An economy expanding at more than 7% a year would normally produce a buoyant stock market. India's has instead delivered one of the weakest performances among major equity markets in 2026. The Sensex and Nifty indices have only just stabilised after eight consecutive weeks of losses, the longest such run in a quarter century, leaving millions of retail investors nursing losses on money they had expected to grow.
A disconnect between the economy and the exchange
The gap between India's macroeconomic performance and its equity markets has become hard to ignore. Domestic investors putting money into the Nifty have seen roughly 15% of their wealth erode this year, a sharp contrast to the gains posted by markets such as South Korea's Kospi. Foreign institutional investors have been even less patient, withdrawing tens of billions of dollars over the past two years. The net result is that cumulative foreign inflows into Indian markets over the past decade are close to zero once withdrawals are counted.
What has kept the market from falling further is domestic money. Mutual fund assets under management in India have grown sharply over the past decade, and the number of individuals holding stocks or fund units has more than tripled. That steady stream of retail capital has acted as a buffer, but it also means ordinary households, already dealing with a soft job market and high living costs, are now absorbing losses on their savings as well.
Energy, interest rates and currency pressure
Much of the strain traces back to global conditions beyond India's control. Prolonged disruption to shipping through the Strait of Hormuz has kept crude oil prices elevated for months, and India imports the overwhelming majority of its oil needs, with a large share passing through that same corridor. Energy costs above the $100-a-barrel range tend to feed directly into inflation and squeeze corporate margins, a dynamic fund managers say markets struggle to absorb.
At the same time, rising global interest rates, with US government bond yields sitting near multi-decade highs, have made safer assets more attractive to foreign capital. That pulls money away from emerging markets generally, India included. A weaker rupee has compounded the problem for overseas investors, since even modest local gains can be wiped out once converted back into dollars, leaving the Nifty's annualised dollar returns over the past decade looking unremarkable next to rival markets.
Valuations, AI, and what comes next
Indian equities have become cheaper relative to their own recent history, narrowing the premium they once commanded over other emerging markets. Yet they remain expensive relative to earnings, particularly when compared with markets like South Korea and Taiwan, where companies have benefited from strong profit growth tied to artificial intelligence. India's largest listed companies are, by comparison, seen by some analysts as more focused on defending established positions than building new growth engines, and the country has yet to produce a globally dominant AI company of its own.
Smaller Indian firms working in areas such as space, defence, semiconductors and deep-tech are often cited as early signs of change, though most remain too small to shift where global capital flows. Analysts point to easing geopolitical tensions and more reasonable valuations as potential triggers for renewed foreign interest, while cautioning that trade tensions and high energy costs will keep pressuring corporate earnings. Upcoming quarterly results should offer a clearer picture of how much margin pressure companies have actually absorbed. For now, domestic savers have kept investing steadily each month despite the losses, and whether that discipline holds through a deeper downturn remains an open question.