Despite impressive growth figures, India’s booming economy, expanding at over 7%, contrasts starkly with its flagging equity markets. Recent weeks have seen an intensification in the decline of Indian stocks, marking one of the worst performances among major economies in 2026. Both the Sensex and Nifty indices have faced losses for eight consecutive weeks—the longest such stretch in 25 years—before showing slight gains since Monday.
While Indian domestic investors, heavily invested in the Nifty, have seen a 15% decrease in their wealth this year, Korean counterparts banking on the Kospi index have reaped a 62% return since January, with even larger gains over two years. The outflow of foreign investment from Indian markets has been concerning, with foreign institutional investors withdrawing nearly $40 billion over the past two years, as reported by Bernstein Research. The cumulative foreign investment in Indian markets over the past decade is approaching nil.
Domestic investment, mainly in mutual funds, has provided a cushion against sharper market declines. Assets under management in mutual funds have expanded significantly from $125 billion in 2016 to approximately $900 billion this year. This growth is backed by a surge in individual investors, with over 150 million Indians now involved in stocks and mutual funds.
Geopolitical and Economic Pressures Weigh Heavy
Several factors contribute to India’s poor stock market performance. Crude oil prices remain high at $90 to $100 per barrel, largely due to ongoing disruptions in the Strait of Hormuz. Despite diversification efforts, the situation is exacerbated by potential US tariffs on countries trading with Russia, complicating energy imports further. As inflation climbs, global interest rates have followed suit, with US government bonds yielding above 5%, drawing foreign investments away from riskier Indian assets to these safer alternatives.
The weakened Indian rupee adds another layer of challenge for foreign investors, dampening returns when adjusted for currency fluctuations. Over the past decade, the Nifty has only provided an annualised 6% return in dollar terms, less appealing than other markets.
Valuation Concerns and Missed Opportunities in AI
Although Indian stocks have become cheaper following market corrections, they remain relatively expensive compared to their earnings. Investors have noted more attractive opportunities in countries benefiting from the artificial intelligence boom, such as South Korea and Taiwan. India’s large companies are perceived as lagging in innovation, with most not actively investing in forward-looking sectors like AI.
India’s potential to attract foreign investors lies in building competitive industries in emerging sectors like AI, space, and semiconductors. While early developments in these fields are promising, they are not yet substantial enough to significantly influence investment decisions.
Future Market Direction
The future trajectory of India’s market will depend on various factors. CareEdge, a brokerage, suggests that easing geopolitical tensions and favourable valuations could reignite foreign portfolio investments. However, challenges such as trade tensions and high energy costs could continue to hinder corporate performance.
Although foreign investors have pulled back, Indian savers persist with their monthly mutual fund investments. The key question remains whether this domestic resilience can withstand potential future market corrections.
Reporting based on coverage first published by bbc.co.uk.