Why Is the Indian Stock Market Falling? Foreign vs Domestic Money
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Two years ago, India made up roughly a fifth of the MSCI Emerging Markets index, the benchmark most global funds use to divide money between developing countries. By the end of last month it was 10.65%. India's share has roughly halved, and it is now fourth in the index, behind Taiwan, South Korea and China.
Watch it play outIndia's slice of the emerging-markets index has roughly halved
Picture the MSCI Emerging Markets index, the benchmark global funds use to divide money between developing countries, as 100 dots.
Two years ago, India made up roughly a fifth of it.
By the end of last month it was 10.65%. India's share has roughly halved.
India is now fourth in the index, behind Taiwan, South Korea and China.
This piece traces how that happened, from the market's peak two years ago to this year's record foreign selling. It shows the tug-of-war between foreign money leaving and Indian savers' money arriving, explains why earnings and valuations, not the economy, did the damage, and ends with what has to change for India to lead again. Dollar figures are as reported by each source; the rupee is trading near ₹96 per dollar.
Watch it play outThis year so far: India down, emerging markets up
Start the year with the same amount, in dollars, in MSCI India and in MSCI Emerging Markets.
By last month-end, emerging markets were up 23.4%.
MSCI India was down 14.9% in dollars. The Nifty 50 was down 13.4% in rupees.
Meanwhile foreign investors have pulled a net $30.4 billion out of Indian stocks this year.
Source: NSE Indices factsheet; MSCI factsheets; NSDL
How far has the Indian stock market fallen since its peak?
The Nifty 50 is the National Stock Exchange's index of 50 large companies; the Sensex is BSE's index of 30. The Nifty closed at a record 26,216 two years ago. Within seven weeks it was almost 9% lower, as China's stimulus pulled money toward Chinese stocks and foreign investors sold a then-record of about ₹1 lakh crore (₹1 trillion; one lakh crore is one trillion rupees) in a single month.
Watch it play outChina's stimulus pulled foreign money out of India
Two years ago the Nifty 50 closed at a record 26,216.
Then China's stimulus pulled money toward Chinese stocks.
Foreign investors sold a then-record of about ₹1 lakh crore of Indian stocks in a single month.
Within seven weeks of its record, the Nifty was almost 9% lower.
The Nifty recovered in rupee terms, rising 10.5% last year and touching a new high of 26,358.25 in the first days of this one. Then the year turned. War involving Iran, which broke out about seven months ago, pushed oil above $100 a barrel, US 10-year Treasury yields climbed to 5.29% by the start of this month, and the rupee hit a record low of 96.96 per dollar five months ago. The Nifty ended last month down 13.43% for the year and closed at 22,422 a week ago, a two-year low and about 15% below its record from the start of the year (a fall from peak like this is a drawdown).
Two years of selling, with one false dawn
2 yrs agoNifty record close26,216
A month laterChina stimulusThen-record ₹1 lakh crore of foreign selling
Last yearUS tariff hits 50%Extra 25% over Russian oil
Early this yrNew Nifty high26,358
Weeks laterTariff cut, then oil shockIran war; record ₹1.18 lakh crore monthly outflow
This monthTwo-year low, RBI hikesNifty 22,422; repo to 5.50%
Index levels are NSE closing or intraday highs as reported at the time.Source: All India Radio; Business Standard; NSE; NSDL; Wikipedia (US tariffs); BusinessToday
How badly has India lagged other emerging markets?
Spot on.Close, a little low.Close, a little high.Way off, too low.Way off, too high. It was 3%.
Just 2.6%. India trailed the EM index by about 31 percentage points, the widest gap in more than three decades.
MSCI India, last year, USD3%
MSCI Emerging Markets34%
Source: MSCI factsheets; Bloomberg via BusinessToday
The gap has since widened. So far this year, MSCI's India index (the IMI version, which includes smaller companies) is down 12.0% in dollars. Korea is up 92.7%, Taiwan 76.2% and the emerging-market index 25.2%. In local currency India is down only 5.6%; the rupee's 6.8% slide against the dollar did the rest. Four months ago, the total value of NSE-listed companies, $4.85 trillion, fell below Taiwan's and South Korea's, dropping India to seventh in the world by market capitalization.
