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The Indian stock market, after a record-breaking nine-year winning streak, faces uncertainty as it enters 2025. While experts predict continued growth, the extent of this growth remains debatable. The consensus points to four key factors that will determine the market's trajectory: the upcoming FY26 budget, government capital expenditure (CAPEX), inflation, and corporate earnings. These factors are interconnected, and a positive outcome in one area can significantly influence the others, ultimately impacting the performance of the Nifty index, which some predict could surpass 26,000.
The FY26 budget, scheduled for release in just over a month, is considered pivotal. Market participants are keenly observing whether it will effectively stimulate economic revival. Key expectations include cuts in personal taxes to boost middle-class spending, increased infrastructure spending to accelerate growth, and rationalization of tariffs to improve exports. The success of the budget in addressing challenges like inflation and weak private consumption will play a crucial role in shaping market sentiment. A well-received budget could be the catalyst needed to propel the market to new highs, as indicated by Kotak Securities' prediction of a Nifty reaching 26,100 based on positive budget outcomes and projected 14% earnings growth.
Government CAPEX spending is another critical factor. The year 2024, marked by elections, saw a slower-than-expected utilization of the budget allocated for infrastructure development. With less than half of the budget estimates utilized by year-end, the need for accelerated spending in the coming months is paramount to meet the FY25 target of 11.1 trillion rupees. A significant increase in government spending in early 2025 is predicted by Motilal Oswal's report to positively influence corporate earnings and consumption, contributing to a gradual economic recovery. However, the report also acknowledges potential volatility in global markets and persistent inflation as countervailing factors.
Inflation remains a major concern. Despite signs of moderation, food inflation continues to be a significant worry, remaining above the comfort zone and exceeding 9%. The Reserve Bank of India (RBI) recently revised its Consumer Price Inflation (CPI) outlook for FY25 upward, reflecting continued inflationary pressures. The management of inflation will be key in influencing the RBI's monetary policy decisions and will have implications for interest rates, which in turn influence investment behavior. Controlling inflation is necessary to ensure sustainable economic growth and market stability.
Corporate earnings have also been a cause for concern. A weaker-than-expected Q2 performance has led to hopes for recovery in Q3 numbers. The success of this recovery will have a direct bearing on the Nifty's performance throughout 2025. Analysts at Motilal Oswal highlight that while valuations have moderated since their CY24 highs, Nifty-50's earnings are still anticipated to achieve an 11% CAGR between FY24 and FY26. This projection underlines the importance of corporate performance in the overall market outlook. The interplay of these four key drivers – budget, government spending, inflation, and corporate earnings – will be the ultimate determinant of whether the Indian stock market can continue its success story into 2025 or faces a period of correction.
In conclusion, the Indian stock market in 2025 is poised for growth but faces significant uncertainties. The upcoming budget holds immense weight, influencing not only fiscal policy but also overall investor sentiment. Government spending, particularly in infrastructure, needs to accelerate to meet its targets and stimulate the economy. The persistent challenge of inflation needs to be addressed effectively to ensure macroeconomic stability. Finally, a strong recovery in corporate earnings is essential for maintaining market confidence and achieving projected growth targets. The success of the market in 2025 hinges on a positive interplay of these four critical factors.
Source: What will drive stocks in 2025? Budget, earnings, and more