Morgan Stanley sees Sensex at 89K by June 2026 on re-rating in Indian stock market

Mint

6 days ago

Indian equities are poised for a structural re-rating, with the BSE Sensex projected to scale new highs over the next 12 months, according to a recent strategy note by Morgan Stanley. Equity strategists Ridham Desai and Nayant Parekh have set Sensex target of 89,000 for June 2026, implying a 10% upside from current levels.
This strong case for re-rating and the bullish forecast rests on fundamental shifts taking place in the Indian economy — ranging from a robust demographic profile to rising macroeconomic stability and a more predictable policy environment.
Morgan Stanley argues that India is likely to gain share in global output, backed by core strengths like its demographic dividend, a functioning democracy, macro stability-influenced policy, better infrastructure, and rising entrepreneurship. These forces are expected to transform India into the world's most sought-after consumer market over the coming decades, while also accelerating its energy transition, credit to GDP, and manufacturing share in GDP.
The strategists highlight a significant structural tailwinds - India's falling intensity of oil GDP, rising services exports, and ongoing fiscal consolidation. These trends are helping reduce the country's saving-investment imbalance, potentially keeping real interest rates structurally lower.
At the same time, lower inflation volatility as a result of both supply-side and policy changes (flexibility inflation targeting) mean that volatility in interest rates and growth rates is likely falling in coming years.
'High growth with low volatility and falling interest rates and low beta = higher P/E multiple,' the report said.
While earnings saw a temporary soft patch beginning in Q2FY25, Desai and Parekh believe the cycle is bottoming out. However, the broader market may not be fully convinced yet.
They believe a set of upcoming catalysts could reignite market confidence: a dovish RBI, a possible final trade agreement with the US, GST rate rationalization, more capex announcements, acceleration in loans, and improving trade with China.
Meanwhile, FPI positioning is at its weakest since 2000. Analysts maintain that India's low-beta nature makes it an outperformer in global bear markets, although it may underperform during global bull runs.
Morgan Stanley has a Sensex target of 89,000 in its base case which implies a trailing P/E of 23.5x, ahead of the 25-year average of 21x.
'The premium over the historical average reflects greater confidence in the medium-term growth cycle in India, India's lower beta, a higher terminal growth rate, and a predictable policy environment,' the report said.
In this scenario — assigned a 50% probability — Sensex earnings are expected to compound at 16.8% annually through FY2028. This is underpinned by stable domestic growth, benign oil prices, and a positive real growth-real rate gap, as well as monetary easing and continued retail investor participation.
Morgan Stanley has Sensex target of 100,000 in its Bull Case scenario, wherein it assigns 30% probability, assuming oil remains below $65 per barrel, global trade tensions ease significantly, and India accelerates reforms. Earnings could grow at a compounded annual rate of 19% through FY2028.
In its Bear Case scenario with 20% probability, it Sensex to fall to 70,000, wherein earnings growth would slow to 15% CAGR, and valuations could compress due to macro headwinds.
Morgan Stanley is placing its bets on Domestic Cyclicals over Defensives and Exports. It is overweight on Financials, Consumer Discretionary, and Industrials, while underweight on Energy, Materials, Utilities, and Healthcare.
'This is likely to be a stock pickers' market, in contrast to one driven by top-down or macro factors, and thus we run an average active position of just 80 bps. We are capitalization-agnostic,' Morgan Stanley analysts said.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.