Global policy jitters, rich valuations to keep Indian equities volatile

The Indian equity market is expected to remain volatile in the near term as global monetary policy actions collide with stretched domestic valuations. The Nifty index is currently trading at over one standard deviation above its 10-year mean compared to Asian peers, leaving limited room for upside in the absence of meaningful earnings upgrades, InCred Equities said in a latest report.

“High volatility in the index, we believe, will continue due to global policy actions and India’s relatively rich valuation compared to Asia (+1SD above the 10-year mean),” the report noted. However, it added that earnings growth for Nifty-50 companies is likely to moderate, with Bloomberg consensus estimates for FY26 seeing further downward revisions.

Mid- and small-caps underperform

The Nifty index has been flattish in the last one-month and three-month periods, with mid-caps and small-caps sharply underperforming in the one-month period, recording a decline of 2–4%. Sector-wise, the GST rate overhaul has brought cheer to automobile and FMCG sector indices, while the IT index seems to be getting valuation support after a sharp decline. Major underperforming sectors in the recent quarter and the month were real estate, BFSI, and energy.

As per the report, global uncertainty remains a key deterrent for the domestic market. Central bank decisions on interest rates, ongoing geopolitical tensions, and currency fluctuations have kept foreign portfolio investor (FPI) flows unstable in recent weeks.

Global uncertainty weighs on FPI flows

FPIs continued to offload Indian equities for the sixth consecutive week, even as debt markets remained a strong draw, the report noted. During the week ended August 22, 2025, FPIs pulled out $120 million from the equity segment, following $350 million of outflows in the previous week. In contrast, Indian debt markets saw healthy participation, with FPIs pumping in $710 million during the week, registering the fourth straight week of inflows. Overall, FPIs recorded a net inflow of $620 million into Indian capital markets during the week, marking the second consecutive week of positive flows, the report highlighted.

SIPs remain resilient

Meanwhile, Indian markets have benefited from resilient domestic liquidity and strong retail inflows through systematic investment plans (SIPs), which has provided crucial support to domestic market at a time when foreign investors have been pulling out funds from equities.

Monthly SIP contributions touched ₹28,000 crore in July 2025, the highest in a year, while new registrations jumped 24% year-on-year. At the same time, the SIP stoppage ratio eased to 62%, retreating from recent highs, indicating that investors are showing greater discipline in continuing their investments despite short-term market swings, the report showed.

This was attributed to the ongoing rate-easing cycle. Term deposit rates fell by about 35 basis points in July 2025, reducing the appeal of fixed-income products and nudging savers toward equity-linked instruments for better long-term returns, the report noted.

On the domestic front, government policy actions in 2025 have been consistently supportive of growth. Income-tax cuts, a planned GST overhaul, fiscal discipline, and policy rate reductions are all designed to revive consumer demand and sustain macro stability.

Cautious stance on Nifty outlook

Citing near-term macro headwinds, InCred Equities has cut its bullish stance on Indian equities and sees only modest gains for the Nifty-50 index by the end of FY26. With India facing growth risks from global trade tariffs and lingering uncertainty around a potential GST rate revision, the brokerage lowered its bull-case probability to 30% from 35% earlier. This adjustment has marginally reduced its blended Nifty-50 target to 25,368, implying an upside of just about 3% by March 2026.

In a bear-case scenario, the brokerage expects a 10.7% downside from current levels, while a bull case projects an 11.6% upside.

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