India’s equity markets, once feted as among the strongest in emerging economies, are now languishing near the bottom of the global performance table. In 2025, the Sensex yielded only 1.9% in USD terms and the Nifty 50, 3.2% — making both among the weakest performers globally.

The comparison with peers is stark. South Korea’s KOSPI has surged more than 53%, Germany’s DAX almost 36%, and Japan’s Nikkei around 22%. Even markets once written off — such as China’s Shanghai Composite (+21%) and Brazil’s Bovespa (+38.5%) — have left India far behind.

Why India Has Fallen Behind

Several interconnected factors explain the slide:

1. Earnings Fatigue

After four quarters of subdued performance, corporate India has failed to justify the lofty valuations of previous years. FY26 earnings growth estimates remain in single digits — far below expectations.

2. High Valuations

At 19× forward price and 22× past-twelve-month earnings, India’s markets appear expensive. In comparison, Korea trades around 10×, Brazil 8×, and China 13×. This valuation gap has made India less appealing to value-seeking investors.

3. Cautious Foreign Investors

Foreign institutional investors (FIIs) have withdrawn almost ₹1.4 lakh crore so far in 2025. Concerns over stretched valuations, currency weakness, and higher returns in developed markets have kept foreign inflows muted.

4. Policy Uncertainty

Shifts in government spending, populist signals, and delays in reform implementation have added to uncertainty. Geopolitical tensions and global risk aversion have further accelerated capital flight.

5. Range-Bound Trading

As the Nifty moves listlessly between 24,000 and 25,000, investor enthusiasm has waned. The absence of breakout momentum reinforces the perception that Indian equities are merely marking time.

Indicators of a Potential Turnaround

Despite the current gloom, several green shoots suggest India may still stage a comeback.

Fiscal Push and GST Reductions

Recent tax cuts are expected to boost consumer spending. Infrastructure expenditure is also likely to accelerate over the coming quarters.

Liquidity Infusion

The RBI may lower the Cash Reserve Ratio (CRR) and possibly cut policy rates in the months ahead — injecting liquidity, easing borrowing costs, and reviving credit growth.

Earnings Recovery from Q3 FY26

Analysts expect that the combined impact of tax changes, reforms, and monetary easing could lift corporate earnings growth to 12–14% in FY27.

Stabilising Global Backdrop

Any progress in tariff negotiations with the US or easing of global inflation could rekindle FII interest in Indian assets.

Roadblocks to Watch

The recovery path remains challenging. Key risks include:

• Persistent Valuation Premium: Without a swift rebound in growth, valuations could come under pressure.
• Currency Weakness: A depreciating rupee may deter foreign inflows.
• External Shocks: Oil price spikes, global rate volatility, or geopolitical events could dampen sentiment.
• Policy Delays: Slower reforms or lacklustre execution might postpone the recovery timeline.

FAQs

Q1: Why is India’s market lagging despite strong GDP growth?
Because GDP growth and corporate earnings don’t always align. Rising costs, policy uncertainty, and weak profitability have capped earnings expansion, even as the economy grows above 7%.

Q2: Are Indian equities overpriced?
Yes — relative to peers. At 19× forward earnings, India trades at a steep premium to other emerging markets. Without stronger earnings support, this premium remains vulnerable.

Q3: What could trigger a near-term rebound?
Stronger Q2 or Q3 results, liquidity injections by the RBI, and greater policy clarity on tariffs or capital expenditure could revive momentum.

Q4: Which sectors might benefit most from policy changes?
Consumption-driven sectors such as FMCG, automobiles, and retail could gain from GST cuts, while banks may benefit from easier credit and renewed capex.

Q5: How important are FIIs for a turnaround?
While FIIs remain crucial, India’s domestic investor base — mutual funds, retail, and pension investors — has grown steadily, providing a buffer during outflows. However, sustained FII participation is still vital for a strong rally.

Conclusion

India’s equity markets in 2025 face a harsh reality: muted profits, high valuations, and fading foreign confidence have made them one of the world’s weakest performers. Yet, the fundamentals are not broken. Policy support, liquidity easing, and a rebound in earnings by late FY26 could rewrite the narrative.

If reforms stay on course and global headwinds subside, India could turn this year of stagnation into the launchpad for one of the fastest recoveries among major markets. The coming quarters will reveal whether this phase is a temporary setback — or the start of an extraordinary revival.