Indian equity markets have stepped into 2026 with a cautious sense of optimism, shaped less by headline GDP growth and more by a long-awaited question around earnings durability. Despite India delivering one of the strongest growth performances among major economies, corporate profits have struggled to keep pace. Six consecutive quarters of underwhelming earnings have left investors sceptical of short-term rebounds, even as macro indicators turn more supportive.

The current debate centres on consumption. Autos and rural demand are finally showing signs of revival, supported by income tax relief, lower interest rates, improved liquidity, and gradual policy transmission. Yet senior economists and strategists are aligned on one point: this recovery, while encouraging, is still unproven.

Speaking at CNBC TV-18’s market conclave The Alpha Managers 2026 (CNBC TV-18 coverage), Sajjid Chinoy, Chief India Economist at JPMorgan, framed the situation bluntly. According to Chinoy, the recent quarter’s strength was widely anticipated due to policy support already in the system. The real test lies ahead. Whether consumer durables and discretionary demand can remain resilient three quarters from now will determine if the cycle has real legs.

That distinction matters because India’s earlier post-pandemic growth engines are losing momentum. Government-led capital expenditure, which powered growth for much of the last three to four years, has slowed to high single-digit growth from much stronger levels earlier. Real estate, while still healthy, is no longer accelerating at the pace seen 12 to 24 months ago. The baton, Chinoy argues, has now passed to consumption initially rural, and increasingly urban through autos.

The durability of this rotation is critical for the next phase of the investment cycle. Chinoy noted that if consumption strength sustains for another two to three quarters, it could provide sufficient demand visibility for corporate capital expenditure to broaden beyond isolated pockets. However, global uncertainty and excess manufacturing capacity, particularly from China, remain meaningful constraints. Corporates, he said, are likely to demand higher capacity utilisation before committing large-scale investments.

At UBS, the lens on consumption is closely tied to credit behaviour rather than just GDP numbers. Gautam Chhaochharia, Head of India Research, argued that monetary easing only becomes effective when credit growth accelerates meaningfully. Rate cuts alone, he said, are insufficient if they do not translate into borrowing and spending.

Chhaochharia pointed to a notable shift in loan disbursements toward the end of December, when fortnight-on-fortnight credit growth surged sharply compared to earlier trends. This acceleration, in his view, may indicate that transmission is finally taking hold. Borrowing fuels spending, spending supports revenues, and revenues drive earnings the virtuous cycle markets have been waiting for.

However, UBS remains cautious about extrapolating early signals. While Chhaochharia expects real GDP growth in FY27 to exceed consensus and believes double-digit nominal GDP growth is achievable, he stressed that earnings recovery still depends on sustained follow-through. Without a broad-based cycle pickup, earnings growth may rely more on nominal normalization than on operating leverage. Financials, he added, remain one of the few sectors where valuations still reflect this potential.

From a broader macro perspective, Neelkanth Mishra, Chief Economist at Axis Bank, suggested markets may be underestimating the longer-term earnings implications of low inflation and improving credit conditions. Nominal GDP growth has been held back by unusually low deflators, influenced by global disinflation and excess Chinese capacity. While this suppresses topline growth in the short term, it also reduces financial stress across balance sheets.

Mishra noted that markets appear to be pricing earnings growth of around 10–12%. Yet outcomes could surprise on the upside if credit conditions continue to ease and risk appetite improves. He pointed to early signs of rising credit off-take, even among large private banks, a segment typically cautious at turning points. Credit channels, he said, are among the hardest to track in real time, but early indicators suggest incremental improvement.