As the countdown to a new year begins, Morgan Stanley is upbeat about the prospects for Indian markets in 2026. They expect a strong bounce in Indian stocks over the next 12 months. According to Morgan Stanley‘s projections, there is a 50% probability of the Sensex scaling to 95,000 by December 2026 if the ongoing policy shift gathers pace. Morgan Stanley India’s Managing Director and Equity Strategist, Ridham Desai’s 2026 India outlook indicates that, “the long-term story is gaining strength with government policy action – cyclical recovery is backed by policy pivot. Most risks to our views come from outside India.”
Morgan Stanley on India: Strong bounce-back ahead
According to Morgan Stanley, “policy has pivoted, supporting a strong recovery in nominal growth, which should take earnings growth out of the mid-cycle slowdown experienced over the past 12 months,” in the Indian perspective. Ridhan Desai, in this report, highlighted that “relative valuations are consistent with improved forward performance. FPI exposure remains the lightest in history. The structural domestic bid is intact. India’s long-term story has been reinforced with a slew of reforms. Thus, Indian equities appear set to reverse their worst performance relative to EM in 31 calendar years.”
Morgan Stanley on India: 50% probability of Sensex at 95,000 by December 2026
The report has presented three possible scenarios about how the market may pan out going forward. They see 50% probability of the base case scenario being played out. In this case, Morgan Stanley expects the Sensex to rise to 95,000 by December 2026. This implies around 13% upside from current levels. The firm said the outcome assumes macro stability, stronger private investment, a positive gap between real growth and real rates, steady global conditions, and manageable oil prices. It also expects one more 25-basis-point rate cut in the current quarter, along with a supportive liquidity backdrop and no heavy bunching of new equity issuances.
The brokerage projects Sensex earnings to grow at 17% a year through FY28. It expects nominal GDP growth to average 10% to 11% over the next five years. It said trend earnings are still trailing nominal GDP, leaving room for a catch-up. This is the earnings leg it believes will pull the index toward the target.
The implied trailing P/E at 95,000 is about 23.5 times, slightly above the long-term average of 22 times. Morgan Stanley expects this to be reasonable if inflation stays steady and policy remains consistent.
Morgan Stanley on India: 30% probability of Sensex at 1,07,000 by December 2026
If conditions turn more favourable, they see 30% probability of the bull case playing out. In this case, they have a Sensex target of 1,07,000. It assumes oil below $65, a calmer global trade environment, and stronger results from reflationary policies. Under this outcome, the firm expects earnings to grow at nearly 19% a year between FY25 and FY28.
Morgan Stanley on India: 20% probability of Sensex at 76,000 by December 2026
They also have a bear case projection – Morgan Stanley sees a 20% probability of Sensex at 76,000. This, they believe, can play out if the crude spikes above $100 and there is a forced policy tightening by the RBI along with a deeper global slowdown and a US recession. The brokerage expects earnings to grow at about 15% annually in this scenario, though valuation multiples would contract.
Morgan Stanley view on the policy pivot and reflation
A central theme of the report is the policy pivot already underway. The government and the RBI reduced policy rates, cut the cash reserve ratio, eased several banking regulations, and provided liquidity. Public capex was advanced. The firm said close to Rs 1.5 lakh crore in GST cuts were applied to mass consumption categories. It also noted movement toward an India-US trade agreement and a more stable relationship with China.
Morgan Stanley expects this combination to lift nominal growth. It described the current stance as the strongest reflation effort since the pandemic years and said such a policy position is unusual in periods without a crisis. The firm expects clearer evidence of the shift in high-frequency data over the next few quarters.
Morgan Stanley on India: Valuation reset
The brokerage’s valuation framework rests on three expectations. Real interest rates are likely to soften as inflation stabilises. Fluctuations in both inflation and growth are expected to remain contained. Structural growth is expected to rise as private capex recovers.
Morgan Stanley said India’s dependence on oil has reduced over time and services exports have increased. This reduces exposure to external shocks. It also expects the rising share of domestic investors to make the market less reliant on foreign flows. These conditions, in its view, support a more stable valuation range.
Morgan Stanley on India: Earnings cycle
The report added that the earnings cycle is at its midpoint. Corporate balance sheets remain healthy, and capacity utilisation has improved. Private capex is gaining traction. Banks are well capitalised, and credit growth is firm. Discretionary consumption has held up and is expected to strengthen as employment improves.
The brokerage’s model suggests broad market earnings will grow by 22% in FY27 and 20% in FY28. It expects the profit share of GDP to move into the high single digits from about 5%. The firm said better margins and improving demand conditions are likely to support this shift.
Morgan Stanley on India: Catalysts to watch
Morgan Stanley listed a set of events that will shape market direction in early 2026. A rate cut from the RBI this quarter is one. Further financial sector deregulation is another. For the Union Budget 2026, the firm expects a reaffirmation of the goal of achieving a primary balance. It also expects possible corrections to inverted duties, an expansion of production-linked incentives (PLI), and adjustments to rules around buybacks and offshore participation.
The expected India-US trade deal is viewed as a stabilising factor for export-driven sectors. The firm also cited the AI Impact Summit 2026 as an event that could shift sentiment if global technology companies outline investment plans for Indian digital infrastructure. State elections in mid-2026 may add volatility, though the firm does not expect them to alter the medium-term trend.
Morgan Stanley on India: Risks to the outlook
Global growth is the biggest risk for India, as per Morgan Stanley. A sharper slowdown would reduce absolute returns even if India maintains relative strength. Oil above $100 would strain the current account and force a policy shift. A US recession would weaken technology and business services exports.
On the domestic side, the risks include a wave of issuances, softer retail flows, uneven state finances, and climate-related disruptions. Agriculture-related constraints were also listed as longer-term risks.
Morgan Stanley’s Ridham Desai pointed out that, “India’s recent bull market has been underpinned by a focus on macro stability sourced in inflation-targeting, fiscal consolidation and the declining oil intensity of the economy.” This, as a result, has made growth more predictable. He concludes saying, “India has a more reliable supply of risk capital, dovetailing into less volatility in equities and more predictable growth – a virtuous cycle we have never seen before in India.”