India is near the bottom of this year's table in dollars
Korea+92.7%
Taiwan+76.2%
Brazil+35.9%
MSCI EM+25.2%
USA+15.3%
India−12.0%
China−12.3%
MSCI IMI indexes, gross returns in US dollars, year to date.
Source: MSCI Daily Equity Insights
Nor is this one bad year. Over the past five years, India's IMI index returned 3.5% a year in dollars against 10.2% for emerging markets as a whole.
Why are foreign investors selling Indian stocks?
Foreign portfolio investors (FPIs) are overseas funds that buy listed shares and bonds without taking control of companies. NSDL, India's main securities depository, publishes their flows daily.
This year is already the worst on record for foreign selling
7 yrs ago+₹1.01 lakh cr
6 yrs ago+₹1.70 lakh cr
5 yrs ago+₹0.26 lakh cr
4 yrs ago−₹1.21 lakh cr
3 yrs ago+₹1.71 lakh cr
2 yrs ago+₹427 cr
Last yr−₹1.66 lakh cr
This yr so far−₹2.85 lakh cr
Net FPI investment in Indian equities, calendar years. 1 lakh crore = 1 trillion rupees.
Source: NSDL, via Upstox and BusinessToday
This year's total so far, ₹2,85,428 crore ($30.4 billion), is 72% more than the previous record set only last year (a crore is 10 million rupees). Two-fifths came in one month. In the month after the Iran conflict began, funds pulled ₹1,17,775 crore out, a monthly record.
The first month of the oil shock accounts for 41% of this year's foreign selling
9 mo ago−₹35,962 cr
8 mo ago+₹22,615 cr
7 mo ago−₹1,17,775 cr
6 mo ago−₹60,847 cr
5 mo ago−₹32,963 cr
4 mo ago−₹49,340 cr
3 mo ago+₹20,200 cr
2 mo ago+₹29,631 cr
Last mo−₹35,861 cr
Net FPI flows into Indian equities, each month of this year so far. Indian digit grouping: ₹1,17,775 crore is ₹1.18 lakh crore.
Source: NSDL
The selling was broad. Over three years, foreign institutions were net sellers in 41 of the 50 Nifty stocks, according to JM Financial, led by IT, financials and consumer staples. That is an asset-allocation decision, not a verdict on a few companies, and the reasons are mostly relative.
The AI trade turned India into a funding market
HSBC called India a "funding market" for Asia's AI boom: global funds sold Indian shares to pay for chip stocks in Korea and Taiwan. Look at what each index actually owns and the logic is obvious.
The EM index became a chip index. The Nifty is a bank index.
MSCI Emerging Markets
Nifty 50
Biggest sector
Tech, 43.8%
Financials, 37.5%
Tech weight
43.8%
7.5%
Largest holding
TSMC, 15.6%
HDFC Bank, 10.4%
Expected EPS growth
About 31%
About 15% (MSCI India)
Weights at the end of last month. Expected growth is MSCI's 12-month forward EPS growth for the MSCI EM IMI and India IMI indexes.Source: MSCI EM factsheet; NSE Indices factsheet; MSCI Daily Equity Insights
Analysts expect the EM index's earnings to grow about 31% over the next 12 months, driven by chip profits, against about 15% for India. A manager judged against that index loses ground by holding India. And as Korea and Taiwan grew, India's weight fell mechanically, so index-tracking money had to sell too: sector rotation on a global scale.
Is it really "sell India, buy China"?
It was two years ago. Business Standard tied the sell-off that followed the Nifty's peak to "a recovery in China's markets fuelled by Beijing's aggressive stimulus measures." Since then the trade has moved on: China's IMI index is down 12.3% this year in dollars, slightly worse than India's. The money has gone to Seoul and Taipei, not Shanghai.
