For years, investors paid up for India. That premium is now rapidly unwinding.
India’s valuation premium over Asian and emerging-market equities has shrunk to its lowest since 2018 after nearly two years of underperformance, according to Bloomberg data. The reset has improved its relative appeal, but also raises a question: has the correction created an entry point, or does it signal a lasting shift in global capital?
As of 27 August, MSCI India traded at a 12-month forward price-to-earnings multiple of 19.53 times, compared with 12.42 times for MSCI Asia and 9.31 times for MSCI Emerging Markets. This left India commanding a valuation premium of about 57% over MSCI Asia and nearly 110% over MSCI Emerging Markets.
The shift is stark. At the end of 2024, India traded at premiums of 71.5% and 82.4%, respectively. In less than two years, the premium over Asia has compressed by 42 percentage points, while the gap with Emerging Markets has narrowed by 37 percentage points.
“The sharp fall in India’s valuation premium has improved the risk-reward, although the market is not cheap yet,” said Shashank Udupa, founder of Vayu Capital and a Securities and Exchange Board of India (Sebi)-registered research analyst. Sustained outperformance will require stronger earnings and renewed foreign investor confidence, he said.
The great reversal
The valuation reset is the result of a sharp reversal in relative returns. MSCI India fell 4% in 2026 through 27 August, while MSCI Asia gained 22% and MSCI Emerging Markets advanced 23%.
The divergence began in 2025. MSCI India returned 8.1%, compared with 25.3% for Asia and 30.6% for Emerging Markets. Since the end of 2024, the India index has gained just 4.2%, against rallies of 52.9% in Asia and 60.2% in Emerging Markets.
That marks a decisive break from the four years through 2024, when MSCI India returned 77.7%, while Asia declined 9.1% and Emerging Markets fell 16.7%. Resilient growth and steady domestic liquidity had helped India command an increasingly steep valuation premium.
India entered the downturn near its 10-year average P/E, based on data from 2016 through 2026, after four strong years, said Aman Chowhan, senior fund manager for research and investments at Abakkus Investment Managers.
Slower growth, tariff uncertainty, limited participation in the global artificial-intelligence (AI) and data-centre rally, and the West Asia crisis then weakened sentiment. Rupee depreciation further hurt foreign investors’ returns, Chowhan said.
The underperformance has been persistent. Since January 2025, MSCI India has trailed both Asia and Emerging Markets in 13 of 20 months. India did regain some ground in June and July, gaining 0.8% and 2.3%, respectively. But that momentum faded in August: through 27 August, India fell 0.7%, while Asia rose 2.9% and Emerging Markets gained 3.4%.
The shift in global allocation has compounded the problem. Investors have gravitated towards Korea and Taiwan for their greater exposure to AI and semiconductors, as well as more attractive valuations, said Anil Rego, founder and chief executive of Right Horizons. Foreign selling widened India’s performance gap, although domestic inflows prevented a steeper correction.
Weak earnings momentum also made India’s premium harder to defend. Higher crude prices added another layer of pressure: India imports roughly 85% of its crude requirements, leaving the trade deficit, inflation and the rupee exposed to an oil shock.
“Importantly, earnings are now moving in the right direction. Nifty 50 profits grew 18% year-on-year in Q1FY27—the strongest growth in 10 quarters, with 19 sectors beating expectations. This suggests that the earnings cycle is improving even while the headline market performance remains weak,” said Rego.
Udupa views the downturn as largely cyclical, but cautioned that capital may not return quickly if competing markets continue to deliver faster earnings growth.
Cheaper, but cheap?
The correction has improved India’s relative risk-reward, but largely because India has de-rated rather than because its peers have become more expensive.
MSCI India’s P/E has fallen from 26.1 times at the end of 2025 to 23.4 times, while MSCI Asia’s multiple has remained broadly unchanged at around 18 times. The valuation gap has therefore narrowed mainly through an Indian correction rather than a significant re-rating of Asian equities.
That leaves India in a more competitive position, but still carrying a meaningful premium.
Prasenjit Paul, equity research analyst at Paul Asset and fund manager at 129 Wealth Fund, said, “India isn't losing its structural edge; it’s just finally digesting years of valuation premium while the rest of EM played catch-up. The silver lining is that this compression nicely resets the risk-reward. FPIs pulled back when the premium got stretched, but a 30% premium to Asia is much more digestible for global allocators today.”
“The next leg of leadership won't be triggered by global liquidity alone, but by domestic catalysts—a visible revival in rural consumption and corporate earnings actually delivering on lowered expectations. Once that 'valuation tax' is paid off, capital usually finds its way back,” he added.