India and Emerging Markets: 2025 Underperformance Explained
· 4 min read · Written by the BuyUnlistedShares desk. Information only, not investment advice.
India's equity markets lagged EM peers through 2025 as valuations corrected and retail money rotated out. This post sets out the factors behind India's 2025 underperformance.
By Team BuyUnlistedShares
1. What Are Emerging Markets (EM)?
Emerging Markets are countries whose economies are growing and developing rapidly, but have not yet reached the full maturity of developed economies like the United States, Germany, or Japan. They are somewhere in between — more advanced than frontier markets, but not quite at the level of fully developed nations.
2. India's Place in the Emerging Markets Universe
India is one of the largest and most watched emerging markets globally. Here is why it occupies such a central role in the EM conversation.
India's Weight in Global EM Indices
Index providers like MSCI have steadily increased India's weightage in their Emerging Market indices over the past decade. This matters because global funds that track EM indices automatically allocate a portion of their money to India. As India's weightage grows, more global capital flows in passively — independent of active investment decisions.
3. What Happened in 2025: The Underperformance Explained
The Setup Coming into 2025
Indian equities rose between 2020 and 2024. Post-pandemic recovery, infrastructure spending by the government, the startup ecosystem, and corporate earnings drove Indian equities to historically high valuations. The Nifty 50 hit multiple record highs during this period.
However, when valuations rise faster than underlying earnings, a correction becomes mathematically inevitable. By late 2024 and into 2025, several factors combined to cool the market down.
Key Reasons India Underperformed EM Peers in 2025
A. Valuation Correction
India's price-to-earnings (P/E) ratios — price relative to company earnings — were higher than those of other EM peers like China, Brazil, and Indonesia.
B. Foreign Institutional Investor (FII) Outflows
Foreign Institutional Investors (FIIs) are large global funds — pension funds, hedge funds, sovereign wealth funds — that invest in Indian markets. When global interest rates remained elevated (especially in the US), FIIs pulled money out of emerging markets, including India, and moved it to US assets. This outflow of FII money created selling pressure on Indian indices.
C. A Stronger US Dollar
When the US dollar strengthens, emerging market currencies — including the Indian Rupee — tend to weaken. Currency depreciation reduces returns for dollar-based foreign investors when converted back to dollars. The rupee came under pressure through parts of 2025.
D. Retail Investor Profit-Taking and SIP Slowdown
India saw an explosion in retail participation through Systematic Investment Plans (SIPs) in the years after COVID. However, as markets corrected, some retail investors paused or reduced their SIP contributions. This reduced the steady inflow of domestic money that had previously provided market support.
4. Retail Participation: India's Unique Domestic Story
One of India's most distinctive features as an equity market is the rapid growth of domestic retail participation — ordinary Indians investing in stocks and mutual funds in large numbers for the first time.
The SIP Revolution
India's mutual fund industry saw its monthly SIP inflows grow from around ₹8,000 crore per month in 2020 to over ₹20,000 crore per month by 2024. This represents millions of middle-class Indians — teachers, doctors, small business owners, salaried employees — systematically investing in equity markets, often for the first time in their families' histories.
Why Retail Participation Matters
When FIIs sell, DIIs — largely funded by retail SIP money — can absorb the selling pressure.
What Happened in 2025 to Retail Flows?
As markets corrected and returns were muted, some first-time investors panicked and either paused SIPs or redeemed units.
5. HNI Re-Entry: What It Signals and Why It Matters
Who Are HNIs in the Indian Context?
In India, HNIs are typically classified as individuals or family offices with investable assets above ₹5 crore. This category includes successful business owners, senior corporate executives, real estate entrepreneurs who have monetised assets, and professionals who have accumulated significant wealth over decades.
How Do HNIs Invest?
Unlike retail investors who primarily use mutual funds and SIPs, HNIs have access to a broader range of instruments:
• Portfolio Management Services (PMS) — where a fund manager manages a customised portfolio directly.
• Alternative Investment Funds (AIFs) — more sophisticated structures, often with higher minimum investments.
• Direct equity — buying shares directly.
• Structured products — instruments with customised risk-return profiles.
What Does 'Re-Entry Window Forming' Mean?
6. Macroeconomic Signals: What the Data Is Saying for 2026
Let us look at the broader macro landscape that forms the backdrop for any discussion of India's potential rebound in 2026.
India's GDP Growth
India's real GDP growth has been among the highest of major economies globally. Estimates for 2025-26 from institutions like the IMF, World Bank, and RBI have generally placed India's growth in the 6.5–7% range.
Inflation and the RBI's Monetary Policy
The Reserve Bank of India (RBI) — India's central bank — manages monetary policy. After a period of elevated global inflation, India's CPI (Consumer Price Index) inflation has trended toward more manageable levels. A more benign inflation environment gives the RBI room to potentially ease interest rates, which is generally positive for equity valuations (lower rates make future earnings more valuable today).
Government Capital Expenditure (CapEx)
The Indian government has maintained an aggressive infrastructure spending program — on roads, railways, ports, airports, and digital infrastructure. This government CapEx creates demand across multiple sectors, supports employment, and lays the groundwork for private sector investment. It is a structural positive that directly feeds into corporate earnings growth.
Currency Stabilisation
After the Rupee experienced depreciation pressure in 2024-25, a stabilisation of the currency would reduce one layer of risk for foreign investors. India's forex reserves provide a buffer against currency volatility.
Disclaimer:
This is written for educational and informational purposes only. Nothing here constitutes investment advice or a recommendation to buy or sell securities. All data is sourced from publicly available information. Investments in securities markets are subject to market risks — please read all offer documents carefully before investing.