Then the macro squeeze. India imports about 85% of its crude oil, so $100 oil widens the current-account deficit and weakens the rupee, which cuts a dollar investor's return. A 5%-plus yield on US Treasuries is a strong risk-free alternative. These are classic capital flows pressures, and they hit India harder because it started as the most expensive large emerging market.
Who is buying when foreigners sell?
Indian savers. Domestic institutional investors (DIIs) are Indian mutual funds, insurers, banks and pension funds. Much of their money arrives through systematic investment plans (SIPs), standing monthly orders that move a fixed amount from a saver's bank account into a mutual fund, the Indian version of dollar-cost averaging.
The flows are huge. Monthly SIP contributions hit a record ₹31,961 crore three months ago, from 9.90 crore (99 million) accounts; a lakh is 100,000. Over the last fiscal year, savers put ₹3.5 trillion in through SIPs and kept a record ₹2 trillion in after redemptions, according to SEBI data. DIIs as a group bought a net ₹7.88 lakh crore of Indian shares last year, a record and about $90.1 billion at that year's rates, and another ₹5.13 lakh crore in just over seven months of this one.
Domestic buying has dwarfed foreign selling for three years
Last yrDomestic institutions₹7.88L crForeign portfolio investors−₹1.66L cr
₹5.13L cr−₹2.85L cr
This yr*Domestic institutions₹5.13L crForeign portfolio investors−₹2.85L cr
2 yrs agoLast yrThis yr*
Net equity purchases in ₹ lakh crore, calendar years. *This year's DII figure covers just over seven months; the FPI figure runs to the latest data. FPI net two years ago was +₹427 crore, which rounds to zero.Source: BSE data via IANS; NSDL
Over the latest 36 months of data, DIIs put in ₹19.21 lakh crore while foreigners took out nearly ₹10 lakh crore. JM Financial estimates foreign institutions now own 14.7% of Indian equities, the lowest in 14 years, and domestic institutions 18.9%, more than foreigners for the first time. In 39 of the 41 Nifty stocks foreigners sold over three years, domestic institutions raised their stakes.
Check the claimThree claims about the tug-of-war
Source: MOSPI; NSE Indices; JM Financial via ANI
If domestic buying is so much larger, why did prices fall? Prices are set at the margin. A buyer with a fixed monthly budget absorbs what is offered, at whatever price clears. Foreign funds selling in a hurry, as they did when the oil shock hit, push prices down until enough patient money steps in. DSP Mutual Fund points to a second drain: "easy exits through IPOs, FPOs and OFS," meaning new listings and share sales by existing owners, often promoters (the founding families or parent companies that control most Indian firms). Domestic money had to absorb foreign selling and a pipeline of new stock at the same time.
Why have Indian corporate earnings disappointed?
The deepest problem is profits. Three fiscal years ago, Nifty earnings per share rose 24% (India's fiscal year doesn't match the calendar year). Then growth almost stopped: 1% the next year and 5% in the most recent one, according to Motilal Oswal, which also counted eight straight quarters of single-digit profit growth through the end of that year, the first such run since the pandemic.
The cuts came slowly. Before last fiscal year had even begun, Motilal Oswal expected Nifty EPS of ₹1,220 for it. The actual figure was ₹1,065.
Last fiscal year's Nifty earnings came in 13% below the early forecast
Early estimate₹1,220
Cuts by month five−₹110= ₹1,110
Cuts to the final number−₹45= ₹1,065
Actual₹1,065
Nifty 50 earnings per share for the last fiscal year. The early estimate was made before the year began; the first round of cuts came in its first five months.Source: Motilal Oswal India Strategy reports
Why the slowdown? Company revenue tracks nominal GDP, meaning growth before inflation is stripped out, and that slowed. On MOSPI's new data series, nominal GDP grew only 8.1% in the comparable quarter last year. Analysts quoted by Business Standard also blamed lower government capital spending and Indian IT companies stuck "in a transition phase" while global AI spending went to chipmakers. This year the oil shock added its own hit, with state-owned fuel retailers the biggest drag on profits as they absorbed high crude costs.
