Indian equities in 2026

The Indian stock market has become a national conversation. Retired pensioners, mutual-fund salesmen and Uber drivers all seem to be asking the same question: if the economy is growing at 7.8%, why has the Nifty fallen almost 11% since late February while markets in the US, Japan and Korea have risen?

Market performance is always relative. Indian shares compete not only with their own history, but with every other place investors can put their money. That is why the GDP headline is not enough: India’s reversal only makes sense against the changing global opportunity set.

My answer is that four pressures arrived together. Indian valuations had run hot. Rising global rates raised the hurdle for every equity market. AI, chips and cloud infrastructure opened up fresh earnings growth elsewhere. And the Middle East crisis squeezed India through dearer oil and a weaker rupee.

The larger issue is not one bad spell in the market. It is whether India is placing the bets that will sustain growth when energy remains vulnerable to distant wars, capital is no longer cheap and the defining technologies of the era are being monetised elsewhere. The test is whether the country can turn its human capital into listed profits and durable wealth, rather than another burst of headline growth.

A falling market cannot answer those questions. It can, however, warn that investors are starting to ask them.

Indian growth needs to earn its remaining equity premium

The obvious objection is that the market has already corrected. It has—partly. The Nifty now trades at about 19 times trailing earnings, below its recent range, and its earnings yield has climbed to 5.21%. Equities still yield less than Indian government bonds, but the gap has narrowed from roughly 2.2 percentage points in 2025 to about 1.9. Calling Indian stocks wildly overpriced is no longer fair.

But cheaper is not the same as cheap. A lower price helps only if the companies behind it can grow into the valuation. This is where the GDP headline misleads: 7.8% describes the economy; the Nifty represents fifty listed companies. Shareholders are paid from those companies’ profits, not from the growth happening around them.

The question, then, is whether India Inc. can deliver enough earnings growth to justify the price—especially for foreign investors, who also carry the rupee risk. Recent profits have been less dependable, while money that once came to India almost by default now has credible alternatives: a Treasury bond with a decent yield, or a Korean chipmaker riding the AI build-out.

I am not calling a crash, or telling anyone to swap every stock for a bond. My point is narrower: India can no longer be bought simply because it is India. The case has to be earned company by company. Faster profit growth, cheaper oil, a steadier rupee or more listed businesses with genuine AI exposure would change the picture. Until then, selectivity matters more than faith in the headline.

India underperformed markets that absorbed the same global rate shock

Start with the scoreboard. From late February to the start of October, the Nifty fell almost 11%. Over the same stretch, the S&P 500 gained more than 11%, while Japan and Korea also rose. China fell and Europe went roughly nowhere. This was not a global sell-off that happened to catch India; something specific to India—or to how investors now price it—was at work.

Table 1 — How India stacked up against other markets

Source: Author’s calculations from Table 1.

The gaps are big. India lagged the S&P 500 by more than 22 percentage points and the tech-heavy Nasdaq by almost 30. That is far too wide to explain away with a GDP headline. One caveat: these are local-currency price moves, without dividends or currency effects, so they tell us the markets diverged, not that investors will necessarily do better elsewhere from here.

The good news: much of the froth is already gone

The bearish version often skips an important fact: much of the excess has already come out. At the end of 2025, investors paid about 22.75 rupees for every rupee of Nifty earnings; today they pay about 19.19, nearly 16% less. That sits below the three- and five-year averages and below the 22x median since NSE moved to consolidated earnings. Every rupee of profit now costs less than it did a year ago. Any claim that India remains a bubble has to reckon with that.

Table 2 — Nifty now trades below its recent norms

Source: Downstox NSE-derived year-end series [2].

Two quirks in the chart are worth knowing about. The 2020 spike happened partly because pandemic profits collapsed, and depressed profits make any P/E look inflated. Then, on 31 March 2021, NSE switched from standalone to consolidated company accounts, which mechanically pushed the reported multiple down. So part of what looks like a decade-long cooling is simply a change in how the number is calculated. The cleaner comparison is within the post-2021 period, and that still shows a real decline.

There’s another way for valuations to come down, and it’s far more pleasant than a crash: earnings can simply catch up. If the Nifty stayed exactly where it is and company profits grew 12% a year, the P/E would fall to around 13.7 within three years. That’s an illustration, not a forecast, but it makes an important point. India can work off an expensive valuation through growth, not only through falling prices.

Stocks versus bonds: the gap has narrowed, not widened

Rising Indian bond yields have made government paper more competitive, but not enough to erase the market’s repricing. Because share prices fell faster than profits, the Nifty’s earnings yield—profits as a percentage of price—rose by about 0.8 percentage points from 2025. The government bond yield rose by roughly 0.5 points. The gap therefore narrowed by around 0.3 points. Higher yields took back some of the improvement, not all of it.

