Elara Capital predicts up to 10% upside in Nifty on easing US Dollar

Business Standard

2 days ago

Elara on Nifty outlook: The month of July might have started on a quiet note for D-Street investors, but global cues are setting stage for a potential upside of 8-10 per cent, believe analysts at Elara Securities. A softer US dollar and easing crude prices, they said, are expected to provide support to Indian equities in the near-term.
So far in calendar year 2025, Nifty has generated 7.5 per cent returns. This, however, is below the median returns of 15 per cent which the benchmark has generated during the previous cycles of a falling Dollar index.
Historically, in each of the eight years when the Dollar index fell more than 5 per cent, the Nifty posted positive returns—with a median gain of over 34 per cent. In 2025, the DXY has declined 9 per cent.
"Should the dollar remain soft, a further 8-10 per cent upside from current levels appears well supported, even without a euphoric rerating," the report read. Notably, the DXY and the Nifty50 have a negative corelation of 0.9 per cent.
Interestingly, the mid and small caps have outperformed the benchmark during such instances as the risk appetite of investors increased.
"Historically, the broader market also has outperformed in these conditions — midcaps and smallcaps delivered median returns of 22 per cent and 21 per cent, respectively, during comparable periods," the brokerage firm said.
Considering the current market scenario, the brokerage firm is bullish on large-cap and mid-cap stocks, while staying away from the small-cap segment.
"REC, Power Finance Corporation, Trent and DLF offer strong risk-reward in the large-cap space. Among midcaps, HUDCO, Godrej Properties, Oberoi Realty, Prestige Estates and Indian Hotels combine consistent bull beta exposure with earnings visibility and macro alignment," Elara Securities mentioned in its report.
Dollar weakness and Indian stock market's outperformance
The US dollar index has experienced a double-digit decline of 10 per cent so far in 2025, logging its worst first-half performance since 1973. This sharp slide signals rising investor uncertainty, driven by tariff-related tensions and Trump's flip-flopping policy stance that continues to keep markets in guessing mode. On top of this, the widening US debt has only added to the overall woes.
Analysis of past data by Elara Capital shows that a weak DXY, coupled with the negative Nifty correlation in 2003, 2004, 2006, 2007, 2009, 2017, and 2020 resulted in positive returns for Nifty every time.
"Crucially, the DXY weakness acts as a global liquidity signal, and when it aligns with strengthening domestic fundamentals, India's equities have historically outperformed meaningfully. That is precisely what makes 2025 notable: India's internal growth levers are already active, and global risk appetite is once again turning supportive," Elara Capital said.
Easing oil prices
At the same time, the de-escalation in the Israel-Iran rift has helped push crude prices back to pre-war levels, with Brent futures now trading comfortably below $70 a barrel.
"The current conjunction of a falling dollar index and moderating crude oil prices is a perfect milieu for emerging markets (EM) economies, especially India. In the past 25 years, during episodes of the dollar index being below 100, India's equities (MSCI India) have outperformed every other asset class, including Nasdaq and gold," Elara Securities said.
Overall, emerging markets (EMs), inlcuding Indfia, have better tailwinds than developed markets (DM). Easier financial conditions due to a softer US dollar with comfortable inflation outlook has provided a window for the EM central banks to cut rates.
"With FII shareholding near low since Sept 2017 and a macro backdrop resembling prior recovery cycles — rate cuts, benign inflation, and external stability — the environment remains supportive for Indian equities. We expect this to play out through selective high beta rally," Elara Capital said.