From Laggard to Leader: How India’s “Self-Help” Policy Push is Priming its Market for a 2026 Breakout 

Based on analysis from Morgan Stanley and other major investment banks, Indian equities, after a period of historic underperformance in 2025 largely due to their lack of exposure to the AI-driven tech rally that benefited other emerging markets, are poised for a significant breakout in 2026 driven by a powerful domestic “self-help” story.

This turnaround is expected to be fueled by a coordinated government and central bank policy push—including interest rate cuts and liquidity measures—designed to reflate the economy, which is projected to lead to a robust 17% annual earnings growth for key indices. Consequently, the market leadership is set to shift from global tech stock-picking to a macro trade favoring domestic cyclical sectors like financials, consumer discretionary, and industrials, positioning India for a potential period of outperformance based on its own internal economic dynamics rather than external trends.

From Laggard to Leader: How India’s “Self-Help” Policy Push is Priming its Market for a 2026 Breakout 

For much of 2025, watching the Indian stock market has been an exercise in patience. While global markets, particularly other emerging economies, rode a wave of AI-fueled euphoria, India’s towering Sensex seemed to be moving in slow motion. The narrative was one of surprising underperformance. But according to a growing chorus from top-tier investment banks like Morgan Stanley, Goldman Sachs, and SocGen, this is merely the calm before the storm—a storm of domestic policy and earnings growth poised to make Indian equities a standout story in 2026. 

This isn’t just a prediction of higher numbers; it’s a forecast of a fundamental market shift. The coming year is being framed as a transition from a stock-picker’s market to a “macro trade,” where broad, homegrown economic forces will take the driver’s seat from the narrow, tech-centric rally that left India behind. Let’s dissect the compelling “self-help” story that could redefine India’s position in the global financial landscape. 

The 2025 Conundrum: Why India Missed the AI Party 

To understand the potential for 2026, we must first diagnose the underperformance of 2025. The MSCI India Index is trailing the broader MSCI Emerging Markets Index by its widest margin since 1993. The primary culprit? Sectoral composition. 

The massive rally across Asian and EM markets this year was largely engineered by a single, powerful theme: artificial intelligence. Tech-heavy markets like Taiwan and South Korea, home to semiconductor giants crucial to the AI supply chain, saw astronomical gains. Taiwan’s TSMC and Korea’s Samsung became the engines of a global speculative and investment frenzy. 

India’s $5.4 trillion equity market, by contrast, is structurally different. It is relatively light on the large-cap, export-oriented technology stocks that have powered the AI boom. Instead, its backbone is a vibrant tapestry of domestic-focused sectors: financials, consumer discretionary, industrials, and materials. When the world was buying chips and servers, India was building infrastructure and funding home loans. In a year dominated by a single global theme, this domestic focus became a headwind. 

The Pendulum Swings: From Global Tech to Domestic Macro 

Morgan Stanley’s key insight is that this very weakness is about to become its core strength. They predict 2026 will be a “macro trade in stocks,” a significant departure from the “stock-picking environment of 2025.” 

What does this mean? 

• A Stock-Picker’s Market (2025): Returns are driven by identifying specific, often thematic, winning companies (e.g., the best AI chip designer). It’s a bottom-up approach where broad economic trends take a backseat to individual company stories. 

• A Macro Trade (2026): Returns are driven by overarching economic forces—interest rates, fiscal policy, GDP growth, and currency movements. In this environment, entire sectors move together based on their sensitivity to these big-picture trends. 

India is uniquely positioned for a macro-driven rally because its growth story is increasingly insulated and self-sustaining. While other EMs might sway with the winds of global tech demand or U.S. Federal Reserve policy, India’s fate is increasingly in its own hands—a “self-help story,” as the Morgan Stanley strategists aptly put it. 

