1. Shallow Revival Likely; Consensus Estimates at Risk
BofA expects India’s economic revival to remain modest despite ongoing monetary support. It projects capex growth at 11% for FY25–27, well below the consensus estimate of 16%. Earnings growth is also expected to fall short, with FY26 Nifty earnings forecast at 9% compared to the Street’s 13%. Notably, consensus earnings have already been revised down by 8%, a trend BofA expects to continue.
2. India–U.S. Trade Deal Fully Priced In
According to BofA, markets have already priced in the benefits of a potential India–U.S. trade agreement. While such a deal could strengthen India’s position in global supply chains, the brokerage warns that the valuation upside is limited unless new, incremental positives emerge.
3. Global Trade Slowdown Not Priced In
In contrast to optimism around trade deals, BofA believes investors are underestimating the risk of a global trade slowdown. Rising trade tensions could weaken global demand, and this risk remains underpriced in equity valuations. Large-cap names may be particularly vulnerable to this disconnect.
4. U.S. Deficit and Growth Risks Could Spill Over
The proposed U.S. tax bill could worsen the fiscal deficit, currently at 6.4%, by extending prior tax cuts and introducing new ones. BofA forecasts U.S. GDP growth to slow to 1.5% in 2025–26, down from 2.8% in 2024. Given the Nifty’s 96% correlation with the S&P 500, a U.S. equity correction could ripple into Indian markets.
5. Rise of Populism Could Strain State Finances
With elections scheduled in six Indian states in the second half of FY26, BofA flags a potential resurgence of populist measures. These states represent 23% of total state expenditure, 16% of subsidies, and 17% of capex. A spike in subsidies could strain state finances and compress valuations, undermining fiscal discipline.
6. Domestic Fund Flows Show Signs of Fatigue
Domestic institutional investor (DII) inflows, which peaked at $8.6 billion in October 2024, have moderated to $6.1 billion in April 2025. BofA sees this declining trend as a concern, potentially reducing domestic support for equities and amplifying the market’s sensitivity to global developments.
7. Foreign Flows at Risk Amid Valuation Concerns
While foreign institutional investor (FII) inflows rebounded to $3.5 billion in April–May 2025 after earlier outflows, BofA remains cautious. With Indian equities rallying, relative return prospects have diminished versus U.S. Treasuries and other global equities. The brokerage warns that stretched valuations could deter future FII inflows.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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