India’s stock market recovery, a steady if slow incline, was rudely interrupted last week by the word “over” used by US President Donald Trump to describe America’s truce memo with Iran. Both the Nifty-50 index and BSE Sensex fell by more than 2% after that news came in. Barring South Korea’s Kospi, which suffered a tech sell-off, no major market fared worse.
American stocks were hit the least, although Trump had softened his words by the time trading began; the industrial-heavy Dow lost a bit over 1% and the S&P-500 less than a third of that, while the tech-filled Nasdaq held firm. Indian equity assets have been rattled more than others by war shudders in other recent episodes too. It seems like a pattern within a larger frame.
While most of the world’s major indices are near their all-time highs, India’s remain roughly a tenth below their late-2025 peak, even as hopes wane of resuming the steep climb that kept an upswell of post-covid retail investors in good cheer.
The factors that drive Indian equities form quite a jumble. Start with the economy. India’s growth remains the world’s fastest among major economies. The July update of the International Monetary Fund’s World Economic Outlook has snipped its 2026-27 forecast for India a bit to 6.4%, given the war’s impact, but upped next year’s projection to 6.7%.
For this, thank the economy’s resilience. Investors, of course, look for how that aids the value of listed businesses. Mutual-fund data signals a bright outlook held by households, even as foreign institutions show little sign of regaining their lost ardour for Indian shares. Infotech sector woes and our market offering no “AI play” are often cited as reasons for a global notch-down of its prospects.
Indeed, AI has acted as a vacuum nozzle for capital. A drop-off in dollar flows into local assets amid costlier-than-usual global credit and enlarged direct investments made abroad by Indian businesses had already shaken the rupee when the Gulf war’s oil squeeze inflated our import bill to cause a scare on the external front.
This worsened uncertainty over the dollar value of portfolios. A policy-level effort to mop up dollars is now expected to act as a stabilizer, even as the global AI rally gets a few jitters of its own. A revival of market inflows from overseas, however, might have a mystery factor at work: geopolitics.
Some trends suggest that we can no longer assume that money always chases the best prospect of returns.
Even so, the Indian stock market’s appeal will invariably be the money to be made off it. The difference—and lesson—might be that the cart of valuations cannot run too far ahead of the horse of earnings. Indian indices have long traded at a premium, spurred by a buzz over wide-scope corporate growth. That spur, alas, seems to have either weakened or grown selective.
This should be taken as a signal that stocks must prove their true financial worth to attract the interest of everyone who has access to them, foreign investors included. Earnings, the stuff that yields dividends for buy-and-hold shareholders, must do the grunt work of leading the market’s ascent.
This would be an inversion of the wild-bet game going on in AI-dazzled markets elsewhere, but is arguably all that local investors can rely on right now (unless they venture abroad).
Thankfully, India Inc’s profits are on a recovery trail in several sectors, with eyes peeled for an uptick that’s both broader and sharper than it is today. Should it happen, Indian indices could take a relatively jitter-free upward path.