The Indian equity markets present a curious picture. While domestic retail investor enthusiasm propels valuations skyward, a noticeable deceleration in corporate earnings growth casts a shadow on the exuberance. Investing in Indian equities is becoming a complex task, demanding a nuanced approach in this environment.

Earnings Growth Slows Down

The June quarter results for fiscal year 2025 paint a less than inspiring picture. Nifty 50 companies reported a modest 4 percent year-on-year earnings growth. Broader market indices reflect a similar trend, with companies under Motilal Oswal Financial Services’ coverage showing a mere 1 percent growth, and Jefferies India reporting a 4 percent decline for their coverage universe. While the drag from oil marketing companies, impacted by volatile crude prices, partially explains this, even excluding them, earnings growth is significantly lower than the robust figures seen in the preceding 12-18 months.

This moderation has prompted research houses to downgrade earnings estimates for FY2025. The ratio of upgrades to downgrades is currently at its least favourable level since the first quarter of fiscal year 2021, indicating a broad consensus on tempered earnings expectations.

Market Valuations Still High

Despite the earnings slowdown, the Indian market’s mojo remains potent. The Nifty 50 has surged 13 percent since January and an impressive 187 percent from the pandemic lows of April 2020. Smaller and mid-cap stocks have outpaced even these benchmarks. This resilience is evident in the face of domestic challenges like sticky inflation and heat waves, and global headwinds including geopolitical tensions and supply chain disruptions.

This market strength, however, has pushed valuations upwards. The Nifty 50 now trades at 22 times its one-year forward earnings, exceeding the 10-year average. This situation of elevated valuations juxtaposed with decelerating earnings growth presents a puzzle for investors. As one analyst notes, Nifty earnings growth is expected to slow from 17 percent CAGR between FY22-FY24 to a projected 14 percent in the coming two years.

Account Aggregator Milestone

In a parallel development, India’s Account Aggregator (AA) ecosystem has crossed a significant milestone, surpassing 100 million consents. This framework, facilitating secure data sharing within the financial sector, is being used by an estimated 80-90 million Indians. The number of financial institutions participating as data providers and users continues to grow rapidly, highlighting the increasing acceptance of open finance principles.

The surge in AA consents, witnessing a 1059 percent jump year-on-year, positions India as the fastest-growing open finance market globally. Initially focused on loan underwriting, AA use cases are expanding into personal finance management, fraud prevention, and investment advisory, showcasing its versatility and potential to reshape financial services.

Open Finance Gains Momentum

The AA framework’s success underscores a broader shift towards open finance in India. By empowering individuals to control their financial data and share it securely, AAs are fostering greater financial inclusion and innovation. This growth is driven by both user adoption and the expanding network of financial institutions embracing the technology.

The Reserve Bank of India’s regulated framework ensures secure data exchange, building trust in the system. As use cases diversify, the AA ecosystem is poised to revolutionise customer onboarding, portfolio management, and various other financial processes, making financial services more efficient and customer-centric.

What does this mean for investors? While the equity markets appear buoyant, the earnings reality check suggests a need for caution. The high valuations, in light of moderating earnings growth, warrant a more discerning investment strategy. However, the concurrent rise of open finance, exemplified by the AA ecosystem’s growth, points towards a technologically advanced and inclusive financial future for India. This digital transformation could unlock new avenues for economic growth and market dynamism in the long run.

Image Courtesy: X (Biswajit Mohanty)