There are green shoots. Nominal GDP growth rebounded to 10.3% in the latest quarter, and Nifty company profits rose 18% from a year earlier, the fastest in 10 quarters. But five companies (ONGC, Hindalco, Reliance, JSW Steel and Bharti Airtel) made up 60% of the increase, and four of them sell commodities.
Analysts again expect a rebound after two lost years
3 yrs ago24%
2 yrs ago1%
Last yr5%
This yr (est.)16%
Next yr (est.)16%
Nifty 50 EPS growth by fiscal year. Estimates for this year and next are ₹1,232 and ₹1,425, made two months ago.
Source: Motilal Oswal India Strategy
Forecasts made almost two years ago also promised a 16% rebound, though. Investors will want to see the cuts actually stop before trusting this one.
Find the real problem
Tap the phrase you think is the tell.
Spotted it.Not that phrase. Relative earnings. India is growing, but the rest of the index is growing faster, and foreign money follows the faster number.
“Real GDP grew 7.8% in the latest quarter” Strong growth. Not a reason to sell.
“Nifty profits rose 18% in the latest quarter” Good, but concentrated in five companies.
“Expected EPS growth: India about 15%, emerging markets about 31%” Global funds are measured against the EM index. India's earnings are growing at half its pace.
“Monthly SIP inflows hit a record ₹31,961 crore” Supports prices at home; doesn't attract foreign money.
“The RBI raised its repo rate to 5.50%” A symptom of the oil shock, not the main cause of the selling.
Source: MOSPI; Motilal Oswal; MSCI; AMFI; RBI
Are Indian stocks still expensive?
The price-to-earnings ratio (P/E) divides a share price by a year of profit. Forward P/E uses next year's expected profit. On the Nifty's own history, the market is no longer expensive. The index traded at 19.36 times trailing earnings at the end of last month. DSP Mutual Fund puts the long-term average at 18.9x and argues that, with a 16% return on equity and 10–12% earnings growth, fair value is 16.5x to 18x. So the market is close to average, not cheap.
Against other markets, which is what a foreign allocator sees, the picture differs.
India still costs nearly twice the EM index per dollar of next year's profit
MSCI India18.6x
MSCI World17.9x
MSCI All Country World16.3x
MSCI Emerging Markets9.7x
12-month forward P/E at the end of last month.
Source: MSCI index factsheets
At 18.6x forward earnings, MSCI India trades at roughly a 90% premium to the EM index (18.61 ÷ 9.72 ≈ 1.9). Part of that gap is a mirage: the EM multiple is low because analysts expect a jump in chip profits, which are famously cyclical. DSP's own charts, using data to the end of last fiscal year, put the Nifty still above its average valuation against emerging markets but already at a discount to the S&P 500. India has de-rated. It just hasn't de-rated as fast as its rivals' earnings have risen.
What about small and midcaps?
The froth was always worst in smaller companies. Over the five years to the end of last year, midcaps compounded at 23.7% a year and smallcaps at 20.1%. Smallcaps fell 6% last year, yet the broader Nifty 500 still trades at 21.77x trailing earnings against 19.36x for the Nifty 50, and lost only 2% over the past 12 months including dividends, against 7% for the Nifty 50. Earnings forecasts are falling faster down the size ladder: Motilal Oswal's review of full-year results cut current-year estimates by 0.9% for large caps, 2.2% for midcaps and 2.8% for small caps. DSP's view is that the time to add aggressively comes "when value also starts to emerge in SMIDs" (small and midcaps). It hasn't yet.
Did US tariffs cause the fall?
Less than the headlines suggest. The US doubled its tariff on Indian goods to 50% a little over a year ago, adding a 25% penalty over purchases of Russian oil, and Emkay Global said at the end of last year that upside depended on a trade deal. Relief came eight months ago, when the tariff was cut to 18%, yet the worst of the sell-off came after it. The remaining risk is a proposed US sanctions bill on buyers of Russian crude, which BusinessToday reports "remains live." Our rupee and tariffs piece covers the currency side.