Table 3 — Equities closed some of the gap with bonds

A quick word on what this comparison does and doesn’t tell you. The earnings yield is not cash in your pocket; it is the profit companies earn relative to their share price, and much of it is reinvested rather than paid out. A bond yield, meanwhile, bakes in inflation and interest-rate risk. Neither number captures future earnings growth. You may hear that the Nifty would need to fall to about 14 times earnings to match the bond yield. That is just arithmetic (1 ÷ 7.15%), not a target or a fair value.

Source: Author’s calculations from Table 3; bond-yield provenance [3].

India still costs more than most of its peers

Even after the correction, India is not cheap by global standards. Country ETFs offer only a rough comparison, but they place India below the US and Taiwan and above Japan, most of Europe, Korea and China. The markets are not like-for-like: each index has a different mix of banks, technology firms, energy companies and state-owned businesses, with different growth rates and risks. Sector composition alone explains part of the valuation gap.

Table 4 — How country valuations compare, today and historically

Source: Author’s calculations from Table 4; World PE Ratio [4].

What matters is whether India’s earnings justify the premium. Korea offers a rival growth story through memory chips. China is cheaper, in part because investors demand compensation for policy and structural risk. Taiwan is the reminder that direct AI exposure is not automatically cheap: semiconductor markets can command rich prices too. The label does not guarantee a good entry point, or protection if the investment boom turns.

In the end, it all comes down to earnings

Stock returns have three moving parts: profit growth, dividends and the price investors are willing to pay for those profits. The third is the troublemaker. Earnings can rise while the index falls if the valuation multiple contracts. That is a large part of India’s story this year.

For those who like a formula: price return = (1 + earnings growth) × (ending P/E ÷ starting P/E) − 1. Add the dividends you received to get a rough total return. The popular shortcut of simply adding earnings growth, dividend yield and the change in the multiple gets you close, but not exactly there.

Table 5 — The earnings forecasts behind the original thesis

An example makes this concrete. Say you buy at 22 times earnings, profits grow a respectable 7%, but by year-end investors will only pay 19 times. Your price return is about −7.6%. A 1% dividend softens that to roughly −6.6%. Even with stellar 15% profit growth, the same drop in the multiple leaves you slightly down, at about −0.7%. Strong growth cushions the blow; it doesn’t make it disappear.

Source: Author’s scenario analysis using the assumptions stated in the latest attached copy.

Two scenarios show how much hinges on valuation. If the multiple holds at 19.19 and earnings grow 8%, you make about 9.2% before tax and currency effects: not spectacular, but respectable. If the multiple slips to 16, the same 8% earnings growth leaves you down about 8.7%. So anyone making the case for India needs two views, not one: where earnings are going, and what investors will pay for them at the end.

Rising rates hurt, but they don’t explain who won

Rising interest rates are the easy explanation for India’s slide. Higher rates reduce the present value of future profits, but that relationship never operates in isolation. If yields rise because the economy is booming, profits may rise with them. If inflation or nervous bond markets are driving the move, there may be no such offset. Before blaming rates, ask why they rose.

Table 6 — Why rates alone don’t explain it

For India, an oil shock is the worst kind of rate move. It pushes yields up while squeezing household budgets and company margins at the same time: a higher hurdle and lower profits together. For a company selling AI chips, by contrast, a big jump in sales can easily outweigh the same rise in global yields. That goes a long way toward explaining why markets moved so differently, although it still needs testing sector by sector.

It also matters what kind of rate rise we are talking about. If yields rise because inflation is expected to be higher, company revenues tend to rise too, which softens the blow. If real yields (after inflation) rise, the hurdle for stocks goes up more directly. I haven’t yet pulled together the data that would separate the two, such as inflation-protected Treasury yields and India’s inflation expectations, so the idea that real rates drove India’s underperformance remains a hunch, not a finding.

One more subtlety. There is no single “risk-free” rate for every investor. An Indian saver measures against Indian government bonds in rupees; an American investor measures against Treasuries in dollars. Currency risk and hedging costs sit between the two, and even government bonds can lose value if sold before maturity. Bond yields are a useful yardstick, but you can’t simply plug them into a formula for where to invest globally.

AI has given investors exciting places to put money outside India

“AI stocks” usually brings to mind a handful of US software names. The investment chain is much wider. Demand for computing power reaches chip designers, foundries, memory producers, networking firms and data-centre operators. The build-out also needs power equipment, electrical systems, cooling and construction. Then come the businesses that install and secure the technology. Shareholders still have to ask the ordinary questions: what price are they paying, how much capacity will be built, and who will keep the profits?

