Domestic earnings recovery to support markets in 2026, but FII return key for sustainable rally: Sudip Bandyopadhyay

The Indian economy, a vibrant and increasingly significant player on the global stage, is constantly under the scanner of analysts and investors alike. The recent prediction by market expert Sudip Bandyopadhyay regarding a stronger Indian market in 2026 offers a fascinating glimpse into the anticipated trajectory of one of the world's fastest-growing major economies. This forecast is not merely a number; it's a synthesis of various economic levers and policy expectations, crucial for competitive exam aspirants to understand in depth.

At its core, the prediction hinges on a robust recovery in domestic corporate earnings. This recovery is expected to be propelled by a trifecta of factors: significant tax relief, ongoing GST rationalisation, and a burgeoning consumption rebound. The government's proactive stance in recent years, such as the corporate tax rate cuts in September 2019 (reducing the base corporate tax rate for domestic companies to 22% and for new manufacturing companies to 15%), was a strategic move to boost investment and manufacturing. These tax incentives aim to leave more capital in the hands of corporations, encouraging reinvestment, expansion, and ultimately, higher earnings. Simultaneously, the Goods and Services Tax (GST), introduced on July 1, 2017, as a landmark indirect tax reform, continues to undergo rationalisation by the GST Council. This process involves simplifying tax structures, reducing compliance burdens, and ensuring a smoother flow of credit, all of which contribute to business efficiency and profitability. A consumption rebound, fueled by improving economic sentiment, rising incomes, and potentially pent-up demand, forms the third pillar, driving demand for goods and services and consequently, corporate revenues.

However, the expert rightly highlights that while domestic factors can initiate a recovery, a *sustained* equity rally critically depends on the return of Foreign Institutional Investors (FIIs), now more broadly referred to as Foreign Portfolio Investors (FPIs). FIIs/FPIs are a significant source of capital for emerging markets like India. Their inflows provide liquidity, support market valuations, and signal global confidence in the Indian growth story. Conversely, their outflows can trigger market volatility and currency depreciation. India has historically seen periods of both robust FII inflows and significant outflows, often dictated by global risk appetite, interest rate differentials, and domestic policy stability. For instance, the 'Taper Tantrum' in 2013 saw substantial capital flight from emerging markets, including India, due to anticipated changes in the US Federal Reserve's monetary policy.

Beyond FIIs, policy clarity on capital gains tax and Securities Transaction Tax (STT) is identified as another crucial determinant for market sustainability. Capital gains tax is levied on profits from the sale of assets, including shares. The rates and holding periods (short-term vs. long-term) significantly influence investor behaviour. STT, introduced in 2004, is a tax levied on every transaction of purchase or sale of securities listed on Indian stock exchanges. Frequent changes or ambiguities in these tax policies can deter both domestic and foreign investors, who seek predictability and stability in the tax regime. Article 265 of the Indian Constitution mandates that “No tax shall be levied or collected except by authority of law,” underscoring the legal framework required for all taxation, including capital gains and STT. The annual Finance Acts passed by Parliament are the primary instruments through which these tax rates and provisions are legislated.

Finally, stable macroeconomic conditions, particularly healthy inflation, are paramount. High or volatile inflation erodes purchasing power, increases input costs for businesses, and often prompts the Reserve Bank of India (RBI) to tighten monetary policy by raising interest rates. Such actions can dampen economic activity and make equity investments less attractive compared to fixed-income instruments. The RBI, guided by the Monetary Policy Committee (MPC) since 2016, operates under a flexible inflation targeting framework, aiming to keep consumer price inflation within a band of 4% (+/- 2%). Maintaining this balance is key to fostering an environment conducive to sustained market growth and economic stability.

For India, the implications of this outlook are profound. A strong equity market reflects investor confidence, facilitates capital formation, and supports economic growth. It can lead to increased foreign direct investment (FDI) as well, as a buoyant market often indicates a healthy underlying economy. This, in turn, can create employment opportunities, enhance government revenues through various taxes (corporate tax, GST, capital gains, STT), and improve India's global economic standing. The ongoing focus on 'Atmanirbhar Bharat' (Self-Reliant India) and initiatives like 'Make in India' are intrinsically linked to boosting domestic manufacturing and consumption, which are the very drivers of corporate earnings recovery. Future implications suggest that if these conditions materialise, India could solidify its position as a global economic powerhouse, attracting more capital and fostering innovation. However, challenges like global economic slowdowns, geopolitical tensions, and the need for continuous structural reforms will remain critical factors influencing this trajectory.

Understanding these interconnected economic factors, policy interventions (like those under the Finance Acts and the 101st Constitutional Amendment Act for GST), and the role of various stakeholders (Government, RBI, SEBI, FIIs, domestic corporates, and consumers) is fundamental for any aspirant preparing for competitive exams. This intricate web of policies and market dynamics shapes India's economic future.