Indian stock market lags behind its global peers in 2025. Is the worst yet to come?

Indian stock market is witnessing a sharp reversal in 2025, with a wave of selling pressure rattling investor confidence, sending stocks to trade at multi-month lows. The world’s fifth-largest market, which once soared with no apparent upside limit, is now facing a stark contrast, struggling to find a floor to halt the sell-off.

The markets have been reacting to every small development, with heightened volatility amplifying price swings and exerting significant pressure on indices. Stocks across the board are witnessing a severe beating in a sustained sharp sell-off, with Dalal Street favourites – mid and small-cap segments leading the decline.

What started as profit booking in October 2024 has intensified into a broader market correction as frontline indices have ended the last five months (including the current month) in negative territory, with the Nifty 50 losing 13% of its value, while the Sensex has slipped 12%. Both indices are down by about 4.3% in 2025. 

The mid- and small-cap segments have seen even steeper corrections, with the Nifty Midcap 100 dropping 20% and the Nifty Smallcap 100 declining by 23% in under two months of the current calendar year.

Notably, Indian stocks have emerged as the worst performers, while their global peers are faring well despite global economic uncertainty. China’s Shanghai Composite Index is up 0.23% in 2025 so far, and other major Asian exchanges, such as Hong Kong’s Hang Seng and South Korea’s Kospi, have gained 17% and 10%, respectively.

Major European indices—the DAX, CAC 40, and FTSE 100—have surged by up to 13%. Meanwhile, the two major U.S. indices, the Dow Jones Industrial Average and the S&P 500, have risen by 2.44% and 2.46%, respectively, so far this year, while the tech-heavy Nasdaq has gained 1.26% during the same period.

As India lags behind its global peers, the country’s market capitalisation has fallen below the $4 trillion mark for the first time in over 14 months. Overseas investors seem to be losing confidence in Indian stocks as they continue to pull billions of rupees from the exchanges.

In the current year so far, FPIs have already withdrawn over ₹1 lakh crore from equities, and alongside, retail investors are witnessing significant wealth erosion as their favourite small-cap segment continues to fall without any respite.

Retail investors have poured billions into small and mid-cap stocks in recent years through the Demat account route, aiming for multibagger returns. They have also invested heavily through mutual funds, forcing fund managers to deploy excessive capital into this segment, driving stock prices to unsustainable levels in a very short time. This bubble has now burst sharply in the recent correction.

In this article, we have analyzed the key factors weighing on investor sentiment, how long this sell-off might continue, and why investors are seeking to protect their wealth by investing in gold.

Why are Indian stock markets falling?

A primary factor contributing to the underperformance of the Indian markets was weak corporate earnings, which have raised concerns about stretched valuations. Additionally, slower economic growth has led investors to believe that a near-term recovery is unlikely.

Further weighing on sentiment, the Union Budget for FY26 kept capital expenditure (capex) largely unchanged. The Centre’s aggregate capex stood at ₹11.2 lakh crore, marginally higher than the FY25 Budget Estimate (BE) of ₹11.1 lakh crore. Moreover, the budget reduced the revised capex estimate for FY25 to ₹10.18 lakh crore, raising concerns over future investment momentum.

The market had anticipated a significant increase in government capital expenditure (capex) to support the slowing economy. However, instead of ramping up spending, the budget shifted the responsibility of driving economic growth to consumers by raising the income tax exemption limit to ₹12 lakh—a move that took investors and economists by surprise.

For the first time in nearly a decade, the government has prioritized consumption and savings over capex, yet this shift failed to boost consumption-related stocks, particularly those in the FMCG sector.

In line with efforts to stimulate demand, the Reserve Bank of India (RBI) cut the repo rate by 25 basis points to 6.25% in its sixth bi-monthly meeting for FY24–25, marking the first rate cut in nearly five years. However, this move has also failed to revive investor sentiment.

For FY25, the RBI lowered its real GDP growth projection to 6.6%, while for FY26, it set a target of 6.7%. However, the first advance estimates released by the National Statistical Office (NSO) in early January indicate that India’s GDP growth is expected to decline to 6.4% in FY25, marking the lowest level in four years.

