India's equity market has continued to underperform in 2026 with several factors making domestic stocks unattractive-especially to foreign institutional investors (FIls). While many global markets are trading flat or higher this year, India's benchmarks-the BSE Sensex and the NSE Nifty50-have fallen roughly 10-12%. The gap widens over a one-year horizon: markets such as Taiwan and South Korea have surged by roughly 100-200% over the same period.
India underperformed global peers in 2025 despite a 9–10% gain in the Sensex and Nifty, weighed down by global headwinds, steep US tariffs and relentless FII selling. By comparison, major markets posted stronger returns: US’ tech-heavy Nasdaq +26%, Japan’s Nikkei +28%, China’s Shanghai Composite 22%, MSCI Emerging Markets +30%, Taiwan +27%, Dow Jones +13%. Standouts were South Korea (+76%) and Spain (+48%).
While the West Asia crisis remains a primary factor dragging Indian stocks lower since early March, analysts point to the absence of a robust AI and semiconductor ecosystem as a less-discussed headwind.
“While global indices are riding a powerful AI‑tech and US‑dollar‑softening wave, the Indian market has been held back by persistent foreign‑outflows, elevated crude‑price and geopolitical risks, and a slower earnings‑growth undercurrent. This has allowed global peers to hit fresh highs even as the domestic index operates in a tighter, more volatile band,” said Vinit Bolinjkar - Head of Research- Ventura.
He added, “Given the sharp correction and compressed valuations, the market is technically ripe for a short‑ to medium‑term bounce, especially if macro headwinds ease and FIIs stabilise their flows. However, a durable rally will depend on resolution of geopolitical risks, crude‑price stability, and clearer earnings visibility, rather than just sentiment.”
Sunny Agrawal, Head - Fundamental Research at SBI Securities, stated that India’s market weakness compared to global equities is mainly due to a mix of lack of new age play (AI, Semiconductor, Memory etc), relatively moderate earnings growth for benchmark indices, valuations, unfavourable taxation and sector composition in the benchmark.
He added that markets like the US, Taiwan and Korea are benefiting from the global AI and semiconductor boom, while India does not yet have large AI, chip or global technology companies that can attract similar flows. The majority of the money flow is getting diverted towards the likes of Nvidia, SK Hynix, Samsung etc which are reporting extraordinary earnings growth of 50-100% and have a significantly large profit pool, leading to massive outperformance.
Agrawal also stated that India’s tax and regulatory environment has become relatively less favourable for foreign investors. “Higher capital gains taxes, tighter derivative rules and higher transaction costs have reduced trading activity and near-term attractiveness,” he said.
Short-term capital gains on listed equities rose to 20%, while long-term gains above Rs 1.25 lakh are taxed at 12.5%. Further, SEBI hiked minimum lot sizes from Rs 5 lakh to Rs 15-20 lakh, limited weekly options to one per exchange and raised margins for short options by 2% starting November 2024. Another big blow can be seen in this year’s budget when STT on futures were hiked from from 0.02% to 0.05%, and on options from 0.1% to 0.15%, effective April 2026, significantly lifting costs for derivatives traders. The changes and high taxes have jolted FIIs' mood.
Tanvi Kanchan, Associate Director, Anand Rathi Share and Stock Brokers said that three forces converged simultaneously. First, the earnings disappointment began long before the West Asia conflict. Nifty 50 EPS growth was barely 6% in FY25 after four years of 24% CAGR from FY21 to FY24. Second, the currency drag. The rupee fell sharply from Rs 85.6 per dollar in April 2025 to Rs 94.65 in March 2026. The rupee has now fallen Rs 96/dollar level.
“For a foreign investor, that 10.6% depreciation is not a footnote, it is the entire return wiped out. And finally, the ongoing West Asia conflict from late February 2026 turned a slowdown into a rout. Brent crude crossed $110 per barrel. India imports 85% of its crude, so elevated oil prices simultaneously widen the current account deficit, pressure the rupee further, raise inflation, and delay RBI rate cuts,” stated Kanchan. All these developments are a big negative for the equity market.
FII's total net sales through the market for 2026, so far, have hit a high of Rs 231486 crores, exceeding the total sales of last year.
V K Vijayakumar, Chief Investment Strategist, Geojit Investments Limited, said “The trend of AI companies attracting capital flows from all over the world also is continuing to the flight of capital from countries like India who are AI laggards. This trend will change when the AI trade, which is already in bubble territory, ends.”
Owing to the ongoing correction and relentless FII selling, India's weight in the MSCI Emerging Markets Index has declined to around 12% by May 2026 from peaking at nearly 21% in September 2024. Taiwan has emerged as the largest constituent at approximately 25%, overtaking China. “India gave around 9% return in 2025 in dollar terms, the worst relative underperformance versus emerging market peers in three decades. Markets of this quality and this size do not stay in that position indefinitely. The underperformance itself creates the conditions for the reversion,” said Kanchan.