India’s Stock Struggle: Rupee Bottoms, Flows Remain Resilient

Indian equity markets have faced a challenging year, lagging behind global peers despite resilient domestic investor support. The broader MSCI Emerging Markets Index outpaced India by 27 percentage points, highlighting the country’s position as a “relative-return disaster” for investors this year. Yet, in absolute terms, Indian stocks have avoided a severe downturn, thanks largely to continued domestic inflows.

From a currency perspective, the Indian rupee—among the worst-performing emerging market currencies in 2025—is showing early signs of stabilization. Analysts point to a narrowing current account deficit, expected to hit just 0.5% of GDP in FY26, a two-decade low, and a robust foreign exchange reserve buffer of $690 billion, covering nearly 11 months of imports. These factors suggest the rupee may have bottomed, though risks linger at the state level due to ongoing populist fiscal policies.

On the policy front, India’s monetary easing and the recent reduction in GST rates aim to stimulate economic activity. Whether these measures will trigger the anticipated pick-up in nominal GDP growth remains the central question for market watchers. Investors are eyeing sectors that could benefit, with the property market showing relative valuation appeal amid broader uncertainty.

However, not all segments are poised for immediate gains. The IT services sector, a traditional driver of India’s stock market, saw its listed companies report only 1.6% revenue growth year-on-year in Q2 FY26. This slowdown has led to valuation pressures and cautious sentiment among investors targeting tech-heavy portfolios.

While domestic inflows have offered a cushion, the markets remain sensitive to fiscal and political developments, particularly at the state level. Experts caution that without a cyclical growth revival, equity valuations could face mounting pressure, even as select sectors provide pockets of opportunity.