In recent decades, India has developed into one of the fastest growing economies in the world. With its young population, increasing urbanization and digitalization, the country continues to offer economic growth opportunities. Since 2003, the Indian equity market has risen from one percent of global equity market capitalization to a weighting of four percent. This makes it the fifth-largest stock market after the USA, China (mainland), Japan and Hong Kong, with a market capitalization of USD 4.4 trillion.
According to GDP, India is expected to become the fourth-largest economy in 2025 with USD 4.19 trillion, ahead of Japan, and even overtake Germany in 2028 (India was still in eighth place in 2003). India's real GDP is expected to grow by 6.5% in the fiscal year 2025, while global GDP growth is expected to be 2.3% according to World Bank estimates. This corresponds to a per capita GDP of just USD 2,700 in 2024 (in China it is USD 13,300). In the 1970s, the agricultural sector (39%) and the service sector (34%) were still almost equal. Today, the service sector dominates with 55% of GDP, while industry contributes 28% and agriculture only 18%. This makes India less susceptible to protectionist interventions and tariff conflicts, as services have so far remained largely duty-free.
In the domestic share index (MSCI India), the financial sector is the most heavily weighted at around 30%, followed by cyclical consumer goods (13%), information technology (10%), industry (9%) and energy (9%). Leading banks and IT service providers are representative of the dominance of the service sector. Companies with a stronger focus on the domestic economy are also likely to continue to benefit from a growing middle class and the associated consumption. This applies to the telecommunications, retail and e-commerce, fuels and plastics sectors. In addition to growing fuel consumption, the main drivers here are the nationwide expansion of mobile and internet infrastructure and the increasing formalization of the retail sector. The expansion of infrastructure also enables the creation of new business models, for example in the areas of e-commerce, FinTech and logistics.
Reforms strengthen monetary policy and inflation control
Until 2015, India's monetary policy lacked a clear, nominal anchor. This regularly led to inflation of over six percent. One of the main problems was that there was no defined reference point for managing inflation expectations (there was also no combined inflation index before 2011). With the introduction of the flexible inflation target, the RBI (Reserve Bank of India) created a tolerance range of +/-2.0% around four percent in 2015. This allows the inflation rate to fluctuate within this corridor without requiring a change in policy. This innovation provided a clear anchor that made monetary policy more predictable and transparent and thus better managed inflation expectations. As a result, inflation stabilized within a narrower range of three to six percent on average - with the exception of 2020 (pandemic) and 2022 (Ukraine war). The anchored inflation expectations led to lower inflation volatility. However, 46% of inflation in India is attributable to food. India imports fossil fuels, especially gas from Russia, for a significant portion of its fertilizers. Should the price of gas rise significantly, this would increase the pressure on the Indian central bank, even if it cannot influence this directly. Since October 2024, however, the inflation rate has fallen steadily from 6.2% to 2.8% in May 2025, prompting the central bank to cut its key interest rate by 50 basis points to 5.50% in June (100 basis points in total since February). At the same time, the forecast for real GDP growth was left at 6.5%, while the inflation forecast was lowered to 3.7%.
Solid public finances and stable currency
India has not defaulted on its debt since independence in 1947. The major rating agencies currently give the Indian state a rating of BBB-/Baa3 in local currency. Ten-year Indian government bonds currently yield 6.27%, two-year bonds 5.77%. The government's aim is likely to be to further improve this rating. India's external debt stood at just 19% in 2023, while foreign currency reserves reached a new high of USD 690 billion, covering 96% of the external debt burden. The government aims to reduce the current public debt of around 83% of GDP to a level of around 70% in the coming years. The average term of government debt is 12.5 years. As a result, the yield premium over US government bonds has fallen from six to just two percent since 2011, which is supporting the stock market. Accordingly, the Indian rupee has shown little volatility in international comparison and has only ever depreciated moderately against the US dollar. This represents a significant advantage over other emerging markets. Over the past ten years, the rupee has lost around two percent in value against the dollar each year.
Access to the Indian stock market is strictly regulated for foreign investors. Most investors therefore opt for funds, ETFs or depositary receipts (ADRs/GDRs) as an alternative to individual shares. German investors currently only have access to 13 liquid ADRs/GDRs and eight ETFs that cover different market breadths. Greater market breadth is attractive as small and mid-cap equities have outperformed large caps over periods of two to 20 years - even on a risk-adjusted basis. Initiatives by the Ministry of Finance to relax investment regulations could lead to additional inflows.
Money supply growth and equity market valuation
It is always important to look at the development of M2 money supply growth. Since 2000, the annual growth of this money supply has been around 12.0%, and around 11.0% over the past ten years. Apart from the USA, only India currently has a higher valuation based on the price/earnings ratio. However, it is important to note that the performance of the stock market has been closely linked to corporate earnings growth. Indian companies have thus always grown into the high valuation through the corresponding earnings growth. These two trends are likely to continue to support the Indian stock market in the future.
Demographic advantage: young population as growth driver
India has the largest population in the world. The country's demographic structure therefore offers considerable opportunities for its future. The base of the population pyramid is very broad, life expectancy is 71 years and around 65% of the population is under 35 years old. The fertility rate is two children per woman, while annual population growth has fallen from 2.1 % to 0.8 % since 1950. The opportunities for companies are therefore great, as many workers will enter the market in the future and lay the foundations for the country's economic development and consumption. This increased demand should continue to boost profits for companies in sectors such as retail, telecommunications and financial services.
Further opportunities may arise from a change in employment by sector. Currently, 43% of the working population works in agriculture, which accounts for 18% of GDP. A long-term increase in productivity - for example through the increasing use of agricultural machinery - could reduce the proportion of household expenditure on food and integrate agricultural workers into the service or industrial sector. An increase in the female employment rate (currently 26%) should increase disposable income and thus consumption growth in the long term. To date, shares and funds only account for around five percent of gross savings, while the majority is held in the form of savings deposits. Over the past ten years, however, the proportion of shares has gradually increased. This indicates a growing awareness of capital market investments and an increasing preference for returns over security. In view of the young population, the proportion of shares and funds is likely to continue to rise, further strengthening the financial industry.
Risks remain despite good prospects
The presidential election in June 2024 highlighted dissatisfaction with inadequate state subsidies and transfer payments to the rural population. In states such as Uttar Pradesh and Maharashtra, the ruling party lost a significant number of votes compared to the last election. Lockdowns and the war in Ukraine led to increased food inflation during the last term of office, without a significant increase in transfer payments. Instead, economic policy focused on supply-side investments with a focus on infrastructure. However, a relaxation of the fiscal deficit target or a reduction in these investments in favor of higher subsidies could jeopardize long-term growth. In addition, a lack of energy imports from Russia could temporarily affect food prices and prompt the central bank to adopt a restrictive stance. Recurring tensions with Pakistan and other geopolitical conflicts - especially upheavals on the energy market - could influence the risk premiums of equities and bonds in the short term. Historically, however, they have mostly remained without prolonged market turbulence.
In the future, the Indian equity market will be supported primarily by its young population, solid corporate profit growth, money supply growth of over ten percent, the shrinking yield gap to US government bonds and low inflation volatility. The broad base of the young population is boosting consumption and the labor market, while companies are justifying their valuations through continuous profit increases. The central bank discipline of the past decade and demographic trends are thus paving the way for a profitable future.