Indian markets will remain volatile in H1 2025: What should investors do?

Indian stock markets have been volatile this year, with equity benchmarks losing over 2% after declining in six out of 11 sessions so far in the calendar year 2025. This volatility is expected to persist in the first half of 2025 due to several global and domestic factors, including the new Trump administration’s policies, China’s measures to counter trade tariffs and their possible implications for emerging market currencies, corporate earnings reports, and the upcoming Indian Union Budget.

“These events are anticipated to create uncertainty in the near term. However, as they unfold and greater clarity emerges, market volatility is expected to subside in the latter half of the year,” Motilal Oswal Private Wealth (MOPW) stated in a recent report.

"The year 2025 will bring its share of uncertainty as the new U.S. president is sworn in. After years of strong performance, U.S. markets also appear fatigued. This calls for moderation in expectations and a sharper focus on risk management through asset allocation,” says Ashish Shanker, MD & CEO of MOPW.

The post-COVID period has been extremely rewarding for equity investors, driven by earnings growth, improving macroeconomic conditions, and strong domestic inflows into equities. The year 2024 was no different, with broader markets performing exceptionally well. The BSE benchmark Sensex scaled 80,000 for the first time in July and crossed the 85,000 mark by September. This broad-based rally was led by mid-cap and small-cap segments, which outperformed large-cap stocks.

Despite potential short-term volatility, the medium-term outlook for Indian equities remains positive, supported by several factors, including a stable macroeconomic environment, increased government spending, and improving corporate earnings. Additionally, expectations of improved liquidity conditions and monetary stimulus from the RBI amid potential rate cuts, along with continued growth in domestic investments—primarily through mutual funds and systematic investment plans (SIPs)—are helping mitigate the impact of foreign institutional investor (FII) outflows and are expected to boost sentiment in the medium term.

Brokerage recommends a hybrid investment approach

On investment strategy, the brokerage suggests: “If equity allocation is below desired levels, investors can increase their exposure by implementing a lump-sum investment strategy in a hybrid equity-oriented fund and adopting a staggered approach over the next six months for pure equity-oriented strategies, with accelerated deployment in the event of a meaningful correction.”

After tepid corporate earnings and slow GDP growth in Q2 FY25, MOPW recommends investors closely monitor the upcoming earnings season and GDP growth trajectory. “We expect this trend to reverse and anticipate large-cap stocks performing better this year due to valuation comfort. Over the long term, earnings growth and stock returns should converge. Given this, small-cap stocks seem to have run up significantly ahead of their earnings growth in many segments,” the report states.

Despite the recent slowdown in GDP, analysts at Motilal Oswal remain optimistic about India’s growth, citing macroeconomic stability, significant foreign exchange reserves, and a well-regulated twin deficit. They expect GDP growth to improve compared to the modest growth reported in Q2 FY25. According to the government’s first advance estimate, India’s GDP growth is projected to slow to 6.4% in FY25, down from 8.2% in FY24.

However, India is still expected to remain one of the fastest-growing major economies despite the recent slowdown, with the economy likely to rebound in the second half of calendar year 2025.

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