Is Market Correction Over? Morgan Stanley’s Ridham Desai Thinks So

The Indian stock market has been experiencing a correction since the end of September 2024, but according to Morgan Stanley’s Ridham Desai, this correction may be coming to an end. In his recent report, Desai stated that Indian equities appear poised to recover from a steep relative correction, as the country’s growth cycle turns upward.

Reasons Behind the Correction

The Nifty index ended below 25,600 on Tuesday, while the Sensex index fell over 500 points, extending its decline. However, Desai believes that the key factors behind India’s underperformance in recent months are beginning to reverse. The growth slowdown that began in the second half of 2024, when rich valuations met weaker data, is giving way to renewed optimism.

India’s Fundamentals Remain Strong

Morgan Stanley pointed out that India’s fundamentals remain strong, with improving visibility on both consumption cycle and investment cycle. The delay in finalising a US trade deal and India’s lack of exposure to the global artificial intelligence boom had also contributed to market volatility, but these issues are now seen as largely priced in.

Positive Growth Surprise on the Cards

A positive growth surprise could be on the cards in the months ahead, according to Morgan Stanley. The brokerage expects India’s growth cycle to accelerate, supported by policy measures such as the reflation efforts of the Reserve Bank of India, front-loaded capital expenditure, bank deregulation and liquidity infusion, as well as a likely cut in the Goods and Services Tax rate worth Rs 1.5 trillion.

Improving Trade and Investor Sentiment

These steps, combined with the thawing of relations between India and China and Beijing’s recent “anti-involution” stance, are expected to lift trade and investor sentiment. A possible India–US trade deal is another key tailwind that could further strengthen the country’s macro outlook.

Unwinding of Hawkish Macro Stance

Morgan Stanley also noted that India’s post-pandemic hawkish macro stance — marked by tight liquidity and high real rates — is beginning to unwind. With inflation easing and fiscal consolidation under way, the firm expects relative valuations, which have already corrected, to have likely made a trough in October.

Potential Re-Rating of Indian Equities

This shift sets the stage for a potential re-rating of Indian equities as lower interest rates, stable growth and improving earnings visibility combine to attract fresh capital. The report argues that India’s falling oil intensity, rising share of exports in GDP, and better fiscal balance should allow the economy to sustain high growth with low volatility, a combination that typically supports equity markets.

Positioning and Sectoral Preferences

In terms of positioning, Morgan Stanley prefers domestic cyclicals over defensives and external-facing sectors. The brokerage remains overweight on financials sector, consumer discretionary sector, and industrials sector, and underweight on energy sector, materials sector, utilities sector, and healthcare sector.

Transition to Macro-Driven Phase

It emphasises that the market is now transitioning from one driven by idiosyncratic stock-picking to a broader macro-driven phase, where sectoral and thematic positioning will matter more than individual stock selection. As the Indian economy continues to grow and the market corrects, it is essential for investors to stay informed and adapt to the changing landscape.

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