Five reasons India's stock market is sinking even when its economy is growing

India's economy is growing at an enviable rate of over 7% despite global energy shocks, rising interest rates, tariff uncertainties and weather-related disruptions.

Key points

• "This single variable tends to influence the markets quite negatively, " Hari Shyamsunder, a fund manager with Franklin Templeton Asset Management India, informed the BBC.
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• But the world's fastest growing major economy additionally has one of the worst performing major equity markets in 2026.
• Indian mom-and-pop investors who put their funds into the Nifty have seen their wealth erode by concerning 15% this year.
• "Many of India's large caps represent a bygone economic era, " Bernstein Research remarked in a note lately.

But the world's fastest growing major economy additionally has one of the worst performing major equity markets in 2026. The correction in Indian stocks has, in fact, only intensified in recent weeks.

Meanwhile, the benchmark Sensex and Nifty indices. It represent the country's largest firms, have inched up slightly since Monday after posting losses for eight straight weeks – the longest losing streak in 25 years, according to Reuters.

Indian mom-and-pop investors who put their funds into the Nifty have seen their wealth erode by concerning 15% this year. In comparison, they would have created 62% returns on Korea's Kospi index since January or 170% in the last two years.

On aggregate, the funds foreign investors have put into Indian markets previously decade – after subtracting what they sold or withdrew – is nearing zero. Previously two years alone, foreign institutional investors have withdrawn a staggering $40bn, according to data from Bernstein Research.

It is the sizeable pool of domestic institutional and retail capital, flowing into instruments like mutual funds, that have supported the markets avoid a sharper fall.

Domestic assets under management of mutual funds have grown from regarding $125bn in 2016 to some $900bn this year, with the number of Indians parking capital in stocks and mutual funds more than tripling to 150 million individuals.

This makes the recent fall in the markets more worrying – since households, already struggling from a subdued job market, high inflation and faltering consumption, are now seeing their equity savings take a beating too. So, what's gone wrong?

Here are five reasons India's booming economy isn't lifting its stock market. Persistent energy shocks due to Middle East conflict.

Crude oil rates have hovered between $90 and $100 a barrel as the disruption to shipping through the Strait of Hormuz enters its eighth month, far longer than analysts had anticipated. Moreover, there's little visibility on when normalcy will return.

"This single variable tends to influence the markets quite negatively, " Hari Shyamsunder, a fund manager with Franklin Templeton Asset Management India, informed the BBC. "Markets can absorb crude between $70 and $90, but when prices move above $100 a barrel, it starts putting stress on macro-economic variables such as inflation and also company earnings and margins."

India imports over 90% of its requirements – almost half of its crude oil imports, along with a substantial share of its liquified petroleum gas (LPG) and liquified natural gas (LNG) shipments, come through the Strait of Hormuz.

While Delhi has diversified its energy sources, tapping Russian oil markets, US President Donald Trump lately threatened up to 100% tariffs on countries doing trade with Moscow, further complicating matters. Rising global interest rates.

With oil rates rising, inflation is going up and, consequently, interest rates are on the rise globally. The effective yield on US administration bonds is above 5%, or at near 25-year highs.

These are often considered risk-free investments. Consequently, foreign funds tends to leave riskier emerging market assets such as Indian equities and chase safer investments like US bonds when interest rates rise.

For foreign investors, the difficulty of muted returns has been compounded by a weaker rupee. In currency-adjusted dollar terms, they have suffered since of the fall in the Indian currency.

For context, the Nifty has delivered just 6% annualised dollar returns over the past decade – hardly attractive, especially in comparison with a number of other competing markets. Indian stocks are cheaper, but still relatively expensive. Stock valuations have been another major concern.

In practice, the market correction over the last two years has reduced the premium that Indian stocks held over their emerging market competitors.

"Stocks are cheaper than they have been on average for the last ten years, " notes Shyamsunder, adding that the premium that Indian shares commanded over other emerging economies has shrunk substantially previously few years.

Nevertheless, they are still expensive relative to their earnings, especially since businesses in countries such as South Korea and Taiwan have benefited from a massive boom in artificial intelligence (AI) which has pushed up their profits. The missing AI piece.

In India, AI, or the new economy broadly, is a major missing piece of its expansion story.

"Many of India's large caps represent a bygone economic era, " Bernstein Research remarked in a note lately. "Most are not investing in the future, but consolidating their past, often expecting policy to continue shielding them from global competition." India seeks AI breakthrough – but is it falling behind?

And its smaller firms are yet to reach a scale that will attract foreign institutional funds.

While Indian firms are investing in data centres and chip fabrication, the country has not produced a global giant like OpenAI, Anthropic or even China's DeepSeek – this is where the largest share of the profits in the AI value chain lie.

Foreign investor interest will only return to India meaningfully if it can build globally competitive industries in these emerging areas, according to Bernstein.

"We are seeing early signs of this in areas such as space, defence, semiconductors, and deep-tech innovation, but most remain too small to materially influence capital allocation decisions over much of this decade."

There are plenty of immediate factors that will influence how Indian markets behave going forward.

Though trade tensions and higher energy rates remain a "challenge for corporate performance going ahead", "Easing geopolitical tensions and relatively attractive valuations could support a revival in FPI inflows, " according to CareEdge, a brokerage.

While foreign investors may have given up, Indian savers, even though increasingly more anxious, haven't slowed their monthly investment flows, externalinto mutual funds, for now.

In practice, the real test will be whether this resilience survives a deeper correction going forward.

In short, five reasons India' s stock market is sinking even when its economy is is the central thread here, and readers can expect follow-up reporting as the picture becomes clearer.