The Nifty 50 is down around 14% this year, with September alone seeing a 6% fall. Gold, which usually provides some comfort when markets are weak, has also pulled back around 9% from its August peak and is now up just 2% year-to-date. Silver, too, has struggled this year.
Even sovereign bonds have not made anyone comfortable. Yields on 10-year Indian government bonds have risen by more than 60 basis points this year, which means bond prices have fallen as yields and prices move in opposite directions.
For Indian investors, this hasn't been a great year. Equities, bonds, gold – all have been a disappointment. Moreover, foreign investors have been pulling money out of Indian equities for much of the year. Their net equity outflows reached around ₹2.6 lakh crore, or roughly $27 billion, by the end of September.
Social media finfluencers are panicking and questioning India's growth story. Let's find the truth.
Is The Economy Doing Well?
Let's be clear about one thing: stock markets and GDP growth are not related.
Many influencers are spinning the story in two ways. First, they show that just after the GDP numbers were released, Indian stocks plunged. So, the GDP data is fudged, and markets know it. In the second story, the language is a bit different. It says ‘despite healthy numbers, stock markets are off' and that's because of some other reasons.
Both are fundamentally wrong. GDP growth data has nothing to do with any of it. GDP measures economic activity for the entire country, and that's past data. Stock markets, on the other hand, look at companies' future earnings. So the statistical release has no relation to the stock prices at all. Therefore, the correctness of the GDP data is secondary and also not today's topic.
US Bond Yields Matter For India's Stocks
The primary reason why Indian stock markets are falling is the US yields. I have written extensively on them. Several factors, including inflation risks, expectations of Fed tightening, heavy government borrowing, geopolitics and rising demand for capital for AI companies, have pushed yields up.
Higher US yields have narrowed India's advantage over the US. I discuss this in the article titled Bond Yields Matter For India's Stock Market. The gap between 10-year Indian and the American yields has fallen from about 3.3 percentage points at the end of 2023 to just over 2 percentage points now.
These calculations change after rupee depreciation. For a domestic investor, a 10% return is a 10% return. But for a foreign investor, that has to be adjusted for depreciation. If the rupee depreciates by 2%, the actual return is 8%. Therefore, foreign investors find Indian markets unattractive after considering the small premium and high currency volatility.
At the same time, Indian stocks are already trading at relatively high valuations. That means investors need stronger earnings growth to justify those prices. In other words, rising US yields are making Indian growth more expensive to own.
Valuations & AI Trade Make Others More Attractive
That brings us to valuations.
India is not cheap. At the same time, its peers have become cheaper.
India's trailing price-to-earnings (PE) ratio of around 21 times earnings is near its ten-year average. Across its 14 emerging market peers, the median PE is about 11x, half of India's. If compared with the long-term average of 13x, we can conclude that the typical peer has been de-rated by roughly 17%. Similarly, India's premium to its peer group has increased by roughly 15%.
That means, despite the correction, India is still costlier than its peers.
Although it's tempting to infer that more correction will make Indian markets attractive, that's not true. This is because investors aren't only interested in cheaper markets. The cheapest markets by this measure are the Philippines, Malaysia, Indonesia and South Africa. They are also falling. Cheapness hasn't helped them.
Two peculiar sets of emerging market equities have flourished this year. First, Taiwan and South Korea, thanks to their AI-linked growth. Second, commodity exporters such as Brazil, Colombia, and Nigeria.
Since India doesn't fit in any of these baskets, it is not on investors' radar. Moreover, India's IT-services industry itself faces disruption from AI. That becomes a clear red flag.
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Oil & Rain Have Added To The Pain
Now another important factor: oil.
The war in West Asia has pressured India's import bills, current account and the rupee. This increases the cost of raw materials, transportation, packaging, and other inputs. It also disrupts industries such as chemicals, aviation, plastic and tiles.
Shortages and higher prices of oil and gas feed into the economy slowly and eat into the companies' earnings and margins.
The monsoon adds another layer of uncertainty. India's 2026 southwest monsoon ended around 13% below normal, its weakest in more than a decade. Water storage in 178 major reservoirs was at around 70% of capacity at the end of September, well below the 10-year average of 77%.
Weak rainfall can reduce agricultural output and raise food prices. It also affects rural incomes and demand.
The combination of inflation, weak demand and lower profits is uncomfortable for everyone, specifically equity investors.
Crisil Ratings estimated in May that organised FMCG companies would see volume growth slow to 2–3% in FY27 from 5–6% in FY26, as higher inflation weighs on demand. In the same month, HSBC retained a tactical mild underweight on Indian equities, saying they were likely to struggle to outperform global equities until oil prices stabilised.
Recently, the Finance Ministry's economic review highlighted the same risks. It warned that geopolitical tensions, elevated crude prices and tighter global financial conditions could add to imported inflation. It also cautioned that a strong El Niño could hurt the upcoming rabi crop by reducing soil moisture and increasing heat stress.
Concentration Of Profit Growth
Some would argue that Indian corporate earnings have had a strong run. And they have. But look closer, and the picture is more mixed. According to Motilal Oswal Financial Services, in Q1 FY27, Nifty 50 index profits grew 18%. However, five companies, viz. ONGC, Hindalco, Reliance Industries, JSW Steel and Bharti Airtel accounted for around 60% of the incremental earnings growth.
For Q2, it estimates profit growth to slow to around 6%. But this time, Reliance Industries, Bharti Airtel, Tata Steel, JSW Steel and Bajaj Finance are expected to drive almost all of the incremental growth.
That matters because this isn't the broader earnings story.
So most investors are concerned about earnings visibility and inflation, even though broader numbers don't invite panic. All this points to a more uncertain near-term outlook for Indian equities.
Gold & Silver Facing Similar Shocks
Gold and silver have the same root cause behind weak performance. Higher Treasury yields make non-interest-bearing assets like gold less attractive. Geopolitical uncertainty is still supporting gold through safe-haven demand, but for now, the higher-yield effect seems to be winning.
Silver has an additional problem. It is also an industrial metal. If higher oil prices and tighter financial conditions weaken global industrial activity, investors may worry about silver demand.
That's the reason we are seeing a dip in the bullion market.
Final Take
All in all, multiple factors are driving the stock market rout.
This is why saying foreign investors have “lost faith in India” misses the bigger picture. India certainly has fundamental challenges, as highlighted by many on social media, from jobs and weak R&D to its high dependence on oil. But these are long-standing issues. Markets rarely react so abruptly to problems that investors have known about for years.
What has changed is the combination of risks investors are facing today — a shrinking yield advantage over the US, higher oil prices, margin pressure, a weaker rupee, trade uncertainty, weather risks and a valuation premium over many emerging markets.
The issue is also bigger than AI. Investors can now find different combinations of growth, earnings momentum, valuations and themes elsewhere.
So the real question is simpler: Is India attractive at its current price with all these risks? The answer is in front of us. For investment sentiment to improve, some of these risks will have to ease. And that may take longer than investors had expected.
Disclaimer: The views expressed in this article are solely those of the author and do not necessarily reflect the opinion of NDTV Profit or its affiliates. Readers are advised to conduct their own research or consult a qualified professional before making any investment or business decisions. NDTV Profit does not guarantee the accuracy, completeness, or reliability of the information presented in this article.
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