India’s $5.4 trillion market loses momentum as valuation concerns rise

India’s red-hot $5.4 trillion stock market is showing signs of fatigue as high valuations, slowing earnings growth, and limited exposure to emerging themes like artificial intelligence (AI) cause global investors to reallocate capital to more promising Asian markets. While the country’s relatively insulated economy helped its equity markets emerge as a safe haven during global turmoil triggered by US President Donald Trump’s tariff hikes in April, the easing of those trade concerns has reduced India’s appeal.

The MSCI India Index, which is up 6.6 per cent, is now trailing the broader MSCI Asia Pacific Index by nearly six percentage points for 2025 so far. “This is not the year for India,” Amol Gogate, emerging markets fund manager at Carmignac, London, told Bloomberg. “India doesn’t have a lot going for it compared with other markets such as China.”

Valuations stretch investor patience

One of the key headwinds is valuation. The MSCI India Index is currently trading at nearly 23 times its estimated earnings, one of the highest in the world and well above its five-year average of 21.5. Meanwhile, expected earnings growth from Indian corporates is now lagging behind regional peers such as South Korea and Taiwan.

Jian Shi Cortesi, a fund manager at GAM Investment Management in Zurich, told Bloomberg that, “We don’t have an overweight allocation to India, and that’s mainly because of valuations… We like the country for its longer-term potential, but right now valuation is even more stretched than in the past.”

The high premium attached to Indian stocks stands in contrast to the recent rally in Hong Kong-listed Chinese equities, which have surged 20 per cent this year on the back of AI breakthroughs and fresh listings. India, by comparison, offers limited access to the AI boom that global investors are keen to ride. Still, some fund managers remain optimistic about the country’s long-term trajectory.

Foreign fund outflows highlight sentiment shift

Despite a resilient domestic economy, foreign investor sentiment has become increasingly volatile. So far in 2025, foreign institutional investors (FIIs) have offloaded nearly $13 billion (about ₹1.12 lakh crore) worth of Indian equities, putting the market on course for its second consecutive year of outflows, based on data compiled by Bloomberg since 1999. In contrast, domestic institutional investors (DIIs) have stepped in to support the market, net purchasing ₹3.43 lakh crore ($40 billion) worth of shares year-to-date.

According to provisional NSE data, after three days of selling, FIIs turned net buyers again, investing ₹1,397 crore (1.63 billion) in a single session. However, DIIs sold shares worth ₹589 crore ($68.9 million) during the same session.

Between June 23 and June 27, foreign portfolio investors (FPIs) made a net investment of ₹13,107 crore (1.53 billion) into Indian markets, according to the National Securities Depository Limited (NSDL). But this inflow has done little to reverse the broader trend of cautious global sentiment toward Indian equities.

Broader market signals remain tepid

Other indicators also point to dwindling enthusiasm. The Indian rupee has declined slightly against the US dollar this quarter, one of the few Asian currencies to do so. Additionally, overseas investors have pulled out ₹3,400 crore (almost $4 billion) from Indian index-eligible bonds since April.

As the first half of 2025 comes to a close, India’s equity market remains one of Asia’s most expensive, and unless earnings accelerate or global risk appetite swings back in its favour, the rally may have run its course, for now.