Oil mattered more. Late last month, Brent sat near $103, India's 10-year bond yield touched 7.20% and US 10-year Treasuries yielded above 5.2%. The RBI's latest rate increase to 5.50%, its first in more than three and a half years, is the bill. Our RBI and inflation piece covers what that means for rate-sensitive stocks.
What has to change for India to outperform again?
Our view: India doesn't need a better economy to win back foreign money. It needs better relative earnings, and that requires three things.
1. Nifty earnings have to beat forecasts, not just grow. After two years of cuts, the current-year estimate of ₹1,232 implies 16% growth. If companies deliver it without downgrades, and growth spreads beyond commodity producers, the case that India is a low-growth market weakens.
2. The chip cycle has to cool. India's weakness mirrors Korea and Taiwan's strength. When chip earnings revisions peak, the EM index's 9.7x forward multiple will look less like a bargain and the rotation can reverse. India doesn't control this, but it is the biggest swing factor.
3. Oil and the rupee have to stabilize. Crude under $90 would ease inflation, the current-account deficit and the RBI. A steady rupee removes the extra loss dollar investors have absorbed.
Valuation sets how much each of those is worth. The scenario below uses Motilal Oswal's earnings estimate for next fiscal year, about what the market will price a year from now, and DSP's fair-value range.
Where the Nifty could trade on next year's earnings
Pick the earnings outcome and the multiple the market pays
+3.9%+13.4%+31.0%−6.4%+2.1%+18.0%−16.8%−9.3%+4.8%above Nifty at last month-endabove Nifty at last month-endabove Nifty at last month-endbelow Nifty at last month-endabove Nifty at last month-endabove Nifty at last month-endbelow Nifty at last month-endbelow Nifty at last month-endabove Nifty at last month-end
Nifty at last month-end22,620
18,81029,640
Level = EPS × multiple. 16.5x–18x is DSP's fair range; 20.8x is Motilal Oswal's long-period average forward P/E. EPS is for the next fiscal year, not the current one. Illustrative, not a forecast.Source: Motilal Oswal (EPS); DSP Mutual Fund and Motilal Oswal (multiples); NSE
If earnings arrive and the market pays a mid-range 18x, the Nifty sits above 25,000, within about 3% of the record it set at the start of this year. If earnings miss by 10% and the multiple stays at 18x, it is barely above today's level. Today's price already assumes some disappointment, but not a lot.
What could make this view wrong?
The data have rough edges: FPI totals differ between NSDL and exchange data, and forward P/Es depend on whose estimates feed them. The war could escalate and push oil higher. And India's domestic bid could weaken: SIP account additions slowed sharply last fiscal year, so a long bear market could test retail patience in a way the past two years have not.
Our read
India's two-year slump is not a verdict on the economy, which grew 7.8% last quarter. It is a verdict on Indian earnings relative to everything else foreign money could own. Nifty profits barely grew for two years while Korean and Taiwanese AI earnings exploded, and India started as the most expensive large emerging market.
Domestic money is winning the tug-of-war on volume, ₹19.21 lakh crore of buying over three years against nearly ₹10 lakh crore of foreign selling. But it has absorbed the fall, not reversed it. Prices follow the marginal seller, and this year that was a foreign fund with an index to track.
Valuations have done much of the adjusting. At 19.4x trailing earnings the Nifty is near its long-run average; smallcaps are still richer.
India will lead again when earnings stop getting cut, chip earnings revisions peak and oil falls back. Watch Nifty EPS revisions after each results season and India's weight in the MSCI EM index. When the weight stops falling, the rotation is over.
Go deeper
Reverse DCF: work backward from the Nifty's 19x multiple to the earnings growth it already assumes, the same test we ran in the scenario above.
Multiples and normalization: why an 18.6x India and a 9.7x EM index aren't directly comparable when one side's earnings are at a cyclical peak.
Risk and scenarios: how to stress a portfolio for oil, currency and rate shocks like the ones that drove India's sell-off this year.
Join for member research that applies these tools to individual stocks.
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drawdown).