Nifty 50's Two-Year Slump: Unpacking the Confluence of Factors Behind Zero Returns

Indian Stock Market Benchmark Nifty 50 Underperforms for Second Consecutive Two-Year Period

The Indian stock market benchmark Nifty 50 has delivered zero returns over the last two years, closing at 24,271 on Friday, 3 July. This marks a significant decline of 0.06% from its level on 3 July 2024, when it stood at 24,286. The Nifty 50's underperformance is not only a domestic issue but also a global phenomenon, as the Indian stock market has underperformed most global markets over the past three years.

Despite the country's robust economic growth, with a gross domestic product (GDP) of 8.2% in FY24, 7.1% in FY25, and 7.7% in FY26, the Indian stock market has failed to keep pace. The narrative behind the underperformance has centered around the lack of AI-trade in the country and increased geopolitical and geoeconomic risks emanating from regional conflicts and US tariffs. However, a closer examination reveals that the disconnect between fundamentals and valuations may be the primary reason for the poor show of the Indian stock market.

According to brokerage firm Kotak Securities, the main reason behind the underperformance of the domestic market is a mismatch between earnings growth and valuations, as well as the low resilience of the domestic economy to global disturbances. The brokerage firm notes that several sections of the Indian market have been complacent about the quality of the Indian corporates' business models and disruption risks to them. Furthermore, Kotak believes that the market has been too optimistic on earnings and too generous on its valuations for the past few years.