drag from restrictive settings that previously weighed on sentiment. It added that domestic equity inflows remain strong and can help stabilise markets during periods of foreign outflows.

Capex and sector investment themes Morgan Stanley highlighted

Morgan Stanley pointed to large-scale investments across energy, defence, semiconductors, fertilisers, and data centres as supportive for growth momentum. It also highlighted strong capital expenditure trends and a relatively supportive fiscal environment, including tax cuts. In its longer-term macro note, the bank said India could see about $100 billion in additional capital spending over the next five years, with around 60% of this projected capex expected to flow into energy transition, data centres, and defence.

It also raised its investment rate forecast to 37.5% of GDP in F2030 (from 36.5% previously). Separately, it projected India’s investment rate to peak at 37.5% of GDP by FY2031, with total investment rising to about $1.2 trillion.

Global risks: geopolitics, oil, external demand and AI anxiety

Morgan Stanley cautioned that the path to sustained nominal growth of 12% may face hurdles. Geopolitical tensions were cited as a fresh challenge, particularly due to oil. While India’s oil intensity has declined, the firm noted that the country still needs to import oil, leaving it exposed to supply and price shocks.

In its FY27 macro projections, Morgan Stanley said it expects global oil prices to peak in the quarter ending June 2026 and average $17.5 per barrel in FY27. It warned that sustained high oil prices could have “non-linear” and progressively larger impacts on growth as households and firms cut back consumption and investment over time.

The brokerage also flagged concerns around AI and external demand. It said the lack of a direct AI play is a persistent challenge for the equity market, especially if AI disruption affects Indian services exports. At the same time, it noted that IT services could be a “dark horse” as global demand rises for AI applications and solutions.

Trade and currency backdrop: deals, China, and an undervalued rupee

Morgan Stanley said progress in trade agreements with the United States and the European Union, along with improving relations with China, adds support to India’s growth outlook. It also stated that the Indian currency remains undervalued on a real effective basis.

On positioning, the firm highlighted that foreign investor positioning is at multi-year lows. It also said India’s trailing 12-month relative equity performance has been the weakest in history, while relative valuations are near previous low levels. The note added that India’s share of global corporate profits exceeds its global index weight by the highest margin seen since 2009.

Equity positioning: cyclicals preferred over defensives

Morgan Stanley said it prefers domestic cyclical sectors over defensive and external-facing sectors. It remains overweight on financials, consumer discretionary and industrials. In another sector preference summary, it identified lenders, discretionary consumption, and select industrials as direct beneficiaries of improved liquidity, deregulation, and demand support measures.

The brokerage’s stance reflects its view that domestic demand and policy settings are currently the more reliable drivers, while global growth and geopolitics remain the swing factors.

Key numbers to track from Morgan Stanley’s notes

Market impact: why these calls matter for Indian investors

Morgan Stanley’s framing matters because it ties market performance to a coordinated reflation push, rather than a single lever like fiscal spending or monetary easing. It also emphasises that domestic flows can provide stability when foreign positioning is light, raising the potential for sharper moves if global investors rebuild exposure.

At the same time, the bank’s risk list is a reminder that India’s equity narrative remains sensitive to global variables: oil prices, freight and insurance costs during geopolitical stress, and the pace of global growth. In its macro note, it said global growth could moderate to 3.2% YoY in 2026 from 3.5% in 2025, with the US at 2.2% and Europe at 0.6%, which would weigh on goods exports even if services exports outperform.

Conclusion

Across its equity and macro notes, Morgan Stanley argues that India is moving into a phase where policy support, capex, and improving earnings visibility could align for stronger equity performance. It remains constructive on domestic cyclicals, while repeatedly flagging external risks led by geopolitics, oil, and uneven global demand. The next set of signposts, as highlighted in its notes, include how oil prices evolve around QE Jun-26, whether trade discussions progress, and whether earnings acceleration becomes visible in estimates and reported results.