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Franklin Templeton India Mutual Fund has released a press note on the outlook for domestic & global equity markets and fixed income. In India, policy support remains firmly in place on both monetary and fiscal fronts. Income tax and GST reductions aim to revive demand and boost mass consumption. Initial signs of demand picking up from indirect tax rate cuts are promising, though their persistence remains to be seen. Rural demand is expected to remain resilient, supported by a favourable monsoon, healthy reservoir levels and strong real rural wages. A recovery in consumption, combined with elevated capacity utilization, could eventually trigger a revival in private capex.

India Equity Market Outlook

In domestic markets, a near-term challenge for equities lies in the supply overhang. Potential government divestments, promoter stake sales, and Foreign Portfolio Investors (FPIs) outflows could hit the market concurrently. It is not just the volume but the pace of this supply that could lead to short-term dislocations.

Global Market Outlook

Global equity markets have been positive, significantly helped by positivity around development of A.I and its infrastructure. India has not been seen as a beneficiary of this trade. Globally, markets remain sensitive to geopolitical developments, shifting interest-rate expectations, and uneven growth patterns across regions. The US economy is navigating a soft-landing trajectory; Europe is stabilising gradually; and Asia, particularly Japan and Southeast Asia, is showing signs of renewed momentum. While global liquidity conditions may remain tight in the near term, central banks are signalling a more balanced outlook ahead. Diversification and disciplined asset allocation will be essential as global markets continue to adjust.

Valuations

Historically, such surges have acted as a self-correcting mechanism, tempering valuations. Valuations remain elevated but broadly defensible. Large-cap stocks are trading above historical averages, while mid-caps hover around 27–28x earnings.

Large-caps: A backdrop of lower inflation volatility, stable interest rates, and a structural decline in the cost of capital supports some degree of re-rating.

Mid-caps continue to command a premium, helped by stronger double-digit earnings growth compared to high single digit growth for large caps.

While markets are not inexpensive, improving macro fundamentals make many stocks reasonably valued. Deep bargains are limited, but selective opportunities exist amid expectations of a broader recovery. Overall, fundamentals remain healthy, and valuations across sectors appear fair rather than stretched.

Volatile phases often test investor conviction, yet they underscore the importance of a disciplined approach. Dynamic allocation strategies such as multi-asset and balanced advantage funds could help mitigate risk. For long-term investors, systematic investment plans in diversified equity funds such as flexi cap, multi cap and large and mid-cap funds could be a sound strategy to achieve financial objectives. Ultimately, consistency and patience, rather than short-term timing, are the true drivers of sustainable returns.

Fixed Income Market Outlook

Macroeconomic indicators present a mixed picture. The International Monetary Fund has revised India's growth forecast upwards from 6.4% to 6.6% for 2025. India's Purchasing Manager Index (PMI) remained strong, and export orders held steady although some softness was noted due to tariff-related disruptions. Inflation remained subdued, with headline CPI at 1.5%, largely due to easing food prices. However, core inflation remained at elevated levels of 4.6%, limiting the RBI's room for aggressive rate cuts.

The RBI's dovish policy stance in the October Monetary Policy led to a compression in corporate bond spreads relative to government securities. The money market curve exhibited slight steepness, particularly in the Certificate of Deposit (CD) segment due to improving credit growth. The Indian currency came under pressure in October 2025, with the INR briefly hitting a record low. The RBI stepped in to smoothen the volatility. While these actions have helped stabilize the rupee, they also risk draining domestic liquidity, potentially impacting short-term interest rates.

Strategically, Franklin Templeton maintains a cautious approach to duration across fixed income portfolios. With market expectations split on a December rate cut from the RBI, the funds are prudently positioned with relative underweight duration. This positioning reflects a view that markets have already priced in much of the dovishness, and further easing may be constrained by currency volatility and global uncertainties. In conclusion, while macroeconomic fundamentals in India remain broadly supportive, the current tariff landscape and currency pressures introduce significant uncertainty.

The RBI's neutral stance, combined with active liquidity management, suggests a wait-and-watch approach. At this juncture it would be appropriate to remain vigilant in the fixed income space, where yield curve dynamics and Forex interventions could influence short-term rate movements.

The Case for Fixed Income

Stability amid change as the global economy adjusts to shifting interest rate cycles, fixed income funds are regaining significance for investors seeking stability and the potential returns. In an environment where equity markets may continue to be volatile, fixed income could offer an anchor to portfolios and could assist in mitigating risk. Indian bond yields remain attractive compared to developed markets, and with inflation moderating and policy continuity expected the outlook for debt markets is positive. This could be the time to bring balance to your portfolio by blending equity growth with fixed income stability.

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