Whalesbook
India's Stock Market Suffers Worst Relative Performance in 30 Years
India's equity market has experienced its most severe relative underperformance in three decades during 2025, according to a recent report by Jefferies. The domestic market has sharply lagged behind both its Asian and broader emerging market counterparts, signalling a challenging year for investors.
Lagging Global Benchmarks
The MSCI India Index, a key gauge for India's large and mid-cap stocks, has seen a modest gain of only 2.2% year-to-date in U.S. dollar terms. This performance stands in stark contrast to the MSCI AC Asia Pacific ex-Japan index, which surged by 25.9%, and the MSCI Emerging Markets index, which climbed 29.9%. This significant disparity highlights India's struggle to keep pace with regional and global growth.
Key Drivers of Underperformance
Jefferies identified several critical factors contributing to India's stock market woes. A deceleration in the earnings cycle is a primary concern, with MSCI India earnings growth projected to slow to an estimated 10% for the fiscal year ending March 31, 2026 (FY26). Compounding this slowdown is a weakening Indian rupee, which has depreciated by 5.3% against the U.S. dollar in 2025, notably breaching the psychologically important ₹90 mark in December.
Heavy outflows from foreign investors have further exacerbated the situation, with record net foreign selling of Indian equities amounting to $17.8 billion this year. This trend, combined with increased overseas investments by Indian companies and private equity exits, has impacted net foreign direct investment inflows, despite gross inflows remaining robust.
Rupee Weakness and Macro Indicators
Jefferies expressed surprise at the rupee's sharp depreciation but indicated that the currency might be approaching a bottom. This optimism is supported by strong underlying macroeconomic indicators. India's external position remains sound, with the current account deficit for FY26 anticipated to be a mere 0.6% of GDP, nearing a two-decade low. Furthermore, foreign exchange reserves stood at a healthy $687 billion as of December 5, sufficient to cover approximately 11 months of imports.
A significant risk to the rupee, however, stems from the 50% tariffs imposed by the United States since August. These tariffs have contributed to India's trade deficit, which reached a record $282 billion in the first 11 months of 2025, an increase of 11.3% year-on-year. While a weaker rupee can theoretically boost export competitiveness, Jefferies noted that the currency is not exceptionally cheap on a long-term valuation basis.
RBI's Dovish Stance
Another potential factor influencing the rupee's recent weakness is a shift towards a more dovish monetary policy by the Reserve Bank of India (RBI). Since Governor Sanjay Malhotra assumed office in December 2024, the central bank has implemented significant monetary and credit tightening measures, a departure from his predecessor's approach. The RBI has reduced the policy repo rate by 125 basis points since February, bringing it down to 5.25%, with the latest 25-basis point cut occurring on December 5. This policy easing reflects inflation remaining well below the central bank's target range of 2-6%.
Impact
The sustained underperformance of Indian equities, coupled with rupee volatility and foreign investor caution, could dampen investor sentiment and potentially affect foreign direct investment and portfolio inflows in the short to medium term. Companies with significant import/export exposure or foreign currency debt may face increased financial pressures. The Reserve Bank of India's monetary policy decisions will be closely watched for their impact on currency stability and economic growth.
Impact Rating: 8/10
Difficult Terms Explained
- MSCI India Index: A stock market index designed by Morgan Stanley Capital International to represent the performance of large- and mid-cap segments of the Indian equity market.
- Total-return basis: An investment return that includes both income (like dividends or interest) and capital appreciation (increase in price).
- FY26: Fiscal Year 2026, typically ending on March 31, 2026, for India.
- Depreciation: A decrease in the value of a currency relative to another currency.
- Current account deficit: The difference between the value of a country's exports and imports of goods, services, and net factor income. A deficit means more is imported than exported.
- GDP (Gross Domestic Product): The total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period.
- Foreign exchange reserves: Assets held by a central bank, in foreign currencies.
- Tariffs: Taxes imposed on imported goods, often to protect domestic industries or raise revenue.
- Trade deficit: The amount by which the value of a country's imports exceeds the value of its exports.
- Real effective exchange rate (REER): A weighted average of a country's currency against a basket of currencies of its trading partners. It's adjusted for inflation.
- Dovish stance: A monetary policy approach favouring lower interest rates and accommodative measures to stimulate economic growth.
- Policy repo rate: The interest rate at which the Reserve Bank of India lends money to commercial banks against government securities.
- Basis points (bps): A unit of measure used in finance to describe the percentage change in a financial instrument. One basis point is equal to 0.01%.
- Inflation: The rate at which the general level of prices for goods and services is rising, and subsequently purchasing power is falling.
- Foreign direct investment (FDI): An investment made by a company or individual in one country into business interests located in another country.
- Private equity exits: The process by which private equity firms realize their investments, often through selling portfolio companies.
- Outbound direct investment: Direct investment made by a domestic entity into a foreign enterprise.