According to Jefferies' Chris Wood, India's equity market has significantly underperformed this year, turning into a "relative-return disaster" despite signs that the rupee may have bottomed out. In his recent "GREED & fear" note to investors, Wood, the Global Head of Equity Strategy at Jefferies, pointed to persistent foreign selling, stretched valuations and rising political populism as key risks impacting the market's stability.
India's underperformance is stark, with the market underperforming the MSCI Emerging Markets Index by 27 percentage points year-to-date. However, Wood notes that strong domestic inflows have prevented the situation from becoming an "absolute-return disaster". These domestic inflows have averaged an estimated $7.4 billion per month in the first nine months of 2025, effectively offsetting new equity supply of $5.7 billion per month over the past three months.
Despite the challenges in the stock market, Wood sees a silver lining in the macroeconomic outlook. He believes there is a growing likelihood that the rupee has bottomed after being the worst performer year-to-date amongst major emerging market currencies. Jefferies anticipates India's current account deficit narrowing to 0.5% of GDP in FY26, potentially the lowest level in two decades. Furthermore, India's foreign exchange reserves remain robust at $690 billion, equivalent to 11 months of imports.
However, Wood cautions that increasing populism and state-level political giveaways pose a risk to currency stability. He points to the recent Bihar election, where competing promises of cash transfers and subsidies are creating fiscal stress. Wood highlights the unsustainable nature of such promises in a state with a per capita income of ₹69,321, calling Bihar a "stress test" for India's fiscal credibility. While the central government's deficit is projected at 4.4% of GDP, the consolidated deficit with states widens to 7.5%.
From a stock market perspective, a key issue in India is whether the credit and monetary easing seen this year, combined with the lowering of GST rates effective from September 22, will lead to a pick-up in growth, particularly nominal GDP growth, in the coming quarters. Wood believes that without an anticipated cyclical pickup, Indian equity valuations in aggregate will become increasingly vulnerable.
According to Wood and Mahesh Nandurkar, Jefferies' head of India research, several improving macroeconomic indicators suggest the rupee has likely bottomed around the 89 level. Wood expects monetary and credit easing this year, combined with GST rate cuts effective September 22, to boost growth in the coming quarters, particularly nominal GDP growth.
Interestingly, India has emerged as a "reverse AI trade" within emerging markets, according to Wood. He notes that India's underperformance compared to the MSCI Emerging Markets Index is partly due to its lower exposure to the AI-driven rally in Taiwan, Korea, and China. This positioning makes India a contrarian play for long-term investors, particularly as a hedge against a potential unwinding of the concentrated AI trade in North Asian technology markets.
One area of AI vulnerability remains India's IT services sector, where revenue growth slowed to 1.6% YoY in Q2FY26, leading to a sector de-rating. The BSE IT Index now trades at 23x one-year forward P/E, down from 31x in mid-December. By contrast, Wood believes India-based global capability centers (GCCs) have increasingly contributed to the services sector's expansion.
