India vs. the World
Why Indian Equities Underperformed in 2025 and Why That Changes in 2026
March 2026 | Qode Advisors LLP
Source: Craytheon (Mar 2026), NSDL (Dec 2025), BofA Securities
Calendar year 2025 was the year India sat out a global rally. [OANDA/MarketPulse] South Korea's KOSPI surged 71%, Hong Kong's Hang Seng rose 29%, Germany's DAX gained 22%, and the Nasdaq climbed 22% [Upstox] - while India's Nifty 50 returned roughly 9%, last among major benchmarks. After the rupee's 6.4% depreciation to a lifetime low of Rs 91.14, dollar returns fell to near-zero for foreign investors.
This wasn't a story of a broken economy. India grew at 7.3% in FY26, with H1 clocking 8% real GDP growth. [DD News] Yet none of that mattered to global investors watching the Nasdaq add a quarter of its value on AI infrastructure spending that India had no equivalent of. The underperformance was real - and understanding its causes is what makes the 2026 setup compelling.
CHART 1: 2025 Global Equity Index Returns (Local Currency). Nifty 50 returned +9%, ranking last among major indices. Source: OANDA/MarketPulse; Upstox
Three Forces Behind India’s 2025 Miss
The AI liquidity machine.
The Nasdaq's gains were concentrated in a handful of hyperscalers - Nvidia, Microsoft, Alphabet, Meta, Amazon - whose earnings growth justified multiples no Indian company could match. India's IT sector, reliant on servicing US clients rather than building AI, fell 11–12% as investors priced in revenue compression for traditional outsourcing. [Stock Edge]
The FII exodus.
Foreign investors recorded their largest-ever equity outflow from India: Rs 1.66 lakh crore, [Upstox] with net selling in eight of twelve months. FII holdings in NSE-listed companies fell to 16.9%, the lowest in fifteen years. [Kotak Securities] The selling fed a currency spiral as rupee conversion amplified losses and encouraged further exits.
The earnings reset.
India entered 2025 priced at 23–24x forward earnings. What arrived instead was a sharp downgrade cycle: consensus FY26 earnings estimates were cut 11%, FY27 by 6%. [Bernstein] The earnings engine didn't stall, but it shifted gears in a way that left valuations stretched.
CHART 2: FII Net Outflows vs DII Net Buying, Monthly 2025 (Rs ’0000 Cr). DIIs consistently absorbed every wave of FII selling. Source: NSDL; Kotak Securities
The Structural Shift Underneath
While FIIs were selling, domestic institutions deployed over Rs 7 lakh crore through the year. [Publicmitra] SIP inflows crossed Rs 3 lakh crore annually for the first time, sustained by over 9.45 crore contributing accounts. By March 2025, DIIs overtook FIIs in NSE shareholding for the first time in history. [NSDL] This created a floor that contained what would previously have been a devastating drawdown:
Source: Publicmitra; NSDL historical data
The market’s shock-absorption capacity has fundamentally improved. FII exits that once created existential portfolio risks now create entry opportunities.
The Valuation Reset
The most important outcome of 2025 was compressing valuations to investable levels. From 23–24x forward earnings at the September 2024 peak, the Nifty's trailing P/E fell to 20.23x by mid-March 2026 - 13% below the long-term average of 23.43x. [Craytheon] [Bernstein] This happened while macro fundamentals quietly improved: CPI inflation fell to a projected 2% for FY26, enabling cumulative repo rate cuts of 125 bps to 5.25%. [DD News] The RBI governor described this as a 'rare goldilocks period' of high growth and exceptionally low inflation
CHART 3: Nifty 50 Trailing P/E, March 2021–March 2026. Current 20.23x sits 13% below the long-term average. Source: Craytheon; Bernstein
The 2026 Earnings Case
BofA expects the Nifty to reach 29,000 by December 2026, driven entirely by earnings growth - not multiple expansion. [Business Standard] Consensus projects 14–16% EPS growth for FY27, which would be the strongest earnings year since FY22. [BofA Securities] [Bernstein] The key catalysts: recovering financial-sector loan growth as rate cuts transmit, consumer discretionary support from tax relief in Budget 2026-27 (which also raised capex to Rs 12.2 lakh crore), [Economy India] sustained telecom tariff hikes, and a low base for IT. The critical insight is that the downgrade cycle is now essentially complete; future revisions are more likely to surprise upward.
CHART 4: Nifty 50 EPS Growth, FY23–FY27E. The earnings downcycle appears to have bottomed in FY26. Source: BofA Securities; Bernstein; Investing.com
Risks Worth Watching
The rupee remains vulnerable. The February 2026 India-US interim trade deal (tariffs cut from 50% to 18%) triggered the strongest FPI inflow in seventeen months, [State Street SSGA] but sustaining this reversal depends on the full deal being formalised. Indian IT faces structural AI disruption, not a cyclical dip. Fitch projects only mid-single-digit revenue growth, and the sector continued seeing FII selling even when broader flows turned positive. [Stock Edge] Mass consumption recovery is likely a 2027 story; rural demand transmission from fiscal action typically lags 12–18 months.
Arithmetic Over Narrative
India's 2025 underperformance was driven by concentrated global capital chasing AI beneficiaries, a weaker rupee, and an earnings downgrade cycle that has now run its course. The Nifty enters 2026 at 20.23x trailing earnings [Craytheon] against 7.3% GDP growth, [DD News] 2% inflation, falling rates, and recovering corporate earnings. The investor base has structurally changed, and so has the risk-reward.
India's 2025 underperformance was a reset, not a reversal. Compressed multiples. A recovering earnings cycle. A domestic growth story that compounds regardless of what the Nasdaq does next.
India’s 2025 underperformance was a reset, not a reversal. Compressed multiples. A recovering earnings cycle. A domestic growth story that compounds regardless of what the Nasdaq does next.
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