The Engine of Growth: A Coordinated “Reflation Effort” 

The catalyst for this macro shift is a powerful, coordinated push from the Indian government and the Reserve Bank of India (RBI) to reinvigorate the economy. Morgan Stanley projects a “positive growth surprise” in the coming months, fueled by a multi-pronged reflation effort: 

• Borrowing Cost Reductions: The RBI is expected to continue its rate-cutting cycle, making capital cheaper for businesses and consumers alike. This stimulates investment in new projects and boosts demand for big-ticket items like homes and cars. 

• Cash Reserve Ratio (CRR) Cuts: By reducing the amount of cash banks are mandated to hold with the central bank, the RBI frees up more capital for lending, effectively increasing liquidity in the financial system. 

• Direct Liquidity Infusions: Further measures to ensure the banking system is flush with cash will keep the wheels of credit greased. 

This trifecta of monetary policy is designed to create a virtuous cycle of investment, consumption, and growth. It’s a classic domestic reflation playbook, and in a world of global uncertainty, its localized nature is its greatest asset. 

The Earnings Engine: The 17% Growth Promise 

Policy is the catalyst, but earnings are the fuel. A market cannot sustain a rally on sentiment alone. Morgan Stanley’s projection is nothing short of stunning: a 17% compound annual growth rate (CAGR) for Sensex earnings annually through the fiscal year ending March 2028. 

This is the bedrock of the entire bullish thesis. If this forecast holds, it means corporate India is on track to nearly double its earnings power over a three-to-four-year period. Such robust bottom-line growth provides a fundamental justification for rising stock prices, preventing the market from becoming a speculative bubble. This earnings explosion will be driven by the same domestic cyclicals that lagged in 2025—as cheaper credit and government spending boost corporate profitability in sectors like banking, manufacturing, and consumer goods. 

Positioning for the Turnaround: The Sectoral Playbook 

Astute investors don’t just buy the index; they position themselves in the sectors poised to benefit most. Morgan Stanley’s strategy provides a clear roadmap: 

Overweight (Preferred Sectors): 

• Financials: As the primary conduit for lower interest rates and increased liquidity, banks and non-banking financial companies (NBFCs) are direct beneficiaries. Higher credit growth and improved margins can supercharge their earnings. 

• Consumer Discretionary: With more money in their pockets and easier access to credit, consumers spend more on automobiles, apparel, entertainment, and luxury goods. This sector is a direct play on rising domestic consumption. 

• Industrials: Government spending on infrastructure—from roads and railways to renewable energy projects—directly flows to engineering, construction, and capital goods companies. 

Underweight (Less-Favored Sectors): 

• Energy, Materials, Utilities: These sectors are often more vulnerable to global commodity price fluctuations and regulatory hurdles. In a domestically-driven rally, they may not see the same explosive growth. 

• Health Care: While a robust long-term story, the sector may face near-term headwinds like pricing pressure and regulation, making it less attractive relative to the high-growth cyclicals. 

A Chorus of Confidence, But Not Without Caveats 

Morgan Stanley is not a lone bull. Goldman Sachs, Societe Generale, and HSBC have all recently published notes echoing the sentiment for an Indian equity rebound. This consensus adds weight to the narrative, suggesting a broad-based reassessment of India’s risk-reward profile is underway. 

However, investors must tread with cautious optimism. The Indian market is not cheap, trading near all-time highs. This means any disappointment on the earnings or policy front could lead to sharp corrections. Furthermore, global risks—a deep recession in developed markets, a resurgence in inflation, or a sudden strengthening of the US dollar—could temporarily derail the domestic story by triggering foreign capital outflows. 

The Final Take: An Indigenous Growth Story for a Fractured World 

The projected turnaround of Indian equities in 2026 is more than a market call; it’s a commentary on the evolution of the Indian economy itself. It signals a maturation from a market that reacts to global flows to one that is increasingly driven by its own internal dynamics. 

For global investors, India offers a compelling proposition: a high-growth, structurally reforming economy that is leveraging its massive domestic market to forge a path relatively independent of the volatile global tech cycle. The “self-help” story is one of policy resolve, demographic destiny, and corporate ambition. After a year of playing catch-up, India may be ready to step out of the shadow of its peers and claim the spotlight on its own terms.