By The financial year 2024-25 (FY25) has been a rollercoaster ride for the Indian stock markets, shaped by both local and global factors. From the upcoming Lok Sabha elections in India to the US Presidential race and China’s aggressive economic stimulus measures, market volatility has been a defining feature of the past 12 months.
As FY25 comes to an end, uncertainty remains a dominant theme, with analysts predicting increased fluctuations in the stock market for the upcoming financial year 2025-26 (FY26). A major concern for global investors is the anticipated implementation of reciprocal tariffs by US President Donald Trump, which could have far-reaching implications on trade and financial markets worldwide.
Domestically, the pace of economic recovery and the consistency of foreign capital inflows will be crucial aspects to monitor. Gaurav Dua, Senior Vice President and Head of Capital Market Strategy at Mirae Asset Sharekhan, emphasized that global factors pose a greater threat than local challenges.
“On the domestic front, the economy is expected to witness improvement driven by increased government capital expenditure and stronger rural demand. However, the global landscape remains uncertain, particularly with the new tariff policies set to take effect from April 2,” he noted.
Performance Overview of FY25
Looking back at FY25, the benchmark indices Nifty50 and Sensex are poised to close the year with gains of approximately 6.3% and 6.1%, respectively. Meanwhile, the broader market indices, including Nifty MidCap and Nifty SmallCap, are expected to register gains of around 6.5%.
Foreign institutional investors (FIIs) withdrew a record ₹1.54 trillion from Indian equities during the year, whereas domestic institutional investors (DIIs) stepped in with a historic investment of ₹6 trillion. This dynamic underscores the changing nature of investor participation in the Indian stock markets.
Against this backdrop, here are some key risks investors should keep an eye on in FY26:
1. Impact of Trump’s Tariff Strategy
With the April 2 deadline drawing near, Trump’s trade policies pose a serious challenge to global equities and currency markets. Analysts caution that these tariffs could negatively influence financial markets in FY26 and dampen investor sentiment.
“The full ramifications on global trade and economic expansion are yet to materialize, as such policy measures often take a few quarters to show their true impact,” explained Narendra Solanki, Head of Fundamental Research – Investment Services at Anand Rathi Shares and Stock Brokers.
While initial reports suggested widespread tariffs, more recent discussions indicate that the new trade policies may be more selective and targeted than previously feared. Nevertheless, these measures remain a crucial risk factor.
2. Uncertainty in Economic Recovery
On the domestic front, no significant immediate risks stand out, but the speed of economic recovery remains a pivotal concern. Many domestic factors, such as slow economic growth and the gradual revival following interest rate adjustments, are already reflected in current stock market valuations.
“Investors have been expecting an economic rebound in the first half of FY26, but any delays could lead to short-term market disappointments,” noted Solanki.
3. Challenges in Corporate Earnings Growth
Despite a reduction in earnings growth projections, market estimates remain higher than actual reported trends. Analysts warn that fourth-quarter corporate earnings may be weaker than expected due to sluggish credit expansion.
Ajit Mishra, Senior Vice President of Research at Religare Broking, explained, “The last quarter’s earnings are expected to be subdued as credit growth remains tepid. Additionally, the effects of government spending and the Reserve Bank of India’s liquidity initiatives will likely be more visible in the next financial year.”
4. Unpredictability of Foreign Institutional Investment (FII) Flows
Indian markets recently witnessed their first weekly net inflow of foreign capital in the 2025 calendar year, largely due to short covering. However, analysts warn that sustaining this trend will be challenging.
“Global economic patterns, movements in US interest rates, and geopolitical uncertainties will continue to influence investor sentiment. The long-term stability of foreign capital flows will depend on a balance between domestic economic resilience and international stability,” remarked Mishra.
5. Broader Global Risks
Beyond the uncertainties surrounding tariffs, global financial markets face other headwinds, including the possibility of a US economic slowdown, prolonged periods of monetary tightening, and unexpected geopolitical disruptions. Any of these factors could impact the flow of capital into emerging markets like India.
Moreover, as China’s economic recovery gains momentum, it could attract foreign investments that might otherwise have been directed toward Indian markets. This shift in global capital allocation could present additional challenges for Indian equities.
As FY26 approaches, investors must navigate a complex landscape shaped by global trade policies, economic recovery trends, corporate earnings, and international capital flows. While the domestic economic outlook remains positive, external risks such as Trump’s tariff policies, uncertainties in global financial markets, and foreign investment trends will play a crucial role in shaping the Indian stock market’s trajectory.
To mitigate risks, investors should adopt a diversified investment strategy and stay informed about evolving global and domestic economic trends. Given the heightened market volatility expected in FY26, a well-balanced and cautious approach will be essential for long-term success in equity markets.
