Indian Stock Market Lags Behind Global Peers: Six Key Factors Contributing to Underperformance

Indian Stock Market Shows Signs of Recovery Amid Easing Geopolitical Tensions

The Indian stock market exhibited a positive trend on Thursday, driven by easing geopolitical tensions in the Middle East and growing optimism around potential US-Iran peace talks. The benchmark indices, led by the Nifty 50, advanced nearly 0.5%, reclaiming the 24,200 level.

The global market's recovery is a significant development, as it had come under pressure following the escalation of the US-Iran war, disrupting crude oil supplies and driving a sharp rise in oil prices. The situation has improved with renewed diplomatic efforts, leading to a strong recovery in global markets. On Wall Street, the S&P 500 has fully recouped its losses linked to the conflict and has gained 3% this week, hovering near record highs. The Nasdaq has risen approximately 5%, marking its longest winning streak since 2019, while the Dow Jones Industrial Average is up over 1%.

Asian markets also exhibited strength, with Japan's Nikkei approaching record high levels. Despite the global rebound, Indian equities have lagged their peers. Although the Nifty 50 has recovered nearly 2,000 points from recent lows following a 12% correction triggered by the conflict, the index remains about 8% below its all-time high.

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Year-to-Date Performance Comparison

The Indian stock market's relative underperformance versus global peers is largely driven by sustained FII outflows and sectoral imbalances. Foreign investors have been consistent sellers amid geopolitical tensions, while higher US bond yields of 4.3-4.5% and better global opportunities have diverted capital away from India.

Analysts attribute the underperformance to several key factors, including:

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1. Limited exposure to high-growth "sunrise" sectors: India's market currently lacks significant representation in emerging high-growth sectors such as artificial intelligence (AI), data centres, robotics, and semiconductor manufacturing — areas that are attracting substantial global capital.
2. Macroeconomic vulnerabilities: India's macroeconomic environment remains exposed to domestic and external risks, including fluctuations in credit growth, weather-induced inflation, and uneven consumption demand.
3. Moderating corporate earnings growth: Global investors are increasingly favouring markets capable of delivering 15-20% annualised earnings growth. Comparatively, India's earnings trajectory has shown signs of moderation, impacting investor sentiment.
4. Elevated valuations relative to peers: Indian equities have historically traded at a premium to global markets. The recent correction has been partly driven by a reassessment of previously elevated growth expectations, particularly in mid- and small-cap segments.
5. Attractive opportunities in global markets: Markets such as the US, Europe, Japan, South Korea, and Taiwan offer broader exposure to high-growth sectors, resulting in durable FII outflows from India.

FPI outflows have weighed on Indian equities, with outflows amounting to nearly ₹1.8 lakh crore in 2026 so far. Combined with weaker export growth, this has exerted pressure on the Indian rupee, which has depreciated approximately 9% over the past three years and 25% over five years.

The recent FPI outflows are being driven by a mix of cyclical profit-booking and a deeper structural shift in how global investors now perceive India, and frankly, the structural part is proving more consequential. Throw in geopolitical tensions, elevated oil prices, taxation concerns, and ease-of-investing hurdles, and global funds have found enough credible reasons to move capital elsewhere.