Even as economic growth remains above 7%, Indian equities have emerged among the weakest-performing major markets of 2026. The sell-off has intensified in recent weeks, with the Sensex and Nifty recording eight consecutive weeks of losses before recovering marginally this week. The losing streak was the longest in about 25 years.
Retail investors have felt the impact sharply. Investors tracking the Nifty have seen the value of their holdings fall by around 15% this year. By comparison, South Korea’s Kospi has gained about 62% since January and nearly 170% over the past two years.
Foreign investors have been pulling money out of India. Bernstein Research estimates that cumulative net foreign investment in Indian equities over the past decade is now approaching zero after accounting for purchases and withdrawals. Nearly $40 billion has been withdrawn by foreign institutional investors in the past two years alone.
The market has avoided a much deeper fall largely because domestic money continues to flow into equities and mutual funds. Indian mutual fund assets under management have increased from around $125 billion in 2016 to nearly $900 billion in 2026. At the same time, the number of individuals investing in equities and mutual funds has more than tripled to around 150 million.
That makes the ongoing correction especially significant. Households already dealing with inflation, employment uncertainty and weak consumption are now also seeing pressure on their financial savings.
Here are five key reasons why strong economic growth has not translated into stock market gains:
High crude oil prices remain one of the biggest risks to the Indian market.
Oil has remained largely in the $90-$100 a barrel range as disruptions to shipping through the Strait of Hormuz continue into an eighth month. The crisis has lasted much longer than markets initially expected, and there is still little clarity on when normal shipping conditions will return.
Higher oil prices have a direct impact on India because the country imports more than 90% of its crude requirement.
Nearly half of India’s crude oil imports, along with a significant share of LPG and LNG shipments, pass through the Strait of Hormuz.
Expensive oil raises inflation, increases the import bill and squeezes company margins. Once crude moves towards or beyond $100 a barrel, the pressure becomes more visible across both the economy and corporate earnings.
India has diversified its energy purchases, including through Russian crude. But geopolitical risks have become more complicated after US President Donald Trump threatened tariffs of up to 100% on countries continuing to trade with Moscow.
Rising oil prices are also contributing to higher inflation and elevated interest rates globally. Yields on US government bonds have moved above 5%, close to their highest levels in roughly 25 years. That makes US debt more attractive to global investors.
When relatively low-risk US government securities offer strong returns, foreign investors have less incentive to take additional risk in emerging markets such as India. This has contributed to continued foreign portfolio outflows from Indian equities.
The rupee’s weakness has further hurt returns for overseas investors. Foreign investors measure performance not only by how Indian shares move but also by how those returns translate into dollars.
A falling rupee erodes part of the gains generated in local currency. In dollar terms, the Nifty has delivered annualised returns of only about 6% over the past decade. That is relatively modest when compared with several competing global and emerging markets.
The market correction has brought Indian valuations down significantly from previous highs. The premium Indian equities once enjoyed over other emerging markets has narrowed considerably over the past two years.
However, Indian stocks still remain relatively expensive when measured against corporate earnings. That becomes more important when compared with markets such as South Korea and Taiwan, where companies have benefited directly from the artificial intelligence boom.
Strong demand for semiconductors, computing infrastructure and AI-related technologies has lifted profits in those economies, helping justify higher valuations. India does not yet have the same earnings engine.
India’s limited exposure to the most profitable parts of the global AI boom is becoming a structural market disadvantage. A large share of India’s biggest listed companies remains concentrated in traditional sectors such as banking, energy, consumer goods, industrials and IT services.
While India is investing in data centres, semiconductor manufacturing and emerging technologies, it has yet to produce a globally dominant AI company comparable with OpenAI, Anthropic or China’s DeepSeek.
This matters because much of the value creation in the current technology cycle is concentrated in advanced AI models, chips and computing infrastructure.
India is making early progress in space technology, defence, semiconductors and deep-tech. But many of these businesses are still too small to materially influence how large global funds allocate capital.
Until such sectors achieve scale, overseas investors may continue to prefer markets offering more direct exposure to the AI-led growth cycle.
Several factors could influence the next phase of the Indian market.
A reduction in geopolitical tensions could bring crude prices lower and improve investor sentiment. The correction in valuations could also make Indian equities more attractive to foreign portfolio investors.
CareEdge expects easing geopolitical risks and more reasonable valuations to support a possible revival in foreign inflows. However, trade tensions and high energy prices remain significant risks to corporate earnings.
Quarterly results beginning this week will provide a clearer picture of how much pressure companies are facing from higher costs, borrowing rates and weaker demand.
For now, domestic investors continue to provide an important cushion.
Monthly mutual fund inflows have remained resilient despite the sharp market correction and growing investor anxiety.
The bigger question is whether that confidence will continue if the downturn deepens.
If domestic investors begin reducing their monthly investments, the market could lose one of the strongest forces currently offsetting persistent foreign selling.