Global trade tensions, fuelled by President Donald Trump’s aggressive “America First” stance, have only added to the turmoil. Once a shining star among emerging markets, India’s equity performance has faltered, trailing its regional peers. As uncertainty looms over global economies and policy landscapes shift, analysts are now debating whether India can retain its edge or whether its investment appeal will continue to erode. The path ahead looks increasingly precarious. Can India navigate these headwinds, or is more pain on the horizon?
Valuations under pressure
A significant over 21% correction has hit India’s $3.95 trillion stock market since September 2024, jeopardizing its position as the world’s fifth largest. Unlike the majority of the top ten markets, which either saw growth or remained relatively stable over these five months, India’s decline, alongside Japan, France, and the UK, raises concerns, leaving investors bracing for a potential dethroning by the UK or Canada, currently at sixth and seventh spot in terms of valuation.
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However, despite the downturn, experts remain optimistic about India’s long-term prospects. “Even with the recent market corrections, India maintains a strong lead, and given the country’s structural economic strengths, policy support, and growing retail investor base, it is highly unlikely that India will fall below Canada and the UK in global market rankings. The long-term trajectory remains intact, and the present correction should be viewed as a natural part of market cycles rather than a sign of prolonged weakness,” said Abhishek Jaiswal, fund manager at Finavenue.
Atul Parakh, CEO of Bigul, shared this view, emphasizing a long-term perspective on Indian markets. He stated, “India’s market capitalization decline is a short-term challenge due to external factors like foreign fund withdrawals and a weakening rupee. However, with strong economic fundamentals and long-term growth prospects, India remains a promising investment destination.”
Billion-dollar club shrink
With this correction, the elite ranks of India’s billion-dollar companies have thinned dramatically. A Mint analysis of 3,000 BSE-listed firms reveals a stark decline, with the number of companies exceeding $1 billion in market capitalization falling from 491 as on 31 December, 2024, to a worrying 425 currently. This abrupt shift from a steady growth trajectory since 2019 paints a concerning picture of the current market sentiments and its future trajectory.
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However, Parakh views this as a healthy consolidation, “This decline indicates a sharp market correction that will continue through early 2025 before settling. While alarming, this correction is a healthy phase of consolidation after earlier exuberance and not structural weakness.”
Jaiswal drew parallels with past downturns, “It mirrors past corrections reflecting market turbulence. During the 2008 financial crisis, the Sensex dropped over 50%, while the 2013 ‘Taper Tantrum’ led to a 15% decline. Yet, history shows resilience—each downturn was followed by recovery. Investors should focus on quality rather than quantity; strong businesses will thrive despite cycles.”
Global underperformance
The country also bears the weight of underperformance in the global arena. The frontline index Nifty 50 has underperformed the global market, posting a year-to-date decline of 5%. In contrast, Germany’s DAX surged nearly 15%, France’s CAC 40 rose 11.4%, and Hong Kong’s Hang Seng gained 18.7%. Other Asian markets showed mixed results, with South Korea’s Kospi up nearly 11%, while Japan’s Nikkei and China’s CSI 300 posted negative returns. Indonesia’s Jakarta Composite Index fared the worst, plunging over 8%.
External pressures, reflected in India’s global market underperformance, continue to weigh heavily. “The Indian market’s underperformance is due to global economic concerns and domestic factors. This trend may persist if global economic uncertainty continues and domestic growth slows. However, India’s long-term growth prospects could stabilize the market over time,” Parakh added.
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FPI outflows: A cause for concern
A staggering $12 billion exodus of foreign portfolio investors (FPI) rocked India’s financial markets in 2025, the largest outflow among its emerging market peers. This outflow, exceeding those of South Korea and Taiwan, reflects growing concerns among foreign investors regarding India’s high valuations. Meanwhile, China and Brazil witnessed a net inflow of around $10 and $26.6 billion, respectively, in 2024 (the latest data available) against India’s $124 million inflows during the year.
“India’s FPI outflows in 2025 are primarily driven by high valuations, global monetary tightening, and political uncertainty. Indian equities have been trading at premium valuations, prompting profit booking,” said Sonam Srivastava, founder and fund manager at Wright Research.
“The US Federal Reserve’s hawkish stance has strengthened the dollar, making risk-free assets more attractive. Additionally, concerns over policy continuity post-elections and regulatory changes in sectors like financial services and technology have increased investor caution,” she added.
In contrast, China is attracting inflows due to its undervalued equities and aggressive stimulus measures, she noted. “The government has introduced monetary easing and direct support for real estate and tech sectors is making China a contrarian bet. Global investors are reallocating from expensive markets like India to China, where a potential recovery could drive returns,” she added.
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A valuation check
Indian equities experienced a significant rally last year, reaching their peak in September and pushing the market capitalization to GDP ratio to a record high. However, following a significant correction, this ratio has declined. For the current fiscal year 2025, the ratio is projected to hover around 110%. However, experts view this as a valuation reset, potentially enhancing the appeal of equities for long-term investors.
“A market cap-to-GDP ratio of 110% suggests that Indian equities are undergoing a valuation reset, potentially making them more attractive for long-term investors. Historically, a ratio above 120% has signalled overvaluation, while levels closer to 100% indicate fair value,” explained Srivastava. “For investors, this correction presents sectoral rotation opportunities,” she added.
However, expensive growth stocks may continue to face pressure, while value-oriented sectors like banking, capital goods, and infrastructure could benefit. “FPIs may re-enter selectively as valuations stabilize. Meanwhile, strong domestic inflows through SIPs and retail investments provide a cushion against excessive downside,” she added further.
