Indian Market To ‘Regain Mojo’ In 2026 - Will Your Portfolio Ride The 13% Sensex Upswing? Morgan Stanley Thinks So

Forecasting a sharp recovery in 2026 after the market posted its weakest relative performance against emerging-market peers in over three decades, Morgan Stanley has turned bullish on Indian equities.

In a recent strategy report, Morgan Stanley noted that Indian stocks have hit an inflection point and are ready to “regain their mojo” over the next 12 months, driven by supportive policy shifts, attractive valuations and a structural domestic bid that remains in place.

From Deep Underperformance to Potential Outperformance

The numbers tell a stark story. India is closing 2025 with its worst relative return versus emerging markets since 1994, a painful stretch that began in the second half of 2024 when growth slowed and valuations stayed stubbornly elevated.

Yet Morgan Stanley believes the correction has done its job. “Relative valuations have corrected meaningfully and may have bottomed out in October,” the report notes.

Foreign portfolio investor exposure to India is now “the lightest in history”, creating ample room for inflows, while domestic money continues to pour in through systematic investment plans and retail participation, as reported by ANI.

The brokerage sees policy moving decisively in favour of growth, with the Reserve Bank of India and the government working in tandem on reflation through rate cuts, liquidity measures, bank deregulation and a likely CRR reduction.

Sensex Target of 107,000 by December 2026

Morgan Stanley’s base-case scenario projects the BSE Sensex to reach around 95,000-96,000 levels by December 2026, implying roughly 13% upside from current levels. Earnings are expected to grow at a healthy 17% CAGR through FY28 under this scenario.

The more optimistic bull case, which the firm assigns a 30% probability, is far more exciting, a Sensex target of 107,000 by December 2026; a whopping 27% rally from today’s levels.

This scenario assumes oil stays below $65 a barrel, global tariff tensions (especially with the US) get resolved quickly, reflationary policies remain aggressive and economic momentum stays strong. Under these conditions, earnings could compound at 19% annually from FY25 to FY28.

Where Morgan Stanley Wants to Bet Big

The brokerage is clearly tilting toward domestic-facing cyclical sectors. It remains overweight on financials, consumer discretionary and industrials, which are areas that stand to benefit the most from lower rates, higher liquidity and rising consumption.

Defensives and export-heavy sectors take a back seat: energy, materials, utilities and healthcare are all underweight in the model portfolio.

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Key Triggers That Could Fire Up the Market

Several catalysts are lining up, according to the report:

• Front-loaded government capex and nearly Rs 1.5 lakh crore in GST rate rationalisation aimed at mass consumption
• Another 25 bps rate cut and a positive liquidity environment
• Thawing India-China relations and Beijing’s “anti-involution” drive to curb overcapacity
• Likely India-US trade deal resolution in the coming weeks
• Benign global growth and steady oil prices

Morgan Stanley also highlights that India’s post-COVID hawkish macro stance is finally unwinding, paving the way for a classic mid-cycle growth revival.