After a tough 2025, are Nifty bulls ready for a strong 2026?

India's economy faced several macroeconomic headwinds throughout fiscal year 2025 and the first half of fiscal year 2026. In FY25, the government reduced the fiscal deficit by 0.46% of GDP, primarily through expenditure control. Simultaneously, the Reserve Bank of India (RBI) took steps to curb excessive retail lending by increasing risk weights on unsecured loans. These measures occurred against a backdrop of tight monetary policy, with the repo rate remaining high at 6.5%.

Consequently, economic growth slowed considerably, with GDP growth decreasing by 2.7% to 6.5% in FY25. This slowdown affected corporate earnings, as Nifty EPS (earnings per share) growth fell to 3.3% in FY25, ending a period of double-digit growth seen in the years following the COVID-19 pandemic. Adding to concerns, forward consensus estimates for Nifty EPS in FY25 declined by 4% between August 2024 and February 2025. Equity markets reacted negatively, with the Nifty falling by 10% between September 30, 2024, and March 31, 2025. Small- and mid-cap stocks experienced even more significant declines.

That said, the reality is a bit more complicated. calendar year 2025 brought a shift in policy. The RBI initiated interest rate cuts in January 2025, starting with a 0.25% reduction and followed by an additional 1% in cuts. As 2025 ended, the repo rate stood at 5.25%, its lowest level since August 2022. The RBI also adjusted its approach to liquidity, moving the overall banking system liquidity into positive territory and aiming to maintain it consistently above 1%. Furthermore, the central bank implemented deregulation measures, lowering risk weights, removing lending restrictions, and easing regulations.