In 2025, the Indian economy is expected to grow rapidly. In Q2FY26, major developments and growth are anticipated in various sectors driven by the quick transition to digital solutions, FII reinvestment, and supporting government policies. This will bring significant changes in the Indian economy and will open up several new opportunities for investors looking to invest in India’s growth trajectory.

In this blog, we will explore the top sectors to watch out for in Q2FY26.

Projections for India’s Stock Market Performance in FY26

Experts believe that the Indian stock market will continue to rise in FY26. According to a Reuters report, the Nifty 50 is expected to reach 26,500 by the end of the year, while the Sensex is expected to increase to 86,100 by the end of 2025, 89,000 by the first half of 2026, and 95,000 by the end of 2026. In FY26, it is predicted that the Nifty 50 will gain 12–15% and that earnings per share (EPS) will exceed ₹1,160.

These expectations are supported by strong domestic demand, reduced interest rates, and India’s estimated GDP growth of 6.2–6.5% for 2025. Even though the market’s average price-to-earnings ratio is a comparatively high 23.5, experts predict that strong earnings momentum, a stable administration, and policy support will maintain high valuations and will draw further investment.

Factors Driving India’s Stock Market Performance in Q2 FY26

Several factors are expected to shape India’s market trajectory in the coming quarter. Some of these are discussed below:

Macroeconomic Stability

India’s GDP is expected to grow to 6.3%- 6.5% in FY26, supported by strong services exports, a recovery in rural areas, and private consumption. Since inflation has dropped below 4%, it has strengthened the case for monetary easing and boosting real returns for investors.

Policy Support

The Union Budget’s emphasis on infrastructure spending, personal income tax relief, and incentives for capital formation is anticipated to increase private investment and consumption.

Foreign and Domestic Flows

FPI inflows have returned in May 2025, with over ₹16,757 crore invested in recent sessions. This will support the Indian stock market and provide the Indian stock market with strong financial support, technology, and exposure on the global stage to continue its growth trajectory in Q2FY26 as well.

Earnings Momentum

Q1 results in 2025 have beaten analysts’ expectations, with 878 businesses having released their earnings for the Q4FY24-25 and Nifty 50 showing an 8% return as of May 18, 2025.  The aftereffect of these results will be seen in early Q2 FY26.

 

Top Sectors to Watch in Q2 FY26

Investors should watch out for the following sectors in Q2FY26.

1. Power and Renewable Energy

In 2025, the power and renewable energy sector will be at the forefront of India’s transition from non-renewable energy to green energy. The government’s ambitious target of achieving 500 GW of non-fossil fuel capacity by 2030 is driving rapid expansion in the Renewable Energy sector.

It is anticipated that India’s renewable energy generation capacity will increase by 30% year-over-year to 44 GW in FY26. The total installed power generation capacity is expected to reach over 520 GW by March 2026. With projects worth Rs 1.54 lakh crore in hand, Power Grid Corporation of India plans to invest Rs 28,000 crore in FY26. It is also exploring new ventures in nuclear power.

Companies like Tata Power, NTPC, and Adani Green are leading the charge, while the sector’s share in total FDI was estimated to be around 8% for FY25. With falling costs of solar and wind energy installations and favorable renewable energy policies, the renewable energy sector is poised for an increase in revenue in Q2FY26.

CRISIL report stated that by 2030, renewable energy and the power sector will attract investment of around  ₹31 lakh crore, making these sectors a good investment option for investors looking to invest in future India.

2. Information Technology (IT) and Electronics Manufacturing

The IT sector and Electronics Manufacturing sector are expected to maintain their robust growth trajectory in Q2FY26, driven by strong demand for AI stocks, semi conductor stocks, etc., due to the increasing need for artificial intelligence, cloud, and cybersecurity solutions.

With a 5.1% growth rate, India’s IT sector was projected to reach $282.6 billion in FY25 and surpass $300 billion in FY26, making India a global powerhouse in the IT sector. Also, IT exports are anticipated to reach $210 billion, constituting 18% of the world’s IT outsourcing.