In FY24, India achieved an 8.2% growth rate, but due to global uncertainties, weakening urban demand, declining exports, and a slowdown in government capital expenditure, growth slowed to 5.4% in the July-September quarter of 2024.

S&P Global Ratings, in a report published in early November, projected India’s GDP growth at 6.7% for FY26 and 6.8% for FY27. Global brokerage firm JP Morgan expects growth to accelerate to 6.7% in the second half (H2) of FY25, bringing full-year GDP growth for 2024-25 to 6.4%, which is still lower than the RBI’s projection.

Weak corporate earnings and slower capex deployment have prompted brokerage firms to revise downward their earnings per share (EPS) projections and, consequently, target multiples for a majority of stocks.

New Headwinds

As India grapples with its own challenges, escalating trade tensions have become another major concern for investors. Since assuming office last month, Donald Trump has been announcing tariffs on imports to the U.S. Analysts believe Trump’s strategy is to use tariff threats as a negotiation tool to secure tariff reductions on U.S. exports.

In mid-February, Trump unveiled plans to impose reciprocal tariffs on all countries that levy tariffs on U.S. goods or implement non-tariff barriers restricting U.S. market access. Analysts warn that these levies could impact key exports such as petrochemicals and pharmaceuticals, which account for about one-fifth of India’s exports to the U.S.

They also believe that these tariffs could further weaken Asia’s third-largest economy, adding to its growth challenges. In 2024, India was the 10th largest exporter to the world’s biggest economy. India’s bilateral goods trade surplus with the U.S. has doubled over the past decade to $35 billion in FY24, equivalent to around 1.0% of India’s GDP, as per the recent estimates. 

Meanwhile, trade experts highlight that there is still no clarity on the rules and conditions of this tariff policy. It remains uncertain whether the reciprocal tariffs will apply only to specific products of U.S. interest or if they will be broader, bilateral measures. This distinction is critical, as it will determine the extent of the impact on India’s exports.

S&P Global Ratings recently stated that the impact of U.S. reciprocal tariffs on India will be limited, as the Indian economy is domestically driven with less reliance on exports.

“India’s dependence on exports for growth is not that significant. So, I think the impact of U.S. tariffs will be relatively limited,” said YeeFarn Phua, Director of Sovereigns and International Public Finance Ratings, Asia-Pacific, at S&P Global. He added that sectors potentially exposed to higher tariffs include jewelry, pharmaceuticals, textiles, and chemicals.

Goldman Sachs outlined that the reciprocal tariff policy could impact India in three keyways. First, country-level reciprocity, product-level reciprocity, and reciprocity including non-tariff barriers.

Last month, Trump imposed a 10% tariff on Chinese imports, announced and later delayed 25% tariffs on goods from Mexico and non-energy imports from Canada, and set a date for 25% tariffs on imported steel and aluminum. Last week, he proposed a 25% tariff on automobile, semiconductor, and pharmaceutical imports, with reports suggesting an official announcement could come as soon as April 2.

Monetary Tightrope

As President Donald Trump announces tariffs on key imports without exempting any country, several nations have initiated countermeasures. China has announced plans to impose a 15% tariff on imports of U.S. liquefied natural gas (LNG) and coal, along with a 10% levy on oil, agricultural equipment, and certain automobiles.

Reports indicate that the European Union is considering potential retaliatory measures against iconic U.S. products, including whiskey, jeans, and motorcycles, should the U.S. proceed with the tariffs. The United Kingdom has accelerated the release of its “Plan for Steel,” a comprehensive strategy aimed at bolstering the domestic steel industry. 

In response to Trump’s tariffs, India plans to increase its purchases of U.S. energy resources from $15 billion to $25 billion, demonstrating a commitment to balancing trade relations. Additionally, India is considering reducing tariffs in sectors such as electronics, medical equipment, and chemicals to boost U.S. exports while aligning with its domestic production initiatives.

Escalating trade tensions between major economies have left investors on edge, as retaliatory measures by affected countries could trigger a full-blown trade war, driving up prices and slowing global economic growth.

