Despite global headwinds, including high interest rates and volatile energy markets, India stood out as a beacon of stability in Asia in 2024. The economy demonstrated robust GDP growth, the stock market showed moderate gains, and bonds attracted foreign inflows. Against this backdrop, the India outlook for 2025 is optimistic. India’s solid economic expansion, minimal reliance on Chinese and US consumer markets, strong domestic demand for equities, and a central bank committed to maintaining currency stability are expected to enhance the nation’s attractiveness to investors amid global uncertainty, according to analysts.

Compared to 8.2% GDP growth in 2023, India‘s economy is losing some steam but is still the fastest-growing major economy, with a forecast of 7% in 2024 and 6.5% in 2025, according to IMF forecasts.

The re-election of Donald Trump in the United States has stirred up markets, and trade tariffs are expected to have the most significant impact on global markets. For India, UBS sees three challenges from trade tariffs: slower global growth, delayed private capex recovery due to China’s manufacturing surplus, and pressure on India’s trade balance from RMB depreciation. However, the investment bank notes that global policy shifts may also create opportunities, bolstering India’s role in ‘China + 1’ supply chain strategies over the medium term.

HSBC AM highlights that India, with its focus on domestic demand and limited reliance on U.S. exports, is among the least affected major economies by global trade disruptions. “Notably, there has been a gradual decoupling of India’s economic and financial markets from major global markets, including the US, Europe and Japan,” the asset manager notes in the 2025 Global Investment Outlook. “This has been demonstrated by a lower correlation of MSCI India with these major markets compared to the past five years, presenting appealing diversification benefits.“

India Outlook: Equities

Eastspring Investments points out that the Indian economy faces some cyclical challenges but says India’s equity market presents a structural opportunity. “Ongoing reforms, rising urbanisation, and supply chain shifts are expected to support India’s economic and earnings growth over the longer term,” the asset manager states.

Matthews Asia notes a recent pullback in earnings growth, which caused a small correction in the market. “The weakness in earnings has been fairly consistent across the board but the main impact has been in the mid- and small-cap space and in consumer segments. We believe earnings expectations for mid- and small-cap companies were too high, while the earnings of consumer-facing companies were weak. India remains an expensive market but fundamentally we still favour areas that are producing good earnings,” says Sean Taylor, Chief Investment Officer, Matthews Asia.

The Indian equity market reached over $4 tn in valuation in 2024 for the first time.

Kenneth Ng, Portfolio Manager with the Asian Equities team at Lion Global Investors, sees India as “one of the structural stories of the coming decade”. “India has given 14% compounded returns over the last twenty years, and we see enough catalysts for it to still repeat that in the next twenty,” the portfolio manager says.

India Outlook: Bonds

Investment experts believe that Indian bonds will perform well in 2025. The expected interest rate cuts by the central bank in response to the slowdown in economic growth sustained foreign inflows linked to index inclusion, and steady demand from local pension and insurance funds should increase the attractiveness of Indian government bonds.

In June 2024, JP Morgan began including Indian government bonds in its Emerging Market Global Bond Index (JPM GBI EM). Gradually adding 1% each month, Indian bonds will hold a total weight of 10% in the index upon conclusion on March 31, 2025. According to clearing house data, this triggered net inflows from overseas investors of about $14.5 bn.

“For 2025, foreign inflows into the Indian government bond market are expected to remain strong but may not match the record levels of 2024,” says Wei Li, Portfolio Manager at BNP Paribas Asset Management, citing inflation expectations, policy adjustments and global market fluctuations as reasons.

Schroders highlights that the ten-year local government bond yields in India (6.9%) are well-positioned to provide potentially high returns in 2025. “However, it’s important to consider active hedging of currency risks in these local bond markets, especially given the current strength of the US dollar and the potential for a renewed global trade war following the inauguration of the new Trump administration in early 2025,” cautions Abdallah Guezour, Head of Emerging Market Debt at Schroders.

This article was first published on AsiaFundManagers.com.