The electronics manufacturing sector is going to boom in Q2FY26 as the government has announced a budget of Rs. 22,919 crore for the Electronics Component Manufacturing Scheme with an aim to establish India as a major player in the electronics supply chain.

In the course of implementation of this scheme, the scheme aims to further attract investment of Rs. 59,350 crore, producing Rs. 4,56,500 crore as revenue, and creating 91,600 new jobs in addition to creating numerous indirect opportunities, making the electronics manufacturing sector an attractive option for investors.

3. Banking

The banking sector is expected to remain important for India’s 2025 earnings growth. The banking sector has already delivered significant returns in Q1FY26, outpacing most mainstream sectors. With the RBI executing its third rate cut of the year in June 2025, bringing the repo rate down to 5.5%, credit growth is poised to accelerate further, benefiting both private and public sector lenders.

The banking sector is poised to continue its growth trajectory as net interest margins are expected to stay robust with improving asset quality and net NPAs falling below 0.5%.

So far in FY26, Foreign portfolio investors (FPIs) have injected over ₹19,860 crore into Indian financials, with private sector banks like HDFC Bank and ICICI Bank attracting strong FII interest. It reflects increasing investors’ confidence in the Indian banking sector. Many have projected double-digit earnings growth for the banking sector in Q2 FY26, supported by strong retail and corporate loan demand, lower funding costs, and continued digital adoption.

4. Infrastructure

India’s infrastructure sector is set for a capex-led boom in Q2FY26. The government’s National Infrastructure Pipeline and PM Gati Shakti are translating into a steady flow of contracts, especially in roads, railways, and urban development. In the 2024–2025 budget, the government allocated Rs 11.1 lakh crore for infrastructure projects; this amount is anticipated to rise even more in the upcoming 2025–2026 budget.

The infrastructure sector is witnessing unprecedented momentum. Major greenfield and brownfield projects are underway across highways, railways, airports, and urban development.

For example, the Nabinagar Super Thermal Power Project in Bihar has received ₹29,948 crore as investment from the government, indicating the scale of ongoing investments by the government in the infrastructure sector, which makes the infrastructure sector an attractive sector for investors.

5. Defence

India’s defence sector is projected to grow robustly in Q2FY26,  with 7-8% annual growth, which will be backed by a record capex outlay of ₹1.8 trillion and a $130 billion opportunity. The defence sector is entering a phase of significant order book execution, especially following Operation Sindoor, which is expected to further boost the growth of Indian defence equipment manufacturing companies.

The entry of new players and the expansion of product lines in the defence sector, especially in unmanned systems, electronic warfare, and indigenous platforms, has led to growth in this space. Additionally, the government’s Make in India initiative and rising defence exports are expected to surpass Rs 30,000 crore in FY26, making the defence sector poised for future growth.

5. Pharmaceuticals

The pharmaceuticals sector in India will grow in Q2FY26, underpinned by strong domestic demand, rising healthcare awareness, and exports. It is anticipated that the Indian pharmaceutical industry will reach US$ 130 billion by 2030. This growth is expected to be fueled by strong performances of Indian companies in key markets, including the United States, Europe, and emerging regions.

With its CRDMO industry expected to double to Rs. 1,21,282 crore (US$ 14 billion) by 2028 and its medical technology industry anticipated to reach exports of up to US$ 20 billion (Rs. 1,69,000) by FY30, India is becoming a major player in the global pharmaceutical supply chain.

It is proposed that the Department of Pharmaceuticals (DoP) would get Rs. 5,268.72 crore (US$ 602.90 million) in the Union Budget 2025–2026, which is approximately 28.8% more than the last budget, making the pharmaceutical sector an appealing investment choice for investors in Q2FY26.

Conclusion

India’s stock market has entered Q2FY26 with a solid foundation, robust macroeconomic fundamentals, supportive government policies, and renewed investor confidence. While global risks and valuation concerns persist, the outlook for the Indian stock market remains positive in Q2FY26, with each sector benefiting from unique tailwinds and structural growth drivers. As the market navigates the coming quarter, investors should conduct their research before investing in these stocks.