India’s economy continues to expand at an impressive rate of over 7%, successfully navigating global energy shocks, rising interest rates, and trade uncertainties. However, this growth has not translated into stock market success; in 2026, India is home to one of the world’s worst-performing major equity markets. The benchmark Sensex and Nifty indices recently endured an eight-week losing streak—the longest in 25 years—before seeing a marginal recovery this week.
For individual investors, the impact has been significant, with Nifty-linked wealth eroding by approximately 15% this year. In contrast, markets like South Korea’s Kospi have seen substantial gains. Foreign institutional investors have withdrawn $40 billion over the past two years, according to Bernstein Research, leaving the net foreign investment in Indian markets over the last decade near zero.
The market has been largely propped up by domestic retail and institutional investors, with mutual fund assets under management surging from $125 billion in 2016 to $900 billion today. With 150 million Indians now invested in stocks and mutual funds, the current downturn poses a risk to households already grappling with high inflation and a weak job market.
Analysts point to five primary factors behind this disconnect. First, the ongoing disruption to shipping through the Strait of Hormuz has kept crude oil prices between $90 and $100 a barrel for eight months. Hari Shyamsunder, a fund manager at Franklin Templeton Asset Management India, noted, "This single variable tends to influence the markets quite negatively.
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 remains highly vulnerable, as over 90% of its energy needs, including significant oil and gas imports, transit through this region.
Furthermore, US President Donald Trump’s threat of 100% tariffs on nations trading with Moscow has added to the geopolitical pressure. Second, rising global interest rates, with US government bond yields exceeding 5%, have drawn capital away from emerging markets like India toward safer assets. Third, the depreciation of the rupee has further eroded returns for foreign investors, who have seen only 6% annualised dollar returns over the last decade.
Fourth, while Indian stock valuations have corrected, they remain expensive relative to earnings compared to markets like South Korea and Taiwan, which have profited from the global artificial intelligence boom. Finally, India is perceived to be missing out on the AI-driven "new economy. " Bernstein Research observed that many of India's large-cap companies represent a "bygone economic era" and are failing to invest in future-oriented technologies.
While India is making strides in sectors like space, defence, and semiconductors, these industries have yet to reach the scale required to attract significant foreign capital. Looking ahead, CareEdge suggests that easing geopolitical tensions and current valuations could eventually support a revival in foreign portfolio investment, though energy prices and trade friction remain persistent hurdles.