Table 7 — Where AI spending ends up

Note: this is a map of where AI spending flows, not a list of stock recommendations. The first four rows earn money more directly from AI; the conglomerates and enablers have plenty of other businesses too. Selling into the AI boom and rewarding shareholders are not the same thing.

The sums are enormous. Reuters reported that the largest cloud companies are expected to spend about $800 billion on capital investment in 2026, rising to roughly $1.1 trillion in 2027 [8]. Those figures are spending plans, not AI revenue, and they do not trace money leaving India. They do show the scale of the investment wave competing for global capital. Whether that spending earns an adequate return remains open.

There is a catch. AI spending helps the companies selling chips and servers, but drains cash from the companies buying them. If capacity arrives faster than demand, an industry can expand while its shareholders lose money; the telecom and fibre-optic boom of the late 1990s is the familiar warning. Investors still have to work company by company: Are customers committed? How concentrated are they? What return will the next round of investment earn? What is already in the share price? Spending proves activity, not superior long-term returns.

Some argue that the AI spending boom is itself pushing interest rates higher by soaking up capital. That’s plausible, but I haven’t tested it. Government borrowing, inflation, central-bank policy and corporate demand for capital all feed into rates, so I’m not blaming AI for the rise in Treasury yields or for foreign money leaving India.

India uses AI, but owns little of the AI profit

Buying the Nifty means buying a market dominated by finance: banks and other financial firms make up 37.45% of the index, while IT accounts for just 7.52%. Telecom, power and capital goods provide some connection to the AI build-out, but a sector weight is not an earnings exposure. A bank using AI to lower costs and a chipmaker selling the hardware have very different economics—and very different upside.

Source: NSE Indices Nifty 50 factsheet [9]; rounded weights sum to 99.99%.

Table 8 — Being touched by AI is not the same as owning its profits

Note: these categories can overlap; HCL, for example, has both implementation and infrastructure businesses. They are rough groupings, not a precise breakdown of revenue, and index membership changes over time.

Interestingly, NSE itself has launched a Nifty AI Catalysts index aimed at the companies that build the plumbing: computing, connectivity, power, cooling, engineering, cables and materials [10]. That is a better place to look for India’s AI infrastructure plays than lumping every IT services firm in with the chipmakers. Still, being in the index means a company fits the theme; it doesn’t tell you how much AI revenue it earns, or that the stock will beat the market.

Not all Indian “AI stocks” are the same

Indian companies with an AI angle have had wildly different years. That is hardly surprising: an infrastructure supplier and an IT services firm may share a theme without sharing a business model. Nor can the performance gap be pinned on AI alone. Rates, industry cycles, margins, execution and one-off events all move share prices. The table is a research list, not a verdict.

Table 9 — A dozen Indian AI-linked stocks and their one-year performance

For Indian IT services, one question matters above all: who keeps the savings when AI makes the work faster? Suppose a project that once needed 100 engineers now needs 60. Under an hourly contract, the provider may lose revenue. Under a fixed-price contract, it may keep the savings and lift its margin. Faster delivery could attract more work, while clients press for lower prices. The outcome will turn on pricing, staffing and the volume of new business.

Table 10 — How AI productivity plays out under different contracts

So India as a whole could win from cheaper AI, with businesses across the economy getting more productive, even as its traditional IT outsourcers come under pricing pressure. That would shift where the profits sit within the Indian market rather than simply shrink them. Before calling any IT company an AI winner, I’d want to see its AI deals, the revenue actually booked, its pricing and its delivery margins.

The AI boom is real, but so are the risks

The AI story outside India is not just hype; a visible cycle of demand and capital spending sits behind it. But industry growth and shareholder returns can part company. Some businesses will post genuine commercial wins even if the sector overbuilds, and the cloud giants may earn healthy returns on existing assets while the next dollar of spending earns far less.

Cheaper AI may also produce more AI use, much as more efficient steam engines once led Britain to burn more coal rather than less. Lower prices can make new applications worthwhile, although total spending will still depend on demand, efficiency, idle capacity and pricing. That creates an opening for India: if the technology keeps getting cheaper, Indian companies can capture many of the same productivity gains without owning the frontier models or chips.

This does not mean every rupee withdrawn from India went into an AI stock. Outflows do not reveal the next destination of the money; that would require fund-level data. The narrower point is enough: AI has created a compelling alternative mix of growth, valuation and risk, and India now has to compete with it.

Oil and a weak rupee: a double hit

Because India imports most of its oil, a price shock lands in several places at once: the import bill rises, inflation picks up, household budgets tighten and business costs climb. Tax and pricing policy determine who feels the pain first. A weaker rupee makes the bill worse, while services exports, remittances, foreign-exchange reserves and companies’ ability to pass on costs provide some cushion. The size of the shock ultimately depends on how much Indian consumption and production still runs on imported fuel.

