Two years ago, the Sensex fired to an impressive 85,000 for the first time, but since then the market has been in a steep and prolonged decline. What seemed like a roaring bull market around September 2024 soon lost the momentum and plunged around 16 percent to hit a low of 71,425 in April 2025 as Donald Trump’s trade flip-flops and other factors dampened sentiment. But again, the Sensex soared 20 percent in eight months to hit a new all time high of 86,159 in December 2025. While the optimism remained high, little did investors know what 2026 had in store for them.
Just a few months into the new year, new AI innovations sparked a sharp sell-off in India’s IT stocks. Thereafter, multiple headwinds have kept the market struggling to recover from the lows it has been hovering around since April 2026.
The current market grind with high volatility and little or no gains is a painful experience for most investors. The question that bothers many is, when India’s economy is growing at an enviable 7 percent rate despite several headwinds like global energy shocks, tariff uncertainties and high interest rates, why the world’s fastest growing major economy has one of the weakest performing major equity markets this year.
Maybe the answer lies in the fact that GDP is all about what happened in the past, while the market tends to price in the current scenario and what comes next. The correction that the equity market has been going through has continued for two years now. Call it a ‘time correction’ more than price correction, recently the benchmark indices posted losses for eight consecutive weeks — the longest losing streak in 25 years.
Retail investors who put their savings into shares of profit-making companies have seen their wealth decline significantly this year. In comparison, elsewhere in Korea and Japan for instance, investors have made handsome gains.
Over the last two months, Indian stock indices have lost around 8.5 percent, evaporating anywhere between Rs 30 to 40 lakh crore in market capitalisation. This was India’s weakest performance in more than two decades in comparison with other emerging markets.
The contrast looks starker against global peers which have delivered standout performance. In 2026, the Sensex plunged 13 percent, while the Korean market soared 68 percent, Japan 29 percent and American 13 percent. The irony is that if the cause of fall in the Indian equity market was the Gulf war, Fed rate hike, rising crude oil prices and surging bond yields, other markets also weathered the same war, same crude and same inflation pressure. While they all went up, India went down.
What explains the prolonged plunge in India when the Jio Platforms IPO, the largest in India's stock market history was oversubscribed 22.7 times? Market analysts have identified a combination of factors for the market’s downward journey from the peak - a classic phase of price and time correction, expensive crude, elevated bond yields, a weaker rupee, geopolitical uncertainty and continued Foreign Institutional Investors (FII) selling.
FII selling is unlikely to subside anytime soon, which means the market will remain vulnerable to foreign outflow. On aggregate, the money foreign investors have put into Indian equities in the past decade is nearing zero, according to financial reports. In September alone, FII pulled out $2.7 billion, taking their total 2026 equity outflow to about $30 billion at the end of October.
Until at least one of these pressures eases, market rallies are likely to meet selling, making recovery harder, although the ongoing correction has taken a fair amount of froth out of the large-cap stocks.
Currently the market capitalization-to-GDP ratio, known as the Buffett indicator, is around 117 percent, which is considered fair value based on historical benchmarks of 99 to 119 percent. The current figure sits roughly 6 percent above the long-term average of 110 percent. This is around 25 percent below the peak of 141 to 147 percent reached earlier in 2026 and two decades ago in 2006 when India’s growth story had really begun to fire.
The RBI’s 25-basis-point repo rate hike on October 7 turned out to be a non-event for the market, despite a sharper growth outlook. What caught the market’s attention was a less comfortable inflation trajectory and shift in its stance from neutral to ‘calibrated tightening’ of liquidity.
While the GDP upgrade to 7.1 percent is supportive of earnings, inflation upgrade and tightening bias suggest more rate hikes could come in the second half of this fiscal. This means more worries for corporate earnings because of higher inflation, since higher oil prices and input costs could prevent revenue growth from translating into profit.
The immediate test for the market’s direction is the ongoing Q2 earnings season. Consensus estimates are that Nifty50 companies would report 20 percent year-on-year revenue growth and similar profit growth. But the catch is higher oil prices and input costs will hit profit margins.
For India, crude oil above $100 a barrel impacts inflation, the current account balance and the rupee. The global bond market also makes things harder. The surge in the US 10-year Treasury isn’t doing the Indian equity market any favour, hitting their highest levels since 2002 and curbing investors’ appetite for risk.
Going ahead, the key question is not just about reclaiming the earlier top for the Sensex but whether the macro headwinds will subside and corporate earnings will regain momentum. While stock valuations were a major concern earlier, correction over the last two years has reduced the premium that Indian stocks held over their emerging market competitors.
Bernstein Research has observed in its recent report that the missing piece in India’s growth story is the AI-led new economy, which is absorbing a lot of global capital. The report further notes that big Indian companies which represent the ‘bygone economic era’ are not investing in the future but consolidating their past.
With foreign investors not looking at India enthusiastically, the saving grace so far has been domestic institutional and retail capital which has prevented a sharper fall in the market. The question is, whether domestic money alone will help avoid a deeper correction in the future.
Ali Chougule is a senior independent Mumbai-based journalist
