Amid the dual pressures of foreign capital outflows and a depreciating rupee, the Indian stock market is poised to conclude the year with its worst performance relative to Asian peers in nearly three decades. As global fund managers reduce their exposure to India, the stock market rally that began in September has lost momentum. Foreign funds withdrew $1.7 billion in December alone, pushing the full-year outflow to a record $17.9 billion. Excessive valuations, slowing earnings growth, and a lack of credible artificial intelligence-related stocks have dampened market sentiment, leading to a loss of favor among overseas investors for Indian equities this year.
Simultaneously, the depreciation of the rupee has intensified selling pressure, eroding returns for international investors. The lack of progress on a trade agreement between India and the United States—which imposes the highest tariff rates in Asia on Indian goods—has contributed to the rupee repeatedly hitting record lows in recent months. Pranav Haridasan, CEO of Axis Securities, stated that 2025 will not be an easy year for Indian capital markets. However, he added that a challenging 2025 could lay the groundwork for a more stable and potentially mean-reverting year thereafter.
On a positive note, the Indian stock market is still set to record its tenth consecutive annual gain, with the NSE Nifty 50 index rising over 10% year-to-date. Robust demand from domestic institutions, which injected approximately $81 billion into the stock market in 2025, has been a key pillar supporting returns this year. Strategists from Nomura Holdings and Citigroup anticipate that, provided corporate earnings continue to improve and policy measures aimed at supporting domestic demand prove effective, Indian equities could advance further in 2026 and potentially outperform other emerging market peers.
Nevertheless, the near-term outlook for Indian assets remains uncertain. Historical data indicates that Indian domestic stocks rarely begin a new year with strong momentum; the NSE Nifty 50 index has, on average, declined by 1.1% in January. Furthermore, following a record-breaking year for Initial Public Offerings (IPOs) in 2025, the thriving IPO market is expected to continue diverting liquidity towards new listings in 2026. Both Kotak Mahindra Capital and Goldman Sachs Group forecast that India's IPO fundraising will exceed $25 billion next year.