India’s domestic strength outweighs global uncertainty

Despite ongoing global trade uncertainty, the domestic economy’s strength leads us to upgrade India’s GDP growth forecast to 6.7% for 2025 and 6.3% for 2026. While we acknowledge that India is not immune from global headwinds, we believe three key drivers should drive India’ resilience: 

Inflation has fallen sharply over the past few months which implicitly increases the purchasing power for consumers. Healthy rainfall in the ongoing monsoon season has led to higher crop sowing and reservoir levels, pointing to a good harvest and a sizeable rise in rural income, which should lead to an uptick in rural consumption. 

Services exports, which account for nearly half of India’s exports continue to grow at a healthy clip aided by the transition from predominantly IT services to more value-added professional services exports through the Global Capability Centres (GCCs). 

Monetary policy is supportive. The RBI has eased monetary policy faster than initially anticipated. It has front-loaded the easing, delivering 100bp cumulative rate cuts in 2025. We expect FY26 inflation to undershoot RBI projections and come in around 3.2%, indicating room for further easing. We now expect RBI to remain on hold in the August and October meeting, before delivering a 25 basis point cut in December MPC meeting to take the benchmark rate to 5.25%. Therefore, monetary policy is also supportive for growth. 

Overweight on Indian equities 

As we head into the upcoming earnings season, elevated valuations mean that corporate earnings growth is crucial to sustain the current momentum. However, we also need to be mindful that there is greater risk of distortion of earnings due to ongoing global trade concerns. Investors may be willing to give companies some benefit of doubt on the back of the improvement in domestic growth prospects and the fact that the impact of front-loaded RBI rate cuts is unlikely to be fully reflected in the current earnings season as monetary policy usually acts with a lag.

The technical picture appears to be largely supportive as well. Domestic flows remain resilient and foreign investors have also poured in approximately USD 9 billion since the lows in April, attracted by strong domestic growth and diversification prospects.

Sector views 

We upgrade consumer discretionary to a preferred sector while we continue to like Financials, Healthcare and Industrials. 

Consumer Discretionary: We expect the sector to be one of the primary beneficiaries of the uptick in domestic consumption. We expect demand for two-wheelers as well as durable goods to increase from the rural segment. 

Industrials: The sector benefits from strong earnings growth expectations, driven by supportive government policies and some expectations of supply chain rejigging due to ongoing trade uncertainty. 

Financials: Credit growth has moderated and is broadly in-line with deposit growth, easing pressure on Net Interest Margins (NIM). While the near-term earnings growth expectation has moderated somewhat, we continue to view the sector as a long-term structural winner given the rising affluence of Indian households. 

Healthcare: Despite the overhang of US tariffs on pharmaceuticals, we continue to like the exposure of the sector to hospitals as well as diagnostic testing services, which are expected to see robust medium growth, given India’s current low spending on healthcare. 

Bond and currency outlook 

We are bullish on Indian local currency bonds. We view the rise in yields across the curve after the RBI rate cut as being temporary and expect further RBI rate cuts, lower net supply and the resumption of foreign demand to drive 10-year yields lower. Elevated credit spreads also offer a good opportunity to add high quality corporate bonds. 

INR has underperformed Emerging Market and G-10 currencies in 2025 which has left it with cheaper valuations and stronger macro-economic fundamentals (due to higher Foreign Exchange reserves). We believe that INR is well-positioned from a fundamental perspective enjoying the combination of strong domestic growth, low inflation and mildly cheap valuations. While the Foreign Exchange markets continue to see elevated levels of volatility, driven by global factors, we expect USD/INR to remain largely range-bound and approach 86.0 by end-2025

Abhilash Narayan is investment strategist, HSBC Private Bank and Premier Wealth.

Views are personal, and do not represent the stand of this publication.