Five reasons India's stock market is sinking even when its economy is growing

India's economy is thriving, expanding at a rapid 7% growth rate, yet its stock market is faltering. Despite global energy disruptions, rising interest rates and geopolitical uncertainties, the nation's largest equity indices have struggled. The benchmark Sensex and Nifty indices have shown a slight uptick after eight weeks of consecutive losses, marking the longest such streak in 25 years.

Indian retail investors, who have poured money into the Nifty, have seen their wealth plummet by approximately 15% this year, a stark contrast to the 62% returns they would have earned in Korea's Kospi index or the 170% they gained in the last two years in other markets. Over the past decade, foreign investors have deposited nearly $0 in Indian markets, with foreign institutional investors withdrawing a significant $40 billion in just the past two years.

This has left domestic investors, already grappling with weak job markets, inflation and fading consumption, with their equity savings taking a significant hit. The recent market decline is particularly concerning, as the growing pool of domestic investors in stocks and mutual funds has been hindered by their mounting losses. The primary reason for India's underperforming stock market lies in the steep rise in crude oil prices.

As the Strait of Hormuz remains disrupted for the eighth consecutive month, oil prices have hovered between $90 and $100 a barrel, far longer than analysts had anticipated. When prices exceed $100 a barrel, it exerts stress on macroeconomic variables like inflation and company earnings, negatively impacting the markets. India relies heavily on this shipping route, importing over 90% of its oil requirements, including a large share of its liquefied petroleum gas (LPG) and liquified natural gas (LNG) shipments.

Moreover, rising oil prices have led to inflation and consequently, a surge in global interest rates. The effective yield on US government bonds now exceeds 5%, near 25-year highs, prompting foreign investors to move their funds from riskier emerging market assets to safer investments like US bonds. This exodus of foreign money from Indian equities, compounded by a weakening rupee, has further exacerbated the situation.

Stock valuations have also been a significant concern. Indian stocks have been underperforming their emerging market peers due to reduced valuations. While Indian companies are investing in data centers and chip fabrication, they have yet to create globally competitive industries like OpenAI or DeepSeek. This lack of innovation in emerging areas is holding back foreign investor interest in India's markets.