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Investing.com -- UBS Global Research maintains an optimistic view on Indian equities, particularly the Nifty, citing strong macroeconomic fundamentals and improving earnings growth as key drivers.
Despite global uncertainties and the ongoing tariff discussions with the US, UBS’s outlook for India’s equity market remains positive, supported by fiscal consolidation, accommodative monetary policy, and an expected earnings recovery.
UBS forecasts India’s GDP growth at 6% for FY26, with some upside risks due to ongoing budget deficit reduction and easing tariff negotiation concerns.
The fiscal deficit is expected to decrease to 7.4% in FY25, down from around 8% previously.
While progress in US-India tariff talks is likely, UBS sees the market already pricing in this outcome, meaning it won’t provide additional upside for the Nifty in the near term.
Instead, the focus will shift to earnings growth, with UBS projecting 13.6% EPS growth in FY26 and 13.5% in FY27, a rebound from the single-digit growth seen in FY25. This recovery will be driven by improving sales and profit margins across key sectors.
The Reserve Bank of India (NSE:BOI) (RBI) is expected to continue its easing cycle, with UBS forecasting two more rate cuts.
This, coupled with a favorable inflation outlook (projected to remain below 4% in FY26), should support economic growth and boost consumption, particularly in urban and rural areas.
Additionally, UBS has revised its USD/INR target down to 83.5 for June 2026, expecting the Indian rupee to strengthen due to global de-dollarization trends and RBI interventions.
In terms of equity market performance, UBS maintains an "attractive" view on Indian equities, emphasizing large and mid-cap stocks over small caps.
While small-cap stocks have experienced higher valuation premiums, UBS believes large and mid-cap companies will better capitalize on the expected earnings growth.
The small-cap premium, as seen in their elevated forward P/E ratios, makes them more susceptible to underperformance if market sentiment shifts toward quality stocks.
UBS also notes that the Nifty’s forward P/E ratio, now slightly above 20x, is supported by strong earnings growth expectations over the next two years.
The falling yield on Indian government bonds, which UBS expects to decline further to 5.9% in the coming year, could keep equity valuations stable or even drive them higher.
The ongoing capex cycle and improving rural demand further bolster the outlook for sectors such as infrastructure and cement, which UBS believes will see an earnings upcycle in FY26.
The cement sector, in particular, stands to benefit from improved demand and cost efficiencies, with price hikes already observed across key regions.
Despite concerns about the Nifty’s recent valuation uplift, UBS argues that the combination of strong earnings growth and a stable macroeconomic environment justifies current valuations. They expect the Nifty to surpass its September highs in the next 6-9 months.