India’s economy is growing at an enviable rate of over 7% despite global energy shocks, rising interest rates, tariff uncertainties and weather-related disruptions. But the world’s fastest growing major economy also has one of the worst performing major equity markets in 2026.
What Happened to India’s Markets?
The benchmark Sensex and Nifty indices have inched up slightly since Monday after posting losses for eight straight weeks — the longest losing streak in 25 years, according to Reuters.
Indian mom-and-pop investors who put their money into the Nifty have seen their wealth erode by about 15% this year. In comparison, they would have made 62% returns on Korea’s Kospi index since January or 170% in the last two years.
Key Drivers of Market Decline
- Energy shocks: Crude oil prices have hovered between $90 and $100 a barrel as the disruption to shipping through the Strait of Hormuz enters its eighth month, far longer than analysts had expected. India imports over 90% of its crude requirements — nearly half of its crude oil imports, along with a large share of its liquified petroleum gas (LPG) and liquified natural gas (LNG) shipments, come through the Strait of Hormuz.
- Rising global interest rates: With oil prices rising, inflation is going up and, as a result, interest rates are on the rise globally. The effective yield on US government bonds is above 5%, or at near 25-year highs. These are often considered risk-free investments. As a result, foreign money tends to leave riskier emerging market assets such as Indian equities and chase safer investments like US bonds when interest rates rise.
- Weak rupee performance: For foreign investors, the problem of muted returns has been compounded by a weaker rupee. In currency-adjusted dollar terms, they have suffered because of the fall in the Indian currency. The Nifty has delivered just 6% annualised dollar returns over the past decade — hardly attractive, especially in comparison with several other competing markets.
- Stock valuations remain high: The market correction over the last two years has reduced the premium that Indian stocks held over their emerging market competitors. Stocks are cheaper than they have been on average for the last ten years, says Hari Shyamsunder, a fund manager with Franklin Templeton Asset Management India. However, they are still expensive relative to their earnings, especially since companies in countries such as South Korea and Taiwan have benefited from a huge boom in artificial intelligence (AI) which has pushed up their profits.
- Lack of innovation in key sectors: Many of India’s large caps [big companies] represent a bygone economic era. Most are not investing in the future, but consolidating their past, often expecting policy to continue shielding them from global competition. India seeks AI breakthrough — but is it falling behind? India has not produced a global giant like OpenAI, Anthropic or even China’s DeepSeek — this is where the largest share of the profits in the AI value chain lie. Foreign investor interest will only return to India meaningfully if it can build globally competitive industries in these emerging areas, according to Bernstein. 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.
Why This Matters
While the economy grows, household savings in equities are being eroded. Domestic assets under management of mutual funds have grown from about $125bn in 2016 to some $900bn this year, with the number of Indians parking money in stocks and mutual funds more than tripling to 150 million individuals. This makes the recent fall in the markets more worrying — since households, already struggling from a weak job market, high inflation and faltering consumption, are now seeing their equity savings take a beating too.
What to Watch Next
Easing geopolitical tensions and relatively attractive valuations could support a revival in FPI [foreign portfolio investor] inflows, according to CareEdge, a brokerage. Though trade tensions and higher energy prices remain a ‘challenge for corporate performance going ahead’.
Domestic savings into mutual funds haven’t reduced despite the market correction. This suggests resilience among Indian savers — but it remains to be seen if this will hold during a deeper downturn.
For long-term market health, India must build globally competitive industries in AI, semiconductors, and deep tech. Current progress in these areas is early and not yet impactful on capital allocation.
Source: BBC News
Sources & further reading
Featured image: India – Koyambedu Market – Faces 01 (3983959747).jpg by McKay Savage from London, UK, CC BY 2.0, via Wikimedia Commons. Image source · License
