The Indian stock market was the only emerging market (EM) that declined in the 2025-2026 financial year (FY26). Bloomberg data shows that the
BSE Sensex and the
Nifty50 slipped over 7 per cent and 5 per cent, respectively, in the previous financial year, compared to far stronger returns posted by other emerging market peers.
By comparison, Taiwan’s Taiex gained 58.82 per cent, South Korea’s Kospi surged 113.27 per cent, Japan’s Nikkei climbed 48.57 per cent, China’s CSI 300 rose 14.4 per cent, and Hong Kong’s Hang Seng rose 9.68 per cent in FY26.
The
MSCI India index also slipped 3.57 per cent during the period, compared to MSCI EM’s 26.86 per cent surge, largely dragged by foreign institutional investors’ (FIIs) selloff.
Going ahead, analysts believe the probability of another year of relative underperformance remains high, unless earnings improve meaningfully, crude stabilises, and foreign flows return.
“A recovery is possible, but it will depend on stronger macro visibility and better corporate earnings delivery,” said Abhinav Tiwari, research analyst, Bonanza .
Why India returns trailed EMs in FY26
According to Vinod Nair, head of research, Geojit Investments, FIIs adopted a risk-off stance toward India in FY26 due to its premium valuations relative to other emerging markets.
The MSCI India index’s P/E stood at 24.33x at the beginning of FY26, compared to MSCI EM’s P/E of 14.88x. These relatively expensive valuations triggered ₹3.31-trillion selloff by FIIs in FY26.
“The selling pressure intensified more recently as India’s sensitivity to crude prices came back into focus amid the West Asia conflict,” he said.
Additionally, Thomas V Abraham, research analyst, Mirae Asset ShareKhan, reckoned that earnings disappointment amid geopolitical shifts also capped India returns.
“Prior to 2025, premium valuations were more policy-fuelled, expected to lead to earnings gains. However, on account of various shifts in the geopolitical scenario and lack of clarity on trade deals—amongst other factors—earnings have not picked up as expected,” said Abraham.
He added: In fact, the Nifty50’s 12-month forward earnings per share (EPS) growth, at present, for the next two years is projected at approximately 14 per cent. If elevated crude prices and a strengthening US dollar persist, India’s gross domestic product (GDP) growth could be trimmed, potentially dragging next year’s earnings growth down toward the 10-per cent mark.
Valuation risks persist
Even after the correction, analysts see India’s valuation at a premium to other EMs, although that gap has started to narrow from historical averages.
“Indian stocks maintain a 1.5-2x P/E premium over EM averages, prompting flows to undervalued options like Brazil, Korea, or EM tech during risk-on phases,” said Abraham.
Bloomberg data shows MSCI India’s P/E ratio has eased to 22.34x now, while MSCI EM’s P/E ratio has risen to 16.6x from a year ago. This means India may look cheaper relative to its own history, but not necessarily cheap relative to EM peers.
Market outlook FY27
That said, while analysts see near-term EM earnings outpacing India, they expect a reversal of India’s underperformance only if FIIs return.
This, they said, is likely on a sustainable basis when global rates peak, the rupee stabilises, and India offers clearer structural stories in tech and trade that can compete with the US and China.
“Valuation premiums have now moderated toward long-term averages. While FII selling may stabilise over the medium term, near-term flows will depend on the duration of the conflict and potential downgrades to FY27 earnings,” said Nair.
Mirae Asset Sharekhan expects a reversal in the next 4 to 6 quarters, with valuations likely to pick up ahead of an anticipated earnings recovery in the second half of 2026. Disclaimer: The views and investment tips expressed by the analysts/brokerage are their own and not those of the website or its management. Business Standard advises users to check with certified experts before taking any investment decisions.
