India markets eye first annual drop since 2015 amid foreign outflows

Indian stocks are on track for their first annual decline in more than a decade, according to a Reuters poll of equity analysts, as sustained foreign investor outflows and limited participation in the global artificial intelligence (AI) rally weigh heavily on market sentiment.

Benchmark equity indices in the world’s fastest-growing major economy have underperformed most global peers this year.

Foreign investors have sold more than $23 billion worth of Indian equities so far in 2026, surpassing last year’s record outflows.

Valuation concerns emerge

Analysts said India’s valuation premium, once supported by expectations of strong economic growth, is becoming increasingly difficult to justify.

Indian equities currently trade at more than 20 times earnings, higher than most major European and emerging markets, while also offering one of the lowest dividend yields globally.

The elevated valuations have made Indian equities vulnerable as global investors seek cheaper markets and higher-return opportunities linked to the AI-led rally, particularly in US technology stocks.

South Korea’s AI-heavy KOSPI index has surged more than 200% over the past year.

In contrast, India’s heavyweight information technology index has fallen by more than one-third since December 2024.

Analysts downgrade market outlook

The Nifty 50, already down about 8.5% this year, is expected to rise only around 8.7% to 26,000 by the end of 2026 from Tuesday’s close, according to a May 15-27 Reuters poll of 24 analysts.

If the forecast materialises, the index would record an annual decline of about 0.5%, marking its first yearly loss since 2015.

Analysts expect the index to recover gradually thereafter, projecting the Nifty 50 at 27,000 by mid-2027 and 29,000 by the end of 2027.

The BSE Sensex is forecast to reach 84,150 by the end of 2026 and 87,895 by mid-2027.

The median forecasts for both benchmark indices were sharply reduced from a February poll conducted before the US-Israel war with Iran began.

AI trade leaves India behind

Market strategists said investors are increasingly focused on sectors benefiting from the AI boom, an area where India is seen lagging.

“Everyone wants returns at the end of the day, whether it's foreigners or domestic investors. Nobody wants to just park their money for fun ... but the returns are not there, and earnings growth is almost negligible to very low. AI is where the flavour of the town is right now, and this is where India, not just we lack it, we are actually on the wrong side,” said Rajat Agarwal, Asia equity strategist at Societe Generale, as cited in a Reuters report.

Agarwal also said domestic investors, who have supported markets through systematic investment plans (SIPs), are beginning to show signs of pressure.

Domestic investors support the market

SIPs, which involve regular monthly mutual fund investments by retail investors, have expanded nearly tenfold over the past decade.

Domestic institutional investors now hold a record share of Indian equities, while foreign ownership has dropped to an all-time low.

A slim majority of analysts surveyed, 13 out of 24, said a market correction was likely over the next three months.

Analysts also pointed to India’s vulnerability to rising energy prices and a widening current account deficit amid tensions in the Middle East.