Repair to Re-Acceleration
Indian equities entered 2026 positioned for reset and repair. As we move through the first quarter, the evidence increasingly suggests that repair is giving way to early re-acceleration - not only in sentiment, but in earnings revival. The corporate earnings for December'25 quarter signal that trend. The broad based nature of growth across sector and companies is noteworthy. We believe the consolidation phase that defined much of CY25 appears largely complete and from here a more fundamentally aligned market where growth, liquidity and positioning are better synchronized should follow. The narrative is shifting from policy cushioning growth to growth validating policy.

Macro: From Cushioning to Transmission
The decisive easing measures undertaken in late CY25 are now transmitting into the real economy. a) System liquidity remains comfortable; b) Lending rates across retail and SME segments have moderated; c) Credit growth is stabilizing-to-slight improving after a mid-cycle slowdown; d) Inflation remains benign, allowing policy continuity. High-frequency consumption indicators - GST trends, digital payment volumes, auto registrations - point toward steady normalization rather than a sharp rebound. The estimated fiscal impulse over FY26–27 is beginning to flow through both rural and urban cohorts. The macro mix today is characterized by – a) supportive monetary conditions; b) targeted fiscal expansion; c) controlled inflation; and d) improving credit transmission. This combination provides a stable earnings runway into FY27.

External Position: Volatility Eased, Deal Seized
The INR depreciation that weighed on USD equity returns in CY25 has moderated. External balances remain manageable, and forex reserves continue to provide stability (~USD 780bn). After almost a year long negotiation, this month we saw announcement of India-US interim trade deal and also the India EU FTA. This strengthens the external narrative and is supportive of capital flows. FPIs have sold USD 12bn worth of Indian equities since the US first announced surprise reciprocal tariffs on India in July'25 and India remains under-owned among Emerging Markets creating optionality of inflows if the global risk appetite improves.

Earnings: Breadth Improving, Dispersion Narrowing
The most important development since January 2026 is the healthy and broad-based improvement in growth. Large caps delivered 13%, mid-caps 16% and small caps 32% earnings growth in the recently reported quarter (December 2025). Consensus earnings growth for FY27 remains in the low-to-mid teens, but the quality of growth is improving - driven more by operating leverage and volume recovery than by pricing alone and evinced as earnings repair cycle gaining credibility.

AI: Narrative impacting tech stocks
Technology sector remains the most compelling asymmetry in Indian equities. The Nifty IT Index has declined 14% YTD primarily led by the incessant noise surrounding AI and revenue deflation fear. The sell-off also implies fear around durability of the business model in AI world, not just the near-term earnings risk. We, however, think that the more likely medium-term outcome is augmentation rather than displacement. Global enterprises lack scalable implementation capacity. Indian IT services firms possess talent depth, domain knowledge and cost competitiveness. Markets currently are discounting disruption far more and reflect through pessimism.

Outlook: Equity markets favorably poised
Indian equities seem to be favorably poised as they enter a steadier and more fundamentally grounded phase. Heavy lifting by RBI and Gov through series of stimulative monetary and fiscal measures has helped and the macro environment for earnings has improved. This is reflected in impressive Dec quarter numbers of revenue and net profit growth of 12% and 16%, respectively. In this backdrop of stabilizing-to-improving earnings, believe that Indian markets appear poised for better performance going ahead. Earnings pick-up in the broader market space is also encouraging and given 2-year modest returns in this segment, valuations selectively appear reasonable and hence increase in exposure to SMID space can be considered.

Source: ABSLAMC Research

SMID: Small and Midcap

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