India’s growth in H2 2025 will be driven by RBI stimulus, strong exports, and domestic demand. Markets might witness a surge in market capitalization of large-cap stocks in financials, industrials, and healthcare.
India’s economy is navigating a complex global landscape in the second half of 2025, with its resilience shaped by the interplay of domestic consumption, export growth, and monetary policy. These interconnected factors—bolstered by the Reserve Bank of India’s (RBI) bold actions—position India’s equity market as a ripe ground for investment. With a projected GDP growth of 6.2% for 2025, India stands as the fastest-growing major economy, on track to become the world’s third-largest in the near future. We explore here the intricate web of economic drivers, from the RBI’s recent rate cuts to consumption patterns and export dynamics, and their collective impact on equity markets, offering a clear lens for understanding India’s economic trajectory.
Domestic Consumption: The Economic Anchor
India’s economic resilience hinges on its domestic consumption, which forms a robust foundation against global uncertainties. Unlike export-reliant economies, India’s growth is driven by millions of consumers spending on everyday goods, services, and experiences—from bustling street markets to digital platforms. A Moneycontrol research report notes that high-frequency economic indicators, such as retail sales and industrial output, reflect sustained domestic demand. Structural reforms, including efforts to boost female labor participation and simplify trade processes, further strengthen this foundation, fostering long-term stability. However based on the moneycontrol research, it is evident that India is not only growing but it’s leading. Compared to key ASEAN economies, India’s consumption growth stands out as the most robust heading into 2026.
However, consumption faces challenges that ripple across the economy. The RBI’s urban consumer confidence survey, cited in the above report, shows a Current Situation Index below 100, signaling pessimism among city dwellers. Rural confidence, at a neutral 100, suggests a tentative recovery in rural spending. This dynamic is critical: weak consumer sentiment can reduce demand for goods and services, slowing corporate revenue growth and, consequently, equity’s performance. Conversely, strong consumption fuels corporate earnings, supporting equity valuations. This interdependence underscores the need for policies that boost consumer confidence to sustain economic momentum.
RBI’s Monetary Policy: A Strategic Lever
The RBI’s Monetary Policy Committee, led by Governor Sanjay Malhotra, implemented a 50-basis-point cut to the repo rate, bringing it to 5.5%. Additionally, the cash reserve ratio (CRR) was reduced by 100 basis points to 3%, unlocking ₹2.5 lakh crore for bank lending by December 2025. These measures aim to counter global trade and geopolitical uncertainties, such as U.S. tariff threats, by making borrowing cheaper and increasing liquidity.
Soumya Kanti Ghosh, the SBI Group’s Chief Economic Adviser, described the rate cut as a “counterbalance to uncertainty”. Low inflation, at 3.16% in April 2025—a six-year low enabled this move, with FY26 inflation projected at 3.7%, below the RBI’s 4% target. Stable food prices, a stronger rupee, and lower oil prices support this outlook. However, the RBI’s decision to retain its FY26 GDP forecast at 6.5%—higher than some analyst’s projection of 6.2%—puzzle many.
Monetary policy’s impact reverberates across the economy. Lower interest rates reduce borrowing costs for businesses, spurring investment in sectors like manufacturing and real estate, which boosts industrial output and job creation. For consumers, cheaper loans for homes or cars can drive spending, reinforcing consumption. The CRR cut ensures banks have funds to lend, amplifying these effects. Yet, the RBI’s shift to a “neutral” stance reflects caution, with the RBI Governor noting “limited space” for further cuts due to potential inflation risks from volatile vegetable prices in May-July. A possible 25-basis-point cut is suggested by some analysts (Gaurav Kapur of IndusInd Bank) if growth weakens. It becomes imperative to maintain the delicate balance between stimulating growth and controlling inflation. This interplay shapes corporate performance and equity markets, as liquidity fuels economic activity but requires careful monitoring to avoid an overheating effect i.e. Inflation.
Export Dynamics: A Global Connector
India’s export sector is a vital element in its economic machinery, interlinked with domestic growth and monetary policy. Europe, India’s largest export market, benefits from a weaker rupee against the euro, enhancing competitiveness. Services exports, such as IT and business process outsourcing, grew 11% year-on-year, contributing 9.6% to GDP. This diversification reduces reliance on U.S. markets, mitigating risks from potential tariffs. Strong exports support corporate earnings, particularly in technology and services, which bolster stock market performance.
Investor confidence is tied to these dynamics. Foreign portfolio investors (FPIs) injected $1.7 billion into Indian equities in May 2025, marking three consecutive months of inflows, while domestic institutional investors added $7.9 billion as per Motilal Oswal. These flows reflect trust in India’s economic stability, driven by export growth and RBI stimulus. The feedback loop is clear: robust exports enhance corporate profits, attracting investors, which lifts stock prices and encourages further economic activity. However, global risks, like U.S. tariffs, could disrupt this cycle, highlighting the interdependence between trade and market sentiment.
Stock Market Dynamics
The Indian equity market is shaped by the macro interconnected forces. Analysts note double-digit earnings growth and a Return on Equity of 15%, which mitigates concerns about high valuations. Domestic investors, particularly younger retail traders who entered post-2020, remain resilient and contributed to the domestic inflows, and foreign inflows are returning. The equity story in India is increasingly being driven by younger retail investors. A demographic breakdown reveals that nearly 70% of investors are below the age of 40.
The June-to-September period historically favors Indian equities, adding to the positive outlook.
Large-cap stocks—big, stable companies—are less volatile than smaller firms and benefit from strong fundamentals. Key sectors include:
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Industrials: Projected to see 18% earnings growth in 2025 and 2026, driven by government infrastructure and security spending.
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Financials: Banks thrive on rising household wealth and increased lending, amplified by RBI’s liquidity measures.
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Healthcare: Hospitals and diagnostic services maintain steady performance, despite pharmaceutical volatility.
These sectors are deeply tied to economic drivers. Industrial growth depends on government spending and monetary stimulus, financials rely on consumer borrowing and liquidity, and healthcare benefits from rising disposable incomes. Weakness in one area – let’s say, consumption—could ripple through creating a stagnant impact on equities.
Challenges and Risks
Challenges persist, with interdependencies amplifying risks. Urban consumer confidence remains low, per the RBI’s survey, and rural recovery is tentative. Weak consumption and private investment have dragged non-food credit growth below 10%, as per Moneycontrol research. The RBI’s stimulus aims to address this, but its success hinges on banks passing on lower rates. Inflation risks, particularly from volatile vegetable prices, could push Q4 FY26 inflation to 4.4%, as per Barclays, limiting further cuts. Geopolitical risks, like U.S. tariffs, threaten exports, but trade talks targeting an optimistic $500 billion in U.S.-India trade by 2030 offer hope.
Connecting the Dots
India’s economic outlook for H2 2025 is going to be a result of interdependent macro factors. Domestic consumption drives corporate earnings, which support stock market gains. RBI’s rate cuts and CRR reduction boost liquidity, spurring investment and spending, but their impact depends on consumer and business confidence. Exports strengthen corporate balance sheets, attracting investors, but global trade risks loom. As India navigates global uncertainties, its ability to balance these interconnected elements will shape its economic and market trajectory, offering a nuanced picture for readers to interpret.
Also Read: RBI Cuts Repo Rate by 50bps to 5.5%