India’s economy is growing at a rapid pace, but the stock market is not delivering returns at the same pace. GDP growth and market returns do not always move in the same direction because the economy is much broader than the listed market, while a few large companies have a greater influence on the indices.
Along with this, global interest rates, crude oil prices, the movement of the rupee, foreign investment and capital flows linked to AI are affecting Indian equities.
Let us understand why the Indian stock market is lagging despite strong economic growth and which factors could determine its future direction.
What’s Happening?
India’s GDP grew nearly 8% in the April–June 2026 quarter, and the economy is maintaining a growth rate of above 7%. Despite this, retail investors who invested in the Nifty in 2026 have seen their wealth decline by approximately 15%. In dollar terms, the Nifty has delivered annual returns of around 6% over the past 10 years.
South Korea’s Kospi has risen 62% since January and nearly 170% over the past two years. Meanwhile, the Indian benchmark has fallen for eight consecutive weeks, its longest losing streak in nearly 25 years. In the September derivatives series, the Nifty 50 fell nearly 6.7%, while the correction that began on 16 August reached 8.7%.
Pressure from Foreign Investment, Oil and Expensive Capital
Foreign institutional investors have withdrawn approximately $40 billion from the Indian market over the past two years, while foreign investor outflows in 2026 stood at $27.8 billion. With the effective yield on US government bonds above 5% and the 10-year Treasury yield reaching levels last seen after 2002, American bonds have become more attractive.
Crude oil prices have remained in the $90–100 per barrel range, and shipping disruptions in the Strait of Hormuz have entered their eighth month. India imports more than 90% of its crude oil requirements. The US warning of tariffs of up to 100% on countries trading in Russian oil, along with the weak rupee, is also putting pressure on foreign investors’ returns and market sentiment.
Valuation, AI and Weak Market Breadth
Strong GDP growth does not automatically translate into high market returns. The market prices in expectations of future corporate earnings in advance. If investors have already paid high valuations, earnings need to catch up with those expectations for further returns to follow. India’s second challenge is its limited exposure to AI. A large part of global investment has gone towards AI and technology companies in markets such as the US, Taiwan and South Korea, while the Indian large-cap index has limited exposure to this trend.
Market breadth is also weak. In the NSE 500, only 12% of stocks are trading above their 20-day moving average, while 16% are above their 50-day moving average. Nearly 18% of stocks are near their 52-week lows, while 36.4% are above the 200-day moving average (DMA) and 26.2% are above the 100-DMA.
The base of domestic investment has strengthened. Mutual fund assets under management have risen from nearly $125 billion in 2016 to approximately $900 billion, and the number of Indians investing in shares and mutual funds has more than tripled to 150 million.
What Does This Mean for Investors?
Strong GDP growth and a weak stock market are not contradictory. Market performance depends on a balance of earnings, valuations and liquidity. In the first half of FY27, Indian companies raised a record $25 billion in equity. The June quarter earnings season saw more positive surprises than negative ones, but margins will remain an important factor to watch in the September and December quarters.
After nearly one and a half years of relative underperformance, Indian valuations have become more attractive compared with those in other markets. However, this does not guarantee an immediate rally, as energy prices, global yields and foreign investment flows remain important factors.
What’s Next?
Going forward, the direction of the Indian stock market will depend on several factors. The RBI has raised the repo rate by 25 basis points, or 0.25 percentage points, marking the first increase since February 2023. This will keep the market focused on interest rates and corporate borrowing costs.
According to CareEdge, a reduction in geopolitical tensions and more attractive valuations could lead to an improvement in FPI inflows. However, trade tensions and high energy prices remain challenges for corporate performance. Upcoming quarterly results will also help clarify the extent to which these pressures have affected corporate margins.
Despite foreign investor outflows, domestic investors have maintained their monthly investment flows into mutual funds. Going forward, the real test will be whether these domestic investment flows remain strong if the market sees a deeper correction.
Disclaimer: This article is for educational and informational purposes only and does not constitute investment advice or a recommendation to buy or sell any securities. The companies mentioned are cited as examples within the context of market developments. Investors are advised to conduct their own due diligence and consult their financial advisor before making any investment decisions.
Investments in the securities market are subject to market risks. Read all related documents carefully before investing.
