While the mega-cap meltdown has captured recent headlines, another compelling growth story of the past five years has suffered a setback: India. Worries over weaker economic indicators have seen a sell-off in Indian markets. But with valuations now at relatively reasonable levels, and the long-term growth story for India still intact, it could represent an opportunity.

The weakness in the Indian market is not simply ‘noise’. For much of the past decade, the growth story for India has continued uninterrupted, with a single difficult year during the pandemic. More recently, there have been wobbles. In particular, consumer spending has weakened, government capital expenditure has slowed down, and system liquidity has been tightened by the Reserve Bank of India (RBI)/central bank. This is not exclusive to India, but is part and parcel of rising inflation, and has been slow to revive. India’s GDP growth is projected to grow by 6.5% in FY 2024-25.

Capital spending has been a major contributor to economic growth under Prime Minister Narendra Modi. This was paused ahead of the election last year (H1FY25). When Modi’s party failed to win an outright majority in parliament, it did not resume with the same vigour. These two factors – a weaker consumer and slower capital spending – have dented corporate earnings for multiple sectors. The market might have been able to absorb this weakness were it not priced for perfection after MSCI India seeing a rise of 22% and 16% gains in 2023 and 2024 respectively.

The BSE Sensex Index – India’s main market index – dropped ~15% between September last year and March 2025. The market has started to revive, but only in the very short term. The question for investors is whether this lower level of growth will persist, or whether it remains a short-term blip in India’s astonishing growth story. We believe this is a temporary roadblock in the structural long-term story for India.

Economic weakness?

The government certainly recognises the problem and is taking steps to address it. RBI in its Feb-25 Monetary policy reduced the repo rate by 25bps to 6.25%, to ease the pressure on liquidity. Further, it has eased restrictions on risk weight assets for non-banking companies, among other steps. However, this is not an economy in dire straits: inflation is benign, the government’s fiscal position would be the envy of the UK, US or France, and debt to GDP is low. In the longer-term, India’s per capita GDP is still low, at just $2,480, which gives it a significant pathway of growth. China’s per capita GDP is $12,614, for example.

The corporate sector is healthy. Aggregate debt to equity is low, while return on equity is high. Economic growth is translating directly into corporate earnings growth, which means economic strength should ultimately show up in stock market performance.

On the thorny question of valuation, the signs are also encouraging. India has always been an expensive market and commanded higher valuations than its emerging market peers. This had been justified by the faster growth available from the Indian corporate sector. However, valuations had become extended. The recent correction puts them back to their 10-year average at 19x. That is not to say that there couldn’t be further corrections, but prices are more realistic.

Selectivity is key to better value

This is from a top-down view and there are still pockets of over-valuation in the market. We are still waiting for some stocks to correct because valuations are too frothy. At abrdn New India Investment Trust, we have a pipeline of ideas, and while more of them have come towards our target price, there remain some attractive companies that are too expensive. This is particularly evident among the small and mid-cap part of the market.

Where do we see better value? The banking sector has not been subject to the same level of over-valuation as stocks. Our Trust has 26% in the financial sector. Prices among healthcare companies also look more compelling than elsewhere in the market and this is an overweight position in the Trust.

It is possible to find good opportunities in the telecoms sector. In India, there has been significant consolidation across the sector. The company we hold in the sector is not cheap, but we can see an avenue for revenue improvement.

The consumer sector had been a significant area of over-valuation, and, while there has been a steep correction, share prices have not yet fallen enough to encourage us to reinvest. The consumer staples sector represents one of the lowest weightings in the Trust. However, the fund is invested in pockets of consumer like auto loans, or in the tourism sector. The drive to bring tourists to ‘Incredible India’ has been successful and tourism remains resilient.

The Trump effect

No country can quite escape the new economic order that President Donald Trump has ushered in. India is not immune to the supply chain disturbances brought about by tariffs across the globe. Equally, capital flows into, and then out of, the US in response to Trump’s unpredictable policymaking are disruptive. It is possible that India will be caught in the crossfire of international trade wars, even if other countries are a more direct target for the US administration.

However, while this could create volatility across financial markets, the growth trajectory for India remains intact. The recent weakness has provided new opportunities to buy into good companies at lower cost. Here, at abrdn New India Investment Trust, we are selectively taking advantage of a rare moment of weakness.

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Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. Authorised and regulated by the Financial Conduct Authority in the UK.

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