Market Divergence Explained
The Indian stock market's recent performance has been divergent from the broader global trend. While markets in South Korea, Japan, China, the US, and
Europe have experienced significant gains, Indian indices like the Nifty50 and Sensex have declined. This disparity is particularly noticeable considering India's robust economic growth, with an expected GDP increase of 7.4% in the current fiscal year, combined with record-low inflation and anticipated consumption spurred by tax cuts. The fundamental question is: why isn't the Indian stock market mirroring these positive indicators?
Trump's Influence and Beyond
A significant factor contributing to the Indian market's recent trajectory is linked to Donald Trump. The anticipation of his potential return and the policy uncertainties accompanying it have caused concerns among foreign investors, leading to substantial outflows. Foreign Portfolio Investors (FPIs) have been net sellers, with an estimated $2.5 billion in sales in the first 16 days of 2026, following nearly $19 billion in outflows during 2025. Besides Trump, country-specific elements are also in play. One contributing factor is that Indian equities are relatively higher-priced compared to those of their peers.
Geopolitical and Trade Issues
Experts suggest that the sustained return of FPIs to the Indian market hinges on global geopolitical stability and the conclusion of a trade agreement between India and the US. Ongoing negotiations between the two nations have spanned nearly a year, with reports of near-agreements on multiple occasions. Geopolitical developments, such as US interventions, have worsened the situation and impacted market sentiment. This uncertainty has created an environment where investors are cautious, affecting the flow of foreign funds into the market.
AI's Global Impact
Artificial intelligence (AI) is a dominant force influencing market dynamics. Countries like South Korea and Japan, with their strong exposure to AI, have seen their benchmark indices surge. The Kospi, for instance, has closely tracked the technology-heavy Nasdaq Composite. The AI-driven demand is particularly beneficial for South Korea. The expansion of AI has spurred demand across the memory ecosystem, boosting prices for both DRAM and NAND, and potentially leading to substantial economic gains for the country. However, India's exposure to AI is considered relatively low, which means the direct benefits of the global AI boom are less pronounced.
Investor Sentiment and Flows
A key challenge in the Indian market is attracting consistent participation from various investors. While Domestic Institutional Investors (DIIs) have stabilized the market, sentiment needs to improve to push the market higher. The absence of steady inflows from Foreign Institutional Investors (FIIs) has affected overall market performance. Sentiment is crucial for market growth, yet the comfort required on the earnings front is missing. The withdrawal of foreign investment, combined with concerns over valuation and global instability, is creating headwinds for the Indian market.
Long-Term Perspective
Despite the recent performance variations, the long-term prospects of the Indian market appear intact. Over the past five years, the Indian market has delivered returns exceeding those of the Kospi, FTSE, and DJIA, and are comparable to the Nasdaq Composite. This suggests that while the current environment poses challenges, the underlying potential of the Indian market remains strong. Investors should consider these long-term trends alongside short-term fluctuations when evaluating the market's overall trajectory.
