India's valuation premium over emerging-market stocks is shrinking, but it is still wider than in 2021, according to a Mint analysis of MSCI data. Investors are considering whether the world's most expensive major market is now a better deal.
As of 2026, the premium of MSCI India over MSCI Emerging Markets has narrowed to 75%. This is down from 119% last year and a post-pandemic high of 164% in 2024. It still exceeds the 65% premium recorded in 2021, showing how Indian stocks continue to trade compared to others.
Fund managers believe the comparison is skewed by Taiwan and South Korea. These countries make up a large part of the MSCI EM index and have seen semiconductor earnings rise due to artificial intelligence-related spending. This boost is likely to be temporary. Shankarraman R., managing director and chief investment officer—Third Party Products, Spark Capital Private Wealth Management, said the low P/E multiples of emerging markets need to be viewed in context. A significant portion of the MSCI EM index comprises Taiwan and South Korea, where artificial intelligence-led capex has driven a sharp surge in semiconductor earnings, he said.
“Since these industries are highly cyclical and such supernormal earnings are unlikely to be sustained, their P/E multiples appear optically cheaper, depressing the overall MSCI EM valuation.” He said this should be taken into account when comparing emerging markets with India.
According to Hari Shyamsunder, vice-president and senior institutional portfolio manager—India Equities, Templeton Global Investments, India's premium has dropped more sharply on a price-to-book basis, from 164% in August 2024 to about 37% now, which is below the 10-year average of 93%.
- India's valuation premium over emerging markets has fallen sharply since their peak in 2024.
- Even after this cooling, India's premium still remains above its 2021 level.
- Analysts say cheap emerging-market valuations reflect volatile semiconductor profits in Taiwan, and Korea.
- India underperformed peers over one and three years, but earnings may improve.
- Foreign investors remain underweight India, but rising earnings could draw fresh inflows.
Despite this, India has performed poorly with the MSCI India having declined by 2% over the past year, while MSCI Emerging Markets and MSCI World have risen by 38% and over 20%. With foreign investors still underweight in India, Jay Kothari, lead Investment Strategist and head of International Business at DSP Mutual Fund, thinks that even a shift to neutral positioning could lead to significant inflows. However, recent volatility linked to the Iran ceasefire has complicated the short-term outlook.
Why money could return to Indian equities
Unlike Taiwan and Korea, India's earnings are anchored in domestic growth rather than global technology cycles, and the recent foreign selling in both markets, according to Templeton’s Shyamsunder, suggests fading confidence in AI-led earnings.
“From here, the case for Indian equities is likely to rest more on sustained earnings momentum and broad-based profit growth in the context of more reasonable valuations and the possibility of greater stability of the currency.”
With foreign investors still underweight India and macroeconomic fundamentals and earnings continuing to improve, DSP MF’s Kothari sees the case for renewed foreign portfolio investor (FPI) allocations strengthening and remains constructive on Indian equities for the rest of 2026 and the medium term.
“Given the current underweight positioning of global investors, even a move back to neutral (vs. going overweight) allocations could result in substantial inflows into Indian equities, providing a meaningful tailwind for the market,” he said.
Spark’s Shankarraman believes India's valuations are becoming more attractive as the rupee stabilises and earnings improve. After elevated valuations and weak earnings growth in 2025 and 2026, earnings expectations have picked up, with FY27 earnings growth seen at 15-17% and FY28 at around 14%.
Fresh risks
All said, looking at the near-term picture, market participants believe sentiment has swung from positive to negative after the US President Donald Trump's latest remarks on the Iran ceasefire. Volatility, which had eased after the June ceasefire announcement, picked up after Trump said, "I think it's over," at a joint press conference with North Atlantic Treaty Organization chief Mark Rutte, as the US and Iran accused each other of violating the ceasefire.
The rupee weakened sharply on Wednesday after Trump's remarks signalling an end to the Iran ceasefire reignited risk aversion. Crude oil prices jumped nearly 7%, fuelling concerns over India's import bill, while the Dollar Index climbed above 101, adding pressure on the currency. Heavy profit booking in domestic equities, with the Nifty 50 tumbling over 2%, further weighed on the rupee.
Markets will closely watch the US-Iran conflict, crude prices and global risk sentiment for further cues.
Having said that, there could be bouts of buying at lower levels, said market participants.