Nifty 50 likely to remain range-bound in 2025, says Kotak; remains cautious on midcaps, smallcaps

The Nifty 50 is expected to trade in a range-bound manner throughout the year, with valuations still on the higher side, according to Pratik Gupta, CEO and Co-Head, Kotak Institutional Equities. Despite India’s strong medium-term growth prospects, factors such as expensive valuations and moderate earnings growth expectations could limit significant upside in the near term.

Limited Upside, But Strong Medium-Term Prospects

According to Pratik Gupta of Kotak Institutional Equities, the NIFTY is currently trading at approximately 19 times March 2026 P/E, which remains significantly higher than historical averages and about a 90 percent premium to the MSCI EM Index. Given the expected 14 percent CAGR in earnings for FY26 and FY27, there are downside risks to these estimates. As a result, meaningful near-term upside in the Nifty is unlikely.

However, Gupta noted that the Nifty’s downside is protected by India’s strong macroeconomic fundamentals and an anticipated better foreign and domestic liquidity environment in the second half of FY26. He also cautioned against small- and mid-cap stocks, stating that despite their recent corrections of 13 percent and 18 percent year-to-date, valuations remain elevated.

Gupta maintained a positive stance on large private banks and NBFCs, life insurance companies, residential real estate, hotels, and the airlines/hospitality sectors. Meanwhile, he expressed caution on consumer staples, discretionary stocks, oil & gas, and the chemicals sector.

Key Market Risks and Potential Upside Catalysts

Gupta of Kotak highlighted several downside risks to the market, including a sharper-than-expected global slowdown, an adverse monsoon affecting farm incomes and inflation, and a slowdown in domestic retail equity inflows, particularly into small- and mid-cap funds.

On the upside, a weaker US dollar could drive increased foreign inflows into emerging markets, while a quicker-than-expected private capex recovery could provide further support to equities.

Foreign Investors Turning Less Negative on India

Foreign investors have moderated their bearish stance on India, as observed during Kotak Institutional Equities’ investor conference, said Pratik Gupta. While most investors did not intend to immediately buy Indian stocks, they were keen to understand specific companies to be prepared for future market corrections.

Some foreign investors acknowledged that they had been underweight on India, and the recent market correction validated their view. However, Gupta stated that these investors are now beginning to see long-term value in large-cap stocks, particularly in financial services, real estate, and e-commerce/QSR companies.

Moreover, many emerging market (EM) fund managers remain hopeful about inflows into EM equities later this year due to the increasing valuation disparity with US markets. However, Gupta noted that India would not be their first priority due to its high valuations and slowing growth prospects.

Additionally, some investors expressed concerns over India’s capital gains tax, which has become a more prominent issue as return expectations have declined compared to previous years when Indian equities provided 20 percent-plus annual returns and the rupee remained relatively stable.

Domestic Investors Shift to Large-Cap and Balanced Funds

Gupta observed that local mutual funds, insurance firms, and PMS funds are witnessing a slowdown in equity inflows, though net flows remain positive. However, there has been a clear shift in investor preference from small- and mid-cap funds to large-cap and balanced debt-equity funds.

Fund managers overseeing small-cap portfolios have turned more cautious due to stretched valuations and the risk of sudden redemptions leading to disorderly sell-offs. Domestic investors are also concerned about earnings downgrades, given weak management commentary from several companies at the Kotak Institutional Equities conference, noted Pratik Gupta.

Corporate Sentiment: Cautious Optimism in Select Sectors

Of the 215 companies that participated in Kotak Institutional Equities’ conference, the overall corporate sentiment remained cautious, with a few sectoral exceptions, according to Pratik Gupta.

Banks expressed concern over loan growth and net interest margins (NIMs) due to tight liquidity and weak demand, but they did not perceive asset quality as a major issue yet. Life insurance companies were optimistic, believing that the industry’s biggest challenges, such as COVID-related claims and regulatory uncertainties, were behind them.

Companies in consumer staples and discretionary segments remained cautious, citing weak urban consumption and sluggish rural demand recovery. However, businesses catering to high-end consumers—such as luxury hotels, residential real estate, and airlines—were relatively bullish, noted Pratik Gupta.

IT services companies reported no immediate pickup in discretionary spending, but Pratik Gupta of Kotak Institutional Equities mentioned that the recent rupee depreciation could provide some support to earnings growth. Meanwhile, pharmaceutical companies stated that pricing pressures in the US generics market had largely stabilized, though uncertainty remains over potential US import tariffs.

Hospitals remained positive about demand prospects and were not overly concerned about rising industry capacity. Capital goods companies expected a mild uptick in order inflows in FY26 due to increased government spending, but they did not foresee a broad-based private capex revival yet, according to Pratik Gupta of Kotak Institutional Equities.

Meanwhile, agrochemical companies had little visibility of a demand recovery in the near term, which remains a sectoral headwind.

Overall, despite a largely cautious corporate sentiment, select sectors—such as real estate, hospitality, airlines, and life insurance—continue to show strong growth prospects. Market risks remain, but potential tailwinds like a weaker US dollar and private capex recovery could provide some upside. Investors will closely monitor earnings trends, liquidity conditions, and global economic factors to gauge the market’s next move.

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