Rough ride ahead for Indian stock market? Trump factor & other challenges that await investors in FY26

The volatility that shook Indian equities in the latter half of FY25 could extend into the new financial year, as global markets await a major policy announcement from US President Donald Trump. His anticipated unveiling of fresh tariffs on April 2 has left investors on edge, adding to prevailing uncertainties.

Despite a turbulent fiscal year, market experts maintain that Indian benchmark indices could stage a recovery in the second half of FY26, driven by a potential rebound in corporate earnings and a renewed influx of foreign capital.

Market Trend In FY25

The Sensex and Nifty recorded gains of around 5 per cent each in FY25, a stark contrast to the 28 per cent surge witnessed in the previous year. The indices remained on a record-breaking streak until September before persistent selling by foreign portfolio investors (FPIs) eroded most of the gains. While FPI outflows weighed on market sentiment, domestic institutional investors—particularly mutual funds—helped cushion the decline. Robust inflows into mutual funds and a sharp market rebound in March prevented steeper losses. 

Broader markets also bore the brunt of the FPI sell-off, with the Nifty Mid-cap 150 and Small-cap 250 indices rising just 5.7 per cent and 2.3 per cent, respectively, over the full fiscal year. The correction intensified in the second half, with both indices tumbling 14.5 per cent and 18 per cent from their September highs. Beneath these figures, several stocks saw deeper cuts of 30-50 per cent from their 2024 peaks. 

Despite these corrections, analysts note that bargain buying remains subdued, as investors prioritise capital preservation amid global uncertainties.

Road Ahead: Recovery in Sight?

Market watchers suggest that the current uncertainty could persist for another three to six months unless a US recession materialises, which could further disrupt investor sentiment. However, if global conditions stabilise, Indian equities may become attractive once again for foreign investors seeking long-term growth opportunities.

While the start of FY26 appears uncertain, domestic resilience, improving corporate earnings, and stable macroeconomic fundamentals could pave the way for a market rebound in the latter half of the year.

What challenges will Indian markets face in FY26? 

Experts highlight the risks that the Indian stock market could face in FY26:

Global Uncertainty Could Hurt Indian Markets

As India steps into FY26, market participants remain optimistic about the country’s growth trajectory. However, experts caution that global uncertainties could pose significant hurdles for Indian equities. With geopolitical tensions, trade policy shifts, and macroeconomic concerns looming, investors must navigate a complex landscape.

According to Alekh Yadav, Head of Investment Products, Indian equities are not insulated from global volatility. Trade policy uncertainty in the US, coupled with concerns over growth and inflation, could spill over into Indian markets. Recent global economic data suggests that inflationary pressures in the US may persist, leading to potential interest rate adjustments by the Federal Reserve. Such moves could trigger foreign capital outflows from emerging markets, including India, adding to market volatility.

At the same time, uncertainties in global trade policies remain a significant risk. The US is one of India’s largest export destinations, and any changes in trade tariffs or restrictions could impact sectors like textiles, pharmaceuticals, agriculture, and chemicals. If stricter trade policies come into play, Indian exports may face headwinds, pressuring corporate earnings and overall market sentiment.

Despite external challenges, domestic economic indicators offer some optimism. India’s economy is projected to grow at 6.5 per cent in FY26, supported by rising domestic demand and continued government-led capital expenditure (CAPEX). 

Om Ghawalkar, Market Analyst at Share.Market, believes that the recent cyclical slowdown in economic activity is temporary and could reverse, leading to stronger earnings growth in key sectors.

Furthermore, market valuations have become more reasonable following the recent correction. This presents potential opportunities for long-term investors, particularly in sectors poised to benefit from domestic consumption trends, infrastructure spending, and policy reforms. The banking and financial sector, for instance, remains well-capitalised and is expected to benefit from improved credit demand.

Earnings Season and Market Sentiment

Corporate earnings will play a crucial role in determining market direction in FY26. With earnings season approaching, analysts will closely track the performance of key industries to gauge economic momentum. Strong earnings growth could reinforce positive investor sentiment, while weaker-than-expected results may trigger volatility.

Experts highlight that sectoral performance will vary, with IT and export-driven industries potentially facing more pressure due to global headwinds, while domestic consumption-driven sectors may exhibit resilience. Monitoring these trends will be essential for investors looking to position their portfolios effectively.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.