It was supposed to be an oasis in an otherwise turbulent world. For a long time, when the Indian story was sold to investors, it was the soaring domestic consumption story that attracted them. Government capital spending and household spending by the rising middle class were considered drivers of India’s growth that could not be affected by external problems. Since December 2024, the India story has been in relative decline.
Indian shares have underperformed the rest of the world so far in 2026. Other emerging markets and Asian equities have also clocked significantly higher returns. Over the past 12 months, the Nifty 50 has been up 13.8%, while the Korean benchmark has jumped 146% and Taiwanese shares have risen 70%.
After pulling out a record $19bn from Indian equities in 2025, foreign portfolio investors continue to see the red in the India story. They pulled out another $1.5 in the first two months of 2026. The only saving grace for India is the net inflow into domestic mutual fund equities. They have been net buyers, as their mandate is to invest in Indian equities through domestic equity-linked mutual funds. The momentum of flows into domestic equities has slowed in the first two months. The presence of domestic money is holding up Indian shares. Had it not been for a decisive shift in household savings to equities, Indian shares would have done worse.
Market analysts believe that today’s prices are a reflection of tomorrow’s profits. With stress on external trade due to surging crude oil prices and disruptions to exports via key trade routes in the Middle East, the Indian rupee is expected to continue sliding to new lows. That has spooked international investors. However, it is not just the rupee's value. The share price valuation was expensive relative to other markets despite the underperformance. Foreigners were unwilling to pay higher prices because businesses with stronger profit growth and dividend yields were available in other markets such as Japan, Korea, Taiwan, and China.
What does it mean to you
The ‘oasis’ story drove all stocks higher. It is now time to learn about the concept of ‘earnings compounding’. You have to focus on businesses that have prospects for multi-fold profit growth. The Nifty price-earnings forward ratio is now below the 10-year average. That means large-cap valuations have adjusted to reflect roughly 10% earnings growth. In the meantime, mid-caps and small-caps saw significant wealth erosion (down nearly 20% from 2024 peaks). That means investing in equities is about being a stock picker, not a trend follower. You need to choose businesses that are likely to generate consistent profits and return money to shareholders through dividends and buybacks. You can apply that formula to established businesses. New-age businesses with compounding revenue growth and a growing customer base can eventually generate profits.
There is an argument that India’s economic growth over the past decade to 2023 was not as fast as it was announced. There was a strong emphasis on themes such as premium consumption. Sectors such as hotels, luxury real estate, and cars saw a significant upswing after the pandemic. It is likely to continue, analysts say. However, there is a visible slowdown in middle-class consumption. You need to learn to distinguish between the high-end consumption class and the mass-consumption middle class. Identify businesses that consistently grow revenue and invest.
Your investments could be in 8-10 stocks you identify yourself or with the help of a professional advisor. You can also make those investments through mutual funds by picking the right schemes.