Having significantly outperformed in recent years, the past 18 months have seen India's economic growth stutter as a host of challenges have hit the world's sixth-largest economy.
While global equities have risen some 30% in the past 18 months, Indian equities have fallen 15%. Approximately $18bn was withdrawn from India's equity market in 2025 alone, which materially contributed to the market's underperformance relative to its peers.
The headwinds facing the economy have been variable. Investors were caught off-guard when India and the US failed to reach a trade agreement on US tariffs, which resulted in hiked export duties on India.
This has since been reversed amid an improvement in bilateral relations. GDP growth also slowed in 2025 after several years of double-digit expansion.
The two other reasons have arguably grabbed more headlines. The first is that India is very much an AI-laggard – the bigger companies in India have often been on the IT and services side, with many of these companies being sold down ruthlessly amid concerns about what impact AI will have on the software market.
Then there is the war in the Middle East. Net oil imports account for about 3.1% of India's GDP. The impact of the war ranges from higher petrol prices, expensive goods, inflation and increased pressure on India's import bill and fiscal balance.
JPMorgan Emerging Markets Growth & Income investment specialist Emily Whiting said: "Two weeks ago, prime minister Narendra Modi came out and encouraged people to travel less while there is pressure on the Rupee (which affects gold).
"When you have a head of state come out and say we're all in this together, it shows you there is actual pressure that even government smoothing cannot solve."
Is there now a valuation opportunity?
Strong demographics, economic growth, few geopolitical concerns, strong corporate governance and the growing online economy have meant the Indian economy has been expensive relative to other emerging markets for many years.
It did start to look stretched prior to this correction, but Indian equities have rarely been this cheap relative to emerging markets.
UTI India Dynamic Equity manager Ajay Tyagi said current Nifty valuations at ~19x one-year forward earnings are at the mid-end of the trading range of 18-20x that prevailed over the past four to five years.
"While there may be volatility in the market in the near-term due to geopolitical headwinds, valuations towards the mid end as well as the long-term growth potential of the Indian economy, along with a stable policy environment, make the Indian market attractive for long-term investors," he said.
Long-term structural drivers still in India's favour
There is an argument that, beyond the aforementioned long-term trends, there are a host of others that are starting to be overlooked given the fall in Indian equity valuations.
The first is that India is still the world's fastest-growing large economy, with forecasts for real GDP growth of 6.5% in 2026 – approximately 50% faster than the broader emerging market universe and almost four times that of advanced economies.
Matthews Asia runs the Matthews Pacific Tiger fund, which currently invests 7.4% in India. In a recent research update, the firm said that after tax cuts and an aggressive cycle of interest rate reduction in 2025, they believe the economy will start to improve.
For example, rising rural wages supported by favourable agricultural dynamics, government support mechanisms and lower interest rates are translating into stronger consumption.
The outflows from foreign investors have also been negated by the rapid increase in Systematic Investment Plans (SIPs) for domestic investors. The number of SIP accounts has increased steadily from 25 million in 2019 to 97 million today.
Research from Liontrust points to this number rising to 150 million for those aged 30-60 alone in the next two decades.
The final point is India's status as an AI-laggard. The view from investors is that it simply does not have anything interesting to invest in when you compare it to the likes of Korea and Taiwan in this space.
There is no doubt that the Saas companies in India have faced challenges (as have these companies across the world), but there will be winners as well as losers.
These are not just call centres that can be replaced – plenty of these businesses are IT services companies that can help with the deliverables of certain projects.
The government also wants India to be part of the global AI infrastructure buildout. In its recent budget, it announced tax incentives to attract both domestic and overseas investment in data centres.
There are real challenges for the Indian economy at present, as the war in the Middle East has hit hard with LPG (petrol) reductions, restaurants unable to offer a full menu and people unable to travel as much.
But the big picture remains strong with long-term drivers aided by government supported initiatives designed to turn tailwinds into headwinds.
Investors wanting exposure to a single country offering might consider the Ashoka India Equity Investment Trust or the Goldman Sachs India Equity Portfolio, a multi-cap offering managed by Aman Batra.
Those who might consider exposure through an emerging markets offering might consider the likes of GQG Partners Emerging Markets Equity or FP Carmignac Emerging Markets, which invest 21% and 11% respectively in the country.
Darius McDermott is managing director of FundCalibre. The views expressed above should not be taken as investment advice.