October 2025 Market Commentary
October was a strong month for Indian equities, with the Nifty 50 up 4.5%. Metals, Energy and Real Estate led the upmove whereas the key laggards were Capital Goods, FMCG and Autos indicating a move from defensives to cyclicals. Optimism surrounding a potential India–US trade agreement, better than expected quarterly earnings, FII inflows after 3 months of outflows and strong festive season sales led to the positivity. The festive season brought encouraging signs — two-wheeler sales rose 27% YoY, credit card spends grew over 23%, and credit growth has climbed back to 11.5%. The 2QFY26 till date(JAS quarter) Nifty earnings beat estimates by 3%. FIIs net inflow of USD 1.6 bn compared to outflows of USD 2.7 billion in September and USD 3.3 billion in August signify that valuations no longer justify continued selling, especially as earnings momentum is building up. As on October 31, 2025, NIFTY 50 Index was trading at ~20.7x price to earnings multiple and the valuations of all sectors except Tech and Private Banks are trading at a premium to historical average (Source: KIE estimates).
Optimism surrounding a potential India–US trade agreement gained traction after positive signals from diplomatic discussions, raising expectations of tariff relaxation in sectors such as textiles and gems, which could significantly boost bilateral trade flows. At the same time, The US-China trade truce, sealed in a Trump-Xi summit, eased global tariffs (US from 57% to 47% on Chinese goods) and unlocked rare earth exports, sparking a worldwide risk-on rally that lifted Indian market as well.
The dollar has stabilized as Donald Trump’s tariff and immigration policies have shown limited impact on U.S. growth. With inflation still above the 2% target and growth holding firm, markets now expects 3–4 Fed rate cuts in 2026, suggesting that most of the rally in U.S. bonds may already be behind us unless a major credit risk emerges. A stronger dollar has prompted the RBI to step up its support for the rupee, contributing to a decline in domestic liquidity. This could lead to liquidity infusion through Open Market Operations (OMO) of up to ₹2 lakh crore in the remainder of FY26.
India’s headline CPI eased to an eight-year low of 1.54% in September (from 2.07% in August) and expected to fall further to around 0.5% in October, led by softening food prices. However, core inflation rose to 4.6%, while super-core (ex-gold and silver) edged up to 3.4% amid higher housing costs.
With inflation well below the RBI’s 2–6% range, there is scope for a policy rate cut in December. The upcoming US–India trade deal and Q2 GDP data will be key triggers. Duration remains attractive, while short-end corporate spreads stay elevated amid tight liquidity.
Both the RBI and the Government have taken strong steps to improve India’s macro situation. In this year, RBI has eased policy through interest rate cuts, CRR reduction, and liquidity infusion, while the Government has complemented this with personal income tax reliefs, GST rate cuts, and record capital expenditure. Together, these measures form a potent mix — lowering borrowing costs, stimulating demand, and enabling a sustainable earnings growth cycle. Although material progress has been made on the same, the unresolved India–US tariff issue remains the single biggest external swing factor. Any settlement could further re-rate Indian equities, while prolonged uncertainty could keep global investors cautious. We continue to favour discretionary consumption, domestic cyclicals, and select financials, where operating leverage and demand tailwinds are most visible. Over the medium term continuous government spending, improving tax buoyancy through GST, and rising profitability should together set the stage for a sustainable, earnings-driven market re-rating.
