Can India’s markets shine again?

Diwali – the ‘festival of lights’ celebrated by Hindus, Jains and Sikhs across the world – begins on 20 October. It is characterised as a period of new beginnings, and investors in the Indian markets may be hoping it can deliver a fresh start for them as well, after a choppy period for this super-star economy. 

After years of strong performance, where it is one of the few areas that has rivalled the success of the US technology sector, the Indian market has struggled over the past 12 months, lagging its Asian peers and broader global stock markets. It hasn’t been a disaster – the main stock market index, the BSE Sensex, is up 5.6% for the year to date and a less impressive 1.4% over the past year*, but there has been an opportunity cost. The MSCI Asia ex Japan index is up 19.8% for the year to date**. 

There have been some economic headwinds. Consumption, for example, has been weak, while investment spending sagged in wake of last year’s election. There was also the tariff problem, whereby Donald Trump imposed a surprise 25% extra tariff on Indian goods (on top of the existing 25% tariff) with the aim of halting Russian oil imports. There were some restrictions on IT workers in the US with the White House raising the cost of the H-1B visa programme. This hit a number of Indian technology companies. 

However, the real, over-riding problem has been that the Indian market got very expensive, particularly the high growth mid and small-cap companies. The market was priced for perfection and when economic growth didn’t come through as expected, it created problems. It has been a salutary lesson in why valuation matters, just as much as growth. 

Abbas Barkhordar, manager on the Schroder Asian Alpha fund, says: “India has underperformed quite a lot, partly because there have been more exciting things going on elsewhere because of technology, but also because it had had a couple of good years before that. Valuations had run up and there had been quite a lot of ‘blue sky’ scenarios priced in.

“We like India as a long-term story. There’s some really great companies there, well-managed, high quality, but the valuations didn’t justify the investment. If it continues to underperform and de-rate and therefore there are better entry prices, it would be an area that looks interesting. Right now, it’s still on the expensive side, but less so than it was.”

It is worth noting that India is always quite expensive. The quality of its companies, its strong growth, its committed domestic shareholder base mean that it has always traded at a premium to other emerging markets. Equally, none of the long-term factors that have made India so attractive have faded. The economy is still growing at 6-7% per year***, making it the fastest-growing major economy in the world. With per capita GDP of just $2,880, it has a long way to go in terms of growth – for reference, China’s per capita GDP is $13,690. 

The Indian government is working hard to address some of the problems in the economy. Sean Taylor, fund manager on the Matthews Pacific Tiger fund, says: “Slowing growth was countered with rate cuts and monetary easing by the central bank, consumer tax reductions and increased fiscal spending.” 

The ‘Make in India’ programme, designed to encourage international companies to manufacture in India, continues to draw investment into the country. According to India’s Ministry of Commerce, 764 companies, including Apple supplier Foxconn, Indian conglomerate Reliance Industries and auto giant Mahindra and Mahindra, signed up for the PLI scheme. Aggregate investments stand at $1.61 trillion Indian rupees (£8.5bn).

In the meantime, there are still some short-term pressures. Taylor points out that earnings estimates continued to be downgraded: “We expect further downgrades in the next quarter. The surprising spike in geopolitical tensions with the US over India’s continued purchase of Russian oil and the Trump administration’s decision to double tariffs on Indian exports to 50% also had an adverse impact on valuations in the quarter. Additionally, new H-1B visa regulations could limit the mobility of Indian professionals, including in the IT sector.”

The tariffs may continue to exert some pressure on sentiment. Tariffs on sensitive sectors such as pharmaceuticals and electronics have yet to be announced and could be destabilising. The direct effects are limited: approximately 80% of the Indian economy is domestically oriented and Indian goods exports to the US account for just 2% of India’s GDP^. However, investors may conclude that it’s another reason to swerve India in search of less complicated options in Asia. 

That said, amid this short-term turmoil, Taylor still sees opportunity: “Despite the challenging economic and trade environment, we believe there are select stocks and sectors in India with the potential to generate alpha. We are positive toward telecommunications, supported by pricing improvements, continued market penetration and healthy dividend payouts. E-commerce and quick commerce continued to perform well. There was also a slight recovery in the rural economy, evident in increased activity in the auto sector.”

Ajay Tyagi, manager on the UTI India Dynamic Equity fund, says the bigger driving factor for the equity markets will be global risk sentiment, “which has surprisingly remained resilient despite the disruptions caused by US policies and imposition of tariffs, and significant weakness in the jobs data. Going forward, growth sentiments should improve with favourable macro indicators, monetary policy support and fiscal support, including potential goods and sales tax rates rationalisation as announced by the Prime Minister during his Independence speech.”

He adds that India market’s price to equity premium to world and emerging market equities is now below the average levels of the last 10 years. “A shift in domestic economic momentum helped by fiscal and monetary easing can aid in relative outperformance as global uncertainty persists. We continue to expect low teen earnings growth for the market ahead of nominal GDP growth.”

India has always been a market more suited to the long-term investor. It has usually been a good idea to buy at moments when sentiment is weak. The market may stay volatile in the short term, but it is an opportunity to buy into India’s growth at a cheaper level than a year ago. 

*Source: MarketWatch, at 10 October 2025

**Source: FE Analytics, discrete calendar year performance in pounds sterling, at 13 October 2025

***Source: IMF, World Economic Outlook Update, July 2025

^Source: BofA Global Research, April 2025