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Strong growth, weak market

Indian stocks are posting one of the weakest performances among major markets in 2026 despite the economy growing by more than 7%. Despite a modest rebound at the start of the week, the Sensex and Nifty had fallen for eight consecutive weeks before that, according to Reuters data, marking their longest losing streak in 25 years.

The picture is particularly notable for retail investors. The wealth of savers who invested in the Nifty has fallen by about 15% this year, while South Korea's Kospi index, by comparison, has returned 62% since January and 170% over the past two years.

The foreign investor side also looks weak. According to Bernstein Research, $40 billion of foreign institutional money has left Indian markets over the past two years. The fact that foreign investors' net contribution has come close to zero over the past decade suggests the selling pressure is becoming more structural rather than temporary.

Main financial risks behind the decline

Oil, rates and currency pressure stand out

One of the biggest pressures on the market is energy prices. Crude oil has stayed in the $90-$100 range as shipping disruptions in the Strait of Hormuz entered their eighth month. For India, which imports more than 90% of its energy needs, this poses a direct risk to inflation and corporate profitability.

  • Higher oil prices raise the import bill and squeeze inflation and profit margins.
  • US Treasury yields rising above 5% are pushing foreign funds toward safer assets.
  • A weaker rupee reduces dollar-based returns, making Indian shares less attractive to overseas investors.
  • Still-expensive valuations continue to weigh on earnings despite the recent correction.
  • The gap in AI and the new economy is limiting profit growth compared with markets such as South Korea and Taiwan.

Valuation concerns persist

The correction over the past two years has erased part of the premium Indian shares once carried versus other emerging markets. But on a company-earnings basis, stocks are still considered far from cheap. The gap is especially wide with South Korean and Taiwanese companies benefiting from AI-driven revenue growth.

According to Bernstein Research, a significant share of India's large-cap companies are focused on protecting their existing businesses rather than making a leap into the future. Although there are investments in data centers and chip manufacturing, no global-scale AI giant has yet emerged that could expand the profit pool on a worldwide level.

Domestic funds are cushioning the fall, but risks remain

For now, domestic investors are limiting a sharper drop in the market. Assets managed by mutual funds have risen from about $125 billion in 2016 to $900 billion, while the number of people putting money into stocks and funds has reached 150 million.

Even so, pressure on households is mounting because of a weak labor market, high inflation and slowing consumption. CareEdge says lower geopolitical tensions and more attractive valuations could revive foreign portfolio inflows, while trade tensions and high energy costs remain key risks for corporate performance.

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