As India navigates the complexities of 2026, the stock market faces a unique set of challenges, primarily stemming from a persistent stalemate in trade negotiations with the United States and continued selling pressure from Foreign Institutional Investors (FIIs). While domestic factors offer some support, these external headwinds could significantly influence market performance in the coming year.
The anticipated India-US trade deal has faced continuous delays, creating uncertainty for investors. Expectations were high that the US would remove the 25% penalty tariff, but this has not yet materialized. The complexities arise from US demands for greater access to the Indian market, particularly in agriculture and dairy, sectors where India seeks to protect its small farmers. Sectors heavily reliant on US business, including IT, pharma, textiles, and jewelry, are especially vulnerable to the fallout from these delays. Chief Economic Advisor V Anantha Nageswaran expressed optimism that a trade agreement could be reached by March 2026, but geopolitical pressures continue to play a significant role.
Adding to the concerns is the continued selling by FIIs. In the first two trading sessions of 2026, FIIs offloaded Indian equities worth ₹7,608 crore, following record outflows of ₹1.66 lakh crore in 2025. This persistent selling pressure has contributed to the depreciation of the Indian Rupee (INR), which has been the worst-performing major currency, slipping nearly 5%. Elevated valuations in India and the attractiveness of other markets, including those benefiting from the AI trade, have been cited as reasons for the FII exodus.
Despite these challenges, there are underlying factors that could support the Indian stock market in 2026. Domestic Institutional Investors (DIIs) have been providing crucial support by stepping in as net buyers, cushioning the market against substantial FII outflows. The Indian economy maintains robust GDP growth, with forecasts exceeding 7% for the fiscal year. Corporate earnings are expected to rebound, accelerating to 12-15% year-on-year over FY26-27, driven by resilient domestic demand and a supportive policy environment. The Reserve Bank of India (RBI) has also implemented rate cuts as monetary stimulus.
However, experts advise caution, suggesting that the market in 2026 will favor stock pickers who focus on quality stocks with strong fundamentals and rational valuations. Kotak Securities has set a Nifty target of 29,120 by December 2026, based on expectations of GST rationalization, potential interest rate cuts, and a benign inflation environment.
In conclusion, the Indian stock market in 2026 faces a complex interplay of factors. While domestic demand and improving earnings offer support, the India-US trade deal stalemate and continued FII selling pose significant risks. Investors will need to carefully navigate these challenges, focusing on fundamentally strong companies and closely monitoring global and domestic cues.