Table 11 — India’s stress points at a glance

An oil shock can squeeze consumers and companies at the same time. Households cut discretionary spending, while manufacturers and transport firms pay more for inputs. Producers may benefit, so the effect on the index depends on what the index owns. With banks carrying so much weight in the Nifty, credit demand, funding costs and bad loans matter too. Oil does not map neatly onto the market.

India can reduce this vulnerability over time. Renewables, nuclear power and electrification all limit dependence on imported fossil fuels; electricity used by air conditioners, data centres or factories is not the same as burning imported oil. The pace of electric-vehicle adoption, freight efficiency and changes in the power mix will determine how closely the import bill follows economic growth. Energy exposure matters, but it has to be measured rather than assumed.

Currency adds another layer. For a foreign investor, a weaker rupee directly erodes the return. The calculation is: dollar return = (1 + rupee return) × (starting USD/INR ÷ ending USD/INR) − 1, where USD/INR is rupees per dollar. Simply subtracting the currency decline from the stock return is only an approximation.

Source: Author’s scenario analysis using the assumptions stated in the latest attached copy.

Table 12 — The currency can change the outcome

Note: these are calculated scenarios. The middle row combines the Nifty price move with approximate exchange-rate endpoints and is not a verified total return. The final row shows the local-currency return required to earn 12% in US dollars if the rupee loses 5% of its value. The 12% figure is an illustration, not a recommended hurdle.

Local investors are holding the market up, while new share sales compete for their money

The market has not collapsed despite foreign selling because Indian investors have kept buying. Mutual funds, insurers, pension products and individuals have absorbed much of the supply. That does not prove prices are too high, or that domestic investors are indifferent to returns. They invest in a different currency, often with a longer horizon and different constraints from a fund manager in New York or London.

My working theory is that domestic savings are supporting valuations while foreign investors remain unconvinced. Proving it requires matched data on institutional buying, mutual-fund subscriptions and redemptions, new issuance and price effects. Monthly SIP contributions are not the same as net stock purchases; some of the money covers redemptions or flows into other assets.

New stock is also competing for the same pool of savings. IPOs and follow-on sales can fund genuine investment; promoters and early investors selling down merely transfer ownership. Either way, buyers must provide cash that might otherwise have gone into existing shares. Comparable data are insufficient to support a claim of record issuance. The narrower point about supply still holds.

Table 13 — What would establish the domestic-savings thesis

Taxes, regulatory uncertainty, capital controls and trading costs also reduce what investors take home. They matter more when India’s growth premium narrows. But no specific tax or rule change has been tied here to this year’s slump. That argument would need a named measure, an effective date, an affected group and evidence of the response.

These frictions can tip a close decision, but the evidence is weaker than it is for falling prices, cheaper valuations and foreign selling. Claims about India’s business environment should rest on specific policies and their effect on profits or market access, not a general feeling that conditions have worsened.

Where my argument holds, and where it could be wrong

The argument has clear weak points. The Nifty is already cheaper. Earnings growth can lower the valuation without another fall in prices. Rising yields did not stop other markets from rallying. The AI boom may disappoint; India can reduce its dependence on imported energy; domestic investors may simply be taking a sensible long view. None of this overturns the case, but it defines the evidence that would change it.

Table 14 — What would change my mind

A falling market is the event to be explained, not proof that every proposed cause was active. The starting date matters as well: this comparison begins amid geopolitical and interest-rate stress, not at the start of a full cycle. Other windows, common-currency returns and sector-adjusted comparisons would help separate a temporary shock from a lasting shift in capital.

Strong markets elsewhere carry their own risks. A rising index can hide many falling stocks, and investors who overpay for exceptional earnings may still be disappointed. India’s weakness could make it a better buy from here. Past outperformance and exciting growth stories are no substitute for estimating what each market can return from today’s price.

So what should investors actually do?

The practical response is to do the arithmetic rather than rely on instinct. Start with a realistic earnings forecast using consistent periods and company sets. Choose an ending valuation that reflects the market’s sector mix and profitability. Add expected dividends, convert the result into your own currency and include hedging costs where relevant. Then compare it with what government and corporate bonds can pay over the same period.

Table 15 — The signals to watch from here

For a broad India allocation, ask how much earnings growth and dividend income today’s price buys after currency and valuation risk. For an individual company, ask what will drive earnings, who captures the benefit and how much bad news is already priced in. The same discipline applies to an Indian bank or IT firm as to a foreign AI chipmaker.

Indian stocks now face a tougher test, even after the sharp fall in valuations. The market can become more attractive through stronger earnings, a lower price, cheaper oil, a steadier rupee or new investment themes that turn into listed profits. India’s economic potential still matters. But investors do not own the potential in the abstract; they own earnings at a price.