After the spectacular performance from April 2020 to September 2024, the Indian stock market has been underperforming most of its global peers during the last one year. As of 12th September 2025, the Nifty 50 is down by around 4 per cent from the 2024 September high of 26,277. Now it appears that the market is on the cusp of a breakout, which can take the Nifty 50 to new record levels soon. What are the fundamental factors that can drive this potential rally?
The Indian economy in a sweet spot
India’s macros are sound. The Q1FY26 GDP growth of 7.8 per cent surprised on the upside. Fiscal consolidation is on track, and the 4.4 per cent target for FY26 appears achievable.
CAD at 0.6 per cent is comfortable; the CPI inflation at 2.07 per cent in August is well within the RBI’s target, and another 25 bp rate cut is possible in this rate-cutting cycle. Recognising these positive developments, Standard & Poor has upgraded India’s credit rating for the first time in 18 years from BBB – to BBB. Despite the Trump tariffs, India is likely to grow at 6.3 per cent in FY26.
Reforms will boost economic growth
The strong macro backdrop has been facilitating growth-stimulating reforms this year. The government provided a massive fiscal stimulus through the 2025 Budget by raising the
income tax exemption limit to ₹12 lakhs and cutting the tax rates. The fiscal stimulus was complemented by the MPC with a massive 100 bp cut in policy rates and a calibrated reduction in CRR.
The boldest reform came when the GST council decided to rationalise the GST rates broadly into two rates of 18 per cent and 5 per cent, with only a small number of ‘sin goods’ and super luxury items in the 40 per cent rate.
This bold reform will provide a big boost to consumption from September 22nd onwards, when the new rates come into effect. The combined effect of the Budget tax cut stimulus, the MPC’s monetary stimulus, and the GST rationalisation can be significant.
Earnings growth to revive and gather momentum
The fundamental factor that pulled the market down from the September 2024 peak was the poor earnings growth. Earnings growth from FY21 to FY24 was impressive at 24 per cent CAGR, and this facilitated the rally from the COVID low of 7,511 to the record high of 26,277 in September 2024.
The rally fizzled out, and the market took a downtrend when the earnings growth nosedived to 5 per cent in FY25. Now, the situation is favourable for a revival in earnings growth, and this has the potential to facilitate a rally in the market.
Automobiles will lead the earnings recovery. The sharp price reduction enabled by the GST cuts and the low borrowing cost can facilitate a significant spurt in automobile demand, and white goods demand will follow suit.
The major contribution to earnings growth in FY27 is likely to come from these segments.
With banking and financials continuing their resilience, earnings growth can grow by above 15 per cent in FY27. The market will start discounting this soon, taking the Nifty to new record levels.
Investors should focus on sectors with growth potential like autos, white goods, healthcare, financials, telecom, capital goods and digital stocks. Chasing overvalued small-caps is better avoided.
(The author of this article is Chief Investment Strategist at Geojit Investments Limited. Views are personal.)
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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of the expert, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
