Five reasons India’s stock market is sinking even when its economy is growing
India is currently experiencing a paradox: while it remains the world’s fastest-growing major economy, it is simultaneously home to one of the worst-performing equity markets of 2026. This downward trend in Indian stocks has only gained momentum in recent weeks.
The benchmark Sensex and Nifty indices, which track the nation’s largest corporations, have seen a marginal recovery since Monday. This follows an eight-week losing streak, marking the longest period of decline in a quarter-century.
Individual Indian investors who allocated capital to the Nifty have watched their wealth shrink by approximately 15% this year. By contrast, those invested in Korea’s Kospi index would have seen returns of 62% since January, or 170% over the last two years.
In aggregate, the net investment by foreign entities into Indian markets over the past decade is nearing zero. According to data from Bernstein Research, foreign institutional investors have pulled out a massive $40bn in the last two years alone.
The market has been spared a more severe collapse primarily due to a substantial influx of domestic institutional and retail capital, much of which is directed into mutual funds.
Domestic assets under management within mutual funds have surged from roughly $125bn in 2016 to approximately $900bn this year. During this period, the number of Indians <a s gone wrong?
Here are five reasons India’s booming economy isn’t lifting its stock market.
Persistent energy shocks due to Middle East conflict
Crude oil prices have remained between $90 and $100 a barrel as shipping disruptions through the Strait of Hormuz have lasted eight months—far longer than analysts initially anticipated. Furthermore, there is little clarity regarding when conditions might normalize.
“This single variable tends to influence the markets quite negatively,” Hari Shyamsunder, a fund manager with Franklin Templeton Asset Management India, told the BBC. “Markets can absorb crude between $70 and $90, but when prices move above $100 a barrel, it starts putting stress on macro-economic variables such as inflation and also company earnings and margins.”
India relies on imports for over 90% of its energy needs. Nearly half of its crude oil, along with a significant portion of its liquified petroleum gas (LPG) and liquified natural gas (LNG), must pass through the Strait of Hormuz.
While Delhi has sought to diversify its energyng with Moscow have added further complexity to the situation
Rising global interest rates. The effective yield on US government bonds has climbed above 5%, reaching levels not seen in 25 years.
Because these bonds are viewed as risk-free, foreign capital often exits volatile emerging markets like India in favor of safer US debt when interest rates climb.
Falling rupee
The challenge of stagnant returns for foreign investors has been exacerbated by a depreciating rupee. When adjusted for currency fluctuations, these investors have faced losses due to the decline of the Indian currency.
The Nifty has provided only 6% annualized dollar returns over the last decade, a figure that lacks appeal when measured against competing markets.
Indian stocks are cheaper, but still relatively expensive
Stock valuations remain a significant point of contention.
The market correction observed over the past two years has narrowed the premium that Indian stocks previously held over their emerging market peers.
“Stocks are cheaper than they have been on average for the last ten years,” says Shyamsunder, adding that the premium that Indian shares commanded over other emerging economies has shrunk substantially in the past few years.
However, they remain pricey relative to their earnings, particularly because companies in nations like South Korea and Taiwan have profited from an artificial intelligence (AI) boom that has bolstered their bottom lines.
The missing AI piece
In India, AI and the broader “new economy” represent a notable gap in the growth narrative.
“Many of India’s large caps [big companies] represent a bygone economic era,” Bernstein Research said in a note recently. “Most are not investing in the future, but consolidating their past, often expecting policy to continue shielding them from global competition.”
Smaller Indian firms have yet to achieve the scale necessary to draw significant foreign institutional investment.
Although Indian companies are putting capital into data centers and chip manufacturing, the nation has yet to produce a global powerhouse comparable to OpenAI, Anthropic, or China’s DeepSeek—the entities capturing the largest share of profits in the AI value chain.
Foreign investor interest will only return to India meaningfully if it can build globally competitive industries in these emerging areas.
“We are seeing early signs of this in areas such as space, defence, semiconductors, and deep-tech innovation, but most remain too small to materially influence capital allocation decisions over much of this decade.”
So what’s next?
There are many immediate factors that will influence how Indian markets behave going forward.
“Easing geopolitical tensions and relatively attractive valuations could support a revival in FPI [foreign portfolio investor] inflows,” a brokerage noted, though trade tensions and higher energy prices remain a “challenge for corporate performance going ahead.”
The extent to which corporate margins have been impacted will become clearer as companies begin releasing quarterly earnings reports starting this week.
For now, while foreign investors may have given up, Indian savers, even though increasingly more anxious, haven’t slowed their investments.
