New Delhi, Jan. 7 -- India's stock market returns are likely to improve in the coming months as several key fundamentals turn favourable, according to a Morgan Stanley report.

The report noted that the past 12 months have delivered the weakest market performance on record, while valuations are nearing earlier lows. For the first time in almost five years, equity valuations are more attractive than short-term interest rates.

The report noted that valuations, past performance, macroeconomic conditions, investor positioning, and the growth cycle all point to better stock returns ahead. Its modified earnings yield gap also suggests improved risk-reward conditions for equity investors.

It stated "Valuations, trailing performance, the macro,...