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

Nifty ends below 25,600 on Tuesday, while Sensex fell over 500 points extending its decline. However, Morgan Stanley's Ridham Desai in his report said Indian equities appear poised to recover from a steep relative correction since the end of September 2024, as the country's growth cycle turns upward.

The brokerage believes that with the macro environment stabilising, relative valuations correcting, and several headwinds easing, India's equity market could be entering a more constructive phase.

The report noted 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.

Morgan Stanley pointed out that India's fundamentals remain strong, with improving visibility on both consumption and investment cycles. 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.

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.

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.

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.

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. It also anticipates that declining interest rates will help drive a reallocation of savings from fixed income to equities, supporting valuations even as global growth remains uneven.

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

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.