Since September 2024, India has been underperforming relative to other emerging markets, a trend that has prompted analysis from experts like Vinod Nair, Head of Research at Geojit Financial Services. Several factors contribute to this situation, including valuation premiums, shifts in earnings growth, and global economic pressures.
One of the primary reasons for India's lagging performance is its historically high valuation. For an extended period, India has maintained a premium valuation driven by consistent increases in index weight and strong earnings growth. However, in 2024, these factors began to decelerate. India's index weight peaked around 20%, and domestic earnings growth downgraded in fiscal year 2025 due to high global inflation and a slowdown in the domestic economy. At the start of 2025, MSCI-India traded at a 90% premium to MSCI-EM, significantly higher than the 5-year average of 75%. India's one-year forward P/E ratio stood at 22.3x, substantially above the emerging markets average of 11.7x.
Despite the high valuation, India has several factors working in its favor. It remains the only large economy growing at a stable real growth rate of 6% to 7%. The country also benefits from political stability, favorable demographics, and promising sectors like technology and manufacturing, creating a progressive industrial outlook. However, as India's earnings growth cooled off after a period of strong performance, other emerging markets experienced a revival driven by government financial stimulus, advancements in artificial intelligence, and economic resurgence.
Recent global events have also played a role. The imposition of tariffs by the United States has created selling pressure in the Indian stock market. In late July 2025, the Indian stock market ended lower after the imposition of tariffs, with the Nifty 50 index, BSE Sensex, and Bank Nifty index all experiencing declines. Vinod Nair noted that the 25% tariff is likely to exert pressure on the domestic economy, particularly affecting sectors like engineering, pharmaceuticals, energy, textiles, and jewelry.
Furthermore, global headwinds and persistent outflows from Foreign Institutional Investors (FIIs) have contributed to a cautious market sentiment. FIIs held the second-highest net short position in derivatives, reflecting elevated caution. Rising U.S. inflation and trade tensions have also negatively impacted markets. This has led investors to show a preference for domestically driven stories with non-discretionary appeal.
However, there are also signs of resilience and potential for recovery. India's domestic market is booming, with over 60% of its GDP coming from domestic private consumption. By 2026, the country is expected to have the third-largest domestic consumer market, outpacing Germany and Japan. Domestic Institutional Investors (DIIs), led by mutual funds, have emerged as a key pillar of strength for the Indian equity market. A major upside in DII traction has been noticed since May 2025, as the domestic economy started to rebound, with positive Q4 corporate earnings results.
Moreover, India's long-term economic outlook remains positive. The International Monetary Fund (IMF) projects India's GDP to grow at 6.4% through 2026, outpacing the United States and other major economies. India is projected to be the world's fastest-growing major economy, with real GDP growing at 6.5% and nominal GDP tripling from ₹106.57 lakh crore (2014–15) to ₹331.03 lakh crore (2024–25).
In conclusion, while India has been lagging behind other emerging markets since September 2024 due to high valuations, decelerating earnings growth, and global economic pressures, the country's strong domestic demand, political stability, and long-term growth potential suggest that it remains a key driver of global economic growth. The upcoming RBI rate decision, potential progress in trade talks, and selective strength in domestic sectors are anticipated to lay the groundwork for a recovery.
