Overview: India underperforms among top global markets in 2025
India’s equity market finished 2025 with the slowest rise in market capitalization among the world’s top 10 equity markets, contrasting with a broader global rally. Analysts attribute the muted performance to a combination of persistent foreign outflows, stretched valuations, softer earnings momentum, and external headwinds such as tariff tensions. As investors priced in these risks, India struggled to keep pace with peers that benefited from stronger earnings revisions and more favorable macro signals.
Key drivers behind the decelerating cap rise
Foreign outflows continue to weigh on sentiment: Despite domestic demand and reform momentum, global investors shifted away from Indian equities in parts of 2025. The outflows, while not catastrophic, chipped away at market breadth and curtailed the pace at which capitalization could accumulate. The effect was most pronounced in large-cap segments, where liquidity-driven gains typically help lift overall market value.
Valuations remain stretched: Indian indices traded at elevated price-to-earnings multiples relative to regional peers. With global rate expectations fluctuating and profitability not tracking exuberant optimism, investors recalibrated risk and demanded higher earnings visibility. This recalibration slowed the pace of upward re-rating that often accompanies strong macro cues.
Softer earnings trends dampen enthusiasm: While several sectors reported resilience, earnings growth in key drivers of market performance did not consistently outpace expectations. Softening top-lines and margin pressures across certain industries contributed to a more cautious equity environment, limiting the momentum needed to propel a rapid capitalization expansion.
Global headwinds and tariff tensions: The backdrop of tariff disputes, supply-chain realignments, and slower global growth created added friction. These external factors can disproportionately affect export-oriented sectors and domestic companies with global exposure, creating more volatility and reducing the impulse for aggressive capital accumulation.
Sectoral and market structure implications
Despite the overall slowdown, some sectors showed resilience, particularly those benefiting from domestic demand and structural reform tailwinds. Financials, information technology, and consumer discretionary remained focal points for investors, but gains were often uneven across sub-sectors. Market breadth narrowed at times, suggesting that a smaller group of stocks drove relative performance while the broader market lagged.
Liquidity dynamics also played a role. As global liquidity conditions evolved, Indian markets faced periods of thinner participation, especially in mid-cap and small-cap segments. This environment favored selective stock picks and higher-quality growth stories over broader index advances.
What this means for investors in 2026
Looking ahead, investors will be watching several variables: the trajectory of foreign flows, the pace of domestic reforms, and earnings revisions across major indices. If earnings momentum improves and valuations look more reasonable relative to global peers, India could regain momentum. Conversely, persistent external shocks or renewed tariff volatility may continue to cap upside and keep capitalization growth subdued.
Asset allocators may emphasize stock-specific strategies, focusing on companies with resilient earnings, strong balance sheets, and domestic-market exposure. Risk management and diversification will remain essential as global headwinds can re-emerge with little warning.
Conclusion
India’s slowest cap rise in three years in 2025 underscores the sensitivity of equity markets to both domestic fundamentals and global crosswinds. While the long-term growth story remains compelling, the near-term path for capitalization and investment premium will depend on how effectively policy makers, corporate leaders, and investors navigate the evolving mix of domestic strength and international uncertainties.
