Morgan Stanley Maintains Bullish Outlook On Indian Equities For Q3 FY26

Global brokerage firm Morgan Stanley has expressed continued optimism about Indian equity markets heading into the third quarter of FY26, projecting that the market is more likely to rise than fall, buoyed by strong fundamentals and improving macroeconomic conditions.

Morgan Stanley growth data & RBI support

Morgan Stanley expects positive growth indicators, a dovish Reserve Bank of India (RBI), and robust corporate earnings to provide strong upward momentum beginning in July.

The brokerage cited a steady increase in government spending and the initial signs of monetary easing as key contributors to the favourable environment for equities.

In addition, moderating inflation and lower interest rates will boost business sentiment and investment, as they accelerate lending growth.

Morgan Stanley anticipates that the upcoming Q2 earnings season could surprise to the upside, thanks to a mix of low base effects, improved operational efficiency, and resilient consumer demand across sectors.

The firm also projected that the RBI may announce a 25-basis point rate cut in the fourth quarter, further reinforcing a pro-growth environment.

Global risks remain a key concern

While the domestic outlook appears promising, Morgan Stanley cautioned that global risks remain the major swing factor.

It pointed to geopolitical tensions, trade policy shifts, and the potential for recession in developed economies as challenges that could impact Indian markets.

The firm acknowledged that although India is often viewed as a low-beta market, it would still feel the impact of a broad global equity sell-off.

For example, a sudden drop in crude oil prices could signal deteriorating global economic conditions, affecting Indian stocks indirectly.

Despite global headwinds, Morgan Stanley emphasised that strong retail investor participation and strategic foreign investment positioning continue to provide a cushion for Indian equities.

India’s equity market also enjoys a scarcity premium, with long-term confidence bolstered by structural reforms such as GST rationalisation and infrastructure investments.

Valuations justified by growth potential

Although current market valuations are high by historical standards, Morgan Stanley said they remain justified by India’s earnings potential and macroeconomic stability.

Even in the face of short-term volatility, India’s stable policy environment and strong growth trajectory make it one of the most attractive emerging markets for global investors, the firm concluded.

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