Global inflation has been moderating in recent years due to a decline in prices, allowing central banks worldwide to focus on growth by cutting borrowing costs. However, if trade tensions intensify further, they may prompt central banks to pause the rate-cut cycle—a trend already observed with the U.S. Federal Reserve, which halted its rate cuts in the January meeting.

Following Donald Trump’s inauguration, Federal Reserve officials voiced concerns over potential inflation, anticipating that firms would raise prices to offset import tariffs, according to notes from their January meeting.

Meanwhile, the latest data released last Friday showed that consumers remain concerned about a potential rise in prices as tariffs take effect in March. The University of Michigan Consumer Sentiment Index fell to 64.7 in February, a decline of nearly 10%—a sharper drop than expected—as consumers expressed concerns about higher inflation due to potential new tariffs. The five-year inflation outlook in the survey stood at 3.5%, the highest since 1995.

On top of that, existing home sales in the U.S. fell more than expected last month to 4.08 million units. The U.S. Services Purchasing Managers’ Index (PMI) also dropped into contraction territory for February, according to S&P Global, as per media reports.

Adding to geopolitical risks, reports suggested Trump might withdraw US support for Ukraine during negotiations with Russia, potentially sidelining Kyiv and its European allies.

Rush to Safety

Amid uncertainty in the global economy, with even policymakers waiting to see the outcomes of Trump’s trade actions, investors were left clueless about the direction of risky assets, prompting them to safeguard their wealth in one of the most precious metals—gold—which has long been considered a safe investment during uncertain times.

Gold, once a medium of exchange, is now playing a similar role by protecting investor portfolios as its prices rise steadily. The yellow metal has maintained a winning streak over the past eight weeks, marking its best weekly performance since the COVID-19 pandemic.

In less than two months of the current calendar year, gold prices have recorded 13 all-time highs, indicating that investors are rapidly shifting away from risky assets such as stocks to safer investments like gold.

 Looking further back, prices have been on a steady upward trajectory over the past year, with no significant pullback—rising from $2,039 per troy ounce to the current trading price of $2,931, delivering a stellar gain of 44%. In the domestic market, gold prices have surged from ₹62,735 per 10 grams to ₹86,560, translating into a 38% gain.

The rally has also led analysts to revise their target prices for the metal, as previous projections have been surpassed earlier than expected. Recently, global brokerage firm Goldman Sachs raised its year-end 2025 gold price forecast to $3,100 per ounce, up from its previous estimate of $2,890.

Similarly, UBS adjusted its 12-month gold price forecast to $3,000 per ounce, up from $2,850, while Citi set a new short-term gold price target at $3,000 per ounce, increasing its average forecast for the year to $2,900 from the previous $2,800.

There are also reports of a potential U.S. return to a gold-backed currency, though experts believe this is unlikely, given the current fiat-based monetary system.

Brace for more volatility

Despite the sharp decline in Indian markets, making them one of the worst-performing among major global peers in 2025, analysts expect continued pressure on equities. They believe valuations across most parts of the market remain expensive.

Domestic brokerage firm Motilal Oswal, in its recent report, stated that Indian stock markets will remain in a “corrective to consolidation” phase for the next 3 to 4 months.

“One of the key shifts is the rise in U.S. interest rates, driven by factors such as a widening fiscal deficit, persistent inflation, and uncertainty surrounding Trump’s policies. This is significant because yields are persisting at levels last seen during the 2007-08 period, and markets expect them to remain elevated for longer, as indicated by Fed Futures probabilities,” the report added.

Japan, another major economy and a key participant in carry trades, also appears to be on the path to higher interest rates after maintaining an ultra-loose monetary policy for more than 15 years, the report noted.

Explaining the broader impact, the report highlighted deglobalization as a second major trend, evident in the recent imposition of tariffs by the U.S. aimed at protecting domestic industries. While the current measures are milder than expected and appear to be more of a negotiation strategy, such actions are likely to disrupt global trade and accelerate the momentum toward deglobalization, the report observed.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.