By CA Aditya Sesh, Founder, Besiz Fund Services Private Ltd.
Economy: India faces an interesting conundrum today. The economy is strong, companies are broadly doing well, yet the stock market has been weak. This is not necessarily a contradiction. It reminds us that economic growth and stock-market returns are related, but not the same thing.
Indian investors paid a substantial valuation premium for growth roughly two years ago. That premium has subsequently compressed. The Nifty 50 forward P/E, for instance, has reportedly fallen from around 21.5 times in 2024 to about 17.4 times today. In other words, part of today’s weak market performance represents the unwinding of yesterday’s optimism rather than deterioration in India’s underlying economy.
Contrast this with the United States. The S&P 500, a much-tracked and followed barometer, delivered a total return of about 16.35% over the latest twelve months. Yet US real GDP grew at an annualised rate of only 2.2% in Q2 2026, while India’s economy expanded 7.8% year-on-year in April-June. India’s growth was backed by investment growth of 11.9%, household consumption growth of 7.1% and manufacturing strength.
Corporate India is hardly in distress either. Nifty 50 profits grew 18% in the June quarter, while earlier NSE estimates had projected approximately 12% earnings growth for FY26 and 15.7% for FY27.MSME-GVA remains around 30% of GDP, 45% of the exports even with a growing economy. MSME credit has grown at 15–18%. The number of workers employed is at 43.30 Cr. This growth is reflected in overall business growth but not captured directly on market operations.
So why are the markets telling a different story?
One answer lies outside India. America has become unusually attractive to global capital. US 10-year Treasury yields recently crossed 5.2%. At the same time, American equities have been powered by extraordinary earnings growth, much of it associated with technology and AI. Importantly, the revenues of America’s technology giants are global. The extraordinary performance of these corporations therefore cannot simply be compared with, or counted as part of, US domestic GDP growth.
The consequence is clear. A global investor can realise a substantial risk-free dollar yield in US Treasuries and still retain access to one of the world’s strongest equity markets. It is a natural corollary for investors to move money from India to America; a decision that comes with the added benefit of eliminating the rupee-dollar currency risk associated with holding Indian assets.
FPIs understood this early and acted by selling in India. Foreign investors withdrew about $26.8 billion from Indian equities through September 2026, even as domestic institutional investors continued buying.
Oil adds another layer of vulnerability. India imports roughly 85–90% of its crude requirement. Higher crude prices affect inflation as a result of the Middle East crisis and current account pressure, ultimately affecting the rupee. This rupee depreciation depresses GDP in Dollar terms, yet India has continued to grow strongly despite these external shocks, thanks to its intrinsic strength. Thus, INR GDP diverges from USD GDP at one level due to FX, while GDP remains very strong.
There is also an important distinction within the Indian market. IT and other export-oriented companies must partly be viewed as plays on the global economy, which is not doing too well, rather than purely on India’s domestic economy. Excluding such externally dependent sectors, large parts of listed and unlisted corporate India continue to reflect strong domestic demand, credit growth, investment and manufacturing.
This brings us to a question that perhaps deserves much more attention: Should Atmanirbhar Bharat extend from manufacturing and strategic supply chains to ownership of Indian capital itself?
India has successfully deepened domestic institutional participation through mutual funds, insurance companies, pension money and retail investors. These flows increasingly counterbalance foreign selling. But FPIs can still exercise disproportionate influence over marginal market pricing and the rupee. Over the last five years, FPIs have cumulatively purchased Rs. 142 lakh crore and sold Rs. 151 lakh crore. Conversely, DIIs have cumulatively purchased Rs. 122 lakh crore and sold Rs. 104 lakh crore. The cumulative purchases-to-sales correlation of FPI is -1.06X vs DPI 1.17X, with domestic institutions clearly saving the day. In 2025, the DII Net Transaction Volumes were more than 2X of FII Net Transaction Volumes. One further point strengthens your thesis considerably: this is less a “strong economy versus weak market” paradox than a “GDP growth versus global cost-of-capital” divergence. September illustrates it vividly—the Nifty fell 6.1% while FPIs withdrew $2.7 billion during the month, despite India’s domestic growth remaining robust.
Thus, the next stage of financial Atmanirbharta should therefore not mean shutting foreign capital out. India should remain attractive and open to global capital. But a $4-trillion-plus economy cannot allow its equity-market confidence to depend excessively upon whether a foreign portfolio manager prefers Mumbai or New York in a particular quarter. This is where a part of the 18% savings rate to GDP can be triggered to make our market somewhat insular to sudden foreign investor pullout risks. The spectacular success of RBI’s 2026 FCNR(B) window—mobilising nearly US$133 billion from NRIs in under three months—demonstrates the enormous pool of patient diaspora capital available to India. Yet NRI participation in equities remains relatively underdeveloped: NRI demat holdings are only about ₹6 lakh crore, growing just 6% YoY, down sharply from 48% growth two years earlier; even NRI PMS assets, while rebounding 12% in April 2026 alone, point to how much more long-term NRI money could be channelled into Indian equities, mutual funds and PMS if access, KYC and taxation, especially TDS, are simplified. The objective should be simple: welcome FPI capital, but build domestic capital pools deep enough that India does not depend upon it.
In conclusion, a strong economy should ultimately have a capital market whose centre of gravity is increasingly at home so that the GDP growth and the market dance in Tango!
Disclaimer: The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the views of Firenib News. The publication does not endorse or verify the author’s personal opinions.
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