Indian equities have spent the past year lurching from one shock to another. Just as investors adjust to one trigger, another upends sentiment—from tariff threats and geopolitical flare-ups to relentless foreign investor selling and slowing earnings growth.
The latest blow has come from the war in West Asia, which has once again rattled markets already struggling to sustain momentum. But the turbulence did not begin there.
Last April, the Indian stock market tumbled after US President Donald Trump announced sweeping tariffs, catching investors off guard. Days later, when Washington paused the tariffs to allow negotiations, stocks rebounded sharply.
Then came the India-Pakistan military conflict, reviving caution across Dalal Street. When tensions eased, the bulls returned with force, pushing the Nifty 50 from 24,000 to 25,600 in roughly six weeks.
That rally, however, quickly lost steam. Trump’s subsequent announcement of a 50% tariff on India dealt another blow to sentiment, dashing hopes of fresh record highs. Optimism briefly returned on expectations of a US-India trade agreement, helping the Nifty begin 2026 at an all-time high.
Yet even after the trade deal announcement, markets struggled under persistent foreign institutional investor (FII) selling pressure. Now, renewed geopolitical uncertainty in West Asia has added another layer of volatility, leaving many investors bruised and disillusioned.
Markets extended their slide for a fourth straight session on Tuesday, with the Sensex plunging 1,456 points to 74,559 and the Nifty 50 falling 436 points to 23,379. Nearly ₹11 trillion of investor wealth was wiped out in a single day, taking cumulative losses over four sessions to ₹17 trillion.
Over the four-session decline, the Sensex has fallen 4.4%, while the Nifty has shed 4%.
While Indian equities have swung violently between optimism and fear, US markets have largely continued climbing, deepening the sense of underperformance among Indian investors.
Why Indian markets have lagged
A key reason behind the weakness has been sustained FII selling.
Historically, foreign investors have been among the biggest drivers of Indian markets, often amplifying both rallies and corrections. Their dominance has reduced in recent years as domestic retail participation through direct investing and mutual funds has surged. But FIIs still exert significant influence, particularly in stocks where they hold large stakes.
Since the Nifty peaked in September 2024, FIIs have been persistent sellers. Even though domestic investors have absorbed part of the selling, markets have struggled to decisively move higher while foreign outflows continue.
This prolonged selling pressure has weighed heavily on stocks with high FII ownership, many of which have remained subdued for multiple quarters.
To understand the underperformance of the Indian stock market, it’s important to understand the reasons behind the FII selling pressure. There are two:
A global “risk-off” environment
Global investors often shift between “risk-on” and “risk-off” modes.
In a risk-on environment, money flows into emerging markets, commodities and other higher-risk assets. In risk-off phases, investors prefer perceived safe havens such as US Treasuries, gold and developed-market blue-chip stocks.
India is currently caught in a risk-off cycle. The West Asia conflict has intensified investor caution, but the selling began well before the war. Slowing GDP growth, weak corporate earnings and uncertainty around Trump’s tariff policies had already dampened sentiment.
Such cycles, however, are rarely permanent. Risk-on and risk-off phases tend to alternate over time. When global risk appetite eventually returns, fundamentally strong Indian companies are likely to benefit the most.
The “Buy China, Sell India” trade
For years, Indian equities traded at a premium to other emerging markets because of India’s relatively strong economic growth and robust corporate earnings.
That premium has come under pressure as growth has slowed and earnings momentum weakened. At the same time, China has re-emerged as an attractive destination for global capital.
Media reports suggest that since October 2024, India’s market capitalization has declined by roughly $1 trillion, while China’s has risen by about $2 trillion, a shift many investors have dubbed the “Buy China, Sell India” trade.
Beijing’s economic stimulus measures announced in September 2024 also helped revive foreign investor interest in Chinese equities after years of weakness.
What investors should focus on
For investors watching markets swing wildly every day, equities can start to feel like a rollercoaster. But short-term volatility often says more about investor emotion than long-term business value.
Benjamin Graham, the father of value investing, famously described the stock market as a voting machine in the short run and a weighing machine in the long run. In the near term, prices are driven by sentiment, fear and momentum. Over longer periods, fundamentals tend to prevail.
That distinction matters in the current environment.
Even as FIIs sell, domestic institutions and long-term investors continue accumulating quality businesses at lower valuations. Away from the daily noise, companies are still working to protect margins, improve efficiency, invest for growth and adapt to changing economic conditions.
Periods of crisis and uncertainty often create opportunities for disciplined investors willing to focus on business fundamentals rather than market headlines.
Conclusion
Predicting short-term market movements is impossible with consistency. Markets are shaped not only by economic data and policy decisions, but also by human emotion and constantly shifting global events.
Rather than trying to forecast every turn, investors are generally better served by sticking to core principles:
Hold fundamentally strong companies.
Exit businesses where confidence in growth, governance, margins or balance-sheet strength has weakened.
Accumulate stocks offering both improving fundamentals and adequate margin of safety.
Maintain liquidity and keep a watchlist ready for opportunities created by volatility.
The Indian market’s recent underperformance has tested investor patience. But for long-term investors focused on quality and discipline, volatility may ultimately prove more of an opportunity than a threat.
Happy investing.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com