India's economy shows impressive strength. GDP growth is projected at 7.4% this fiscal year. Inflation sits at record lows. Recent cuts to income and GST rates should boost consumer spending. Yet, the Indian stock market tells a different story. It struggles to keep pace with global peers.
Global Markets Race Ahead
Look at international benchmarks. South Korea's Kospi and Japan's Nikkei 225 have surged 9-21% in just one month. They trade at all-time highs. China's SSE Composite Index gained 6%. In the United States, the Dow Jones and S&P 500 rose 2-3%. European indices like Germany's DAX and France's CAC 40 climbed 1-5%.
Meanwhile, India's Nifty50 and Sensex fell 1%. This underperformance persists over six-month and one-year periods. Indian markets did hit records earlier this month. However, they still lag significantly behind other major economies.
The Artificial Intelligence Factor
One key driver separates winners from laggards: artificial intelligence. Global fund flows heavily favor AI-exposed markets. South Korea stands out. Firms like Samsung Electronics and SK Hynix ride the AI wave. Nomura analysts classify Korea with 'very high' AI exposure in Asia.
"The benefit to Korea appears particularly substantial," Nomura noted. AI growth fuels demand across the entire memory ecosystem. This includes high-bandwidth memory and commodity memory. DRAM and NAND prices could jump 65% by 2026. Such gains would boost Korea's terms of trade significantly.
Japan also benefits. A weaker yen lifts earnings for export-focused companies. Political moves for a snap election spur the 'Takiachi trade'. Investors bet on increased government spending.
India's Low AI Exposure
Where does India stand? Nomura places India in the 'low' AI exposure category. Thailand, Indonesia, and the Philippines share this classification. Direct spillovers from the global AI boom remain limited for these nations. This technological gap partly explains the divergent market performances.
The Trump Card and FPI Outflows
The biggest weight on Indian equities is foreign capital flight. Foreign Portfolio Investors (FPIs) sold shares worth $2.5 billion in the first 16 days of 2026. Outflows totaled nearly $19 billion in 2025. The trend started in late 2024.
Why the exodus? Donald Trump's likely return to the White House creates policy uncertainty. Experts say FPIs may not return sustainably until global geopolitics stabilize. A conclusive India-US trade deal is also crucial. Negotiations have dragged on for over a year.
VK Vijaykumar, Chief Investment Strategist at Geojit Financial Services, explains: "The market expectation was that the much-delayed US-India treaty will materialise early in the year. But geopolitical developments took a turn for the worse."
Valuation Concerns Persist
High valuations also deter foreign investors. Indian stocks command a premium compared to peers. Yet, earnings consistency remains a concern.
Ajit Mishra, Senior VP of Research at Religare Broking, states: "Major challenge is not just tariffs, but also the valuation part. We have always been a market attracting a premium, but the comfort needed on the earnings front is missing."
Domestic Institutional Investors (DIIs) provide stability. Strong retail inflows support them. However, broader market sentiment needs participation from all players. Earnings growth should accelerate in the second half of FY26. Investors await concrete results.
Long-Term Promise Endures
Despite recent struggles, India's long-term appeal stays strong. Over the past five years, Indian markets delivered over 70% returns. This outperforms the Kospi (53%), FTSE (52%), and DJIA (60%). It rivals the Nasdaq Composite's 79% gain.
The current divergence highlights specific short-term challenges. AI-driven global rallies and foreign investor caution create headwinds. India's fundamental growth story, however, remains intact for patient investors.
