Indian equity markets' pain to worsen as economy, corporate profits slow

The nearly five-month-long slide in Indian equities could continue since the slowdown in corporate earnings growth and the exodus of foreign investors will persist as the world's fifth-largest economy sputters, fund managers and analysts said.

Since hitting its all-time highs in late September, the benchmark Nifty 50 index has tumbled about 13%, much steeper than a roughly 2% drop in both its Asian and global emerging market peers.

The slide was triggered by a sharp slowdown in profit growth in India's top companies. The earnings growth of the Nifty 50 companies was 5% in the October-December quarter, a third straight quarter of single-digit increases after two years of double-digit jumps, according to brokerage data.


That was largely due to weakening urban demand amid high prices and modest income growth. In turn, India's economic growth is expected to slow to a four-year low of 6.4% this fiscal year.

"With corporate earnings missing expectations and the rising uncertainty over U.S. tariffs, markets' returns across the board could moderate further," said Harsha Upadhyaya, chief investment officer of equity and president at Kotak Mutual Fund, which manages assets worth about $56 billion.

Most analysts expect the market weakness to persist until at least the end of March.

WEAK PROFITS, STRONG SALES

As the growth in what was once the world's fastest-growing economy stalls, foreign investors too have pulled out in droves.

They had bought $12.1 billion worth of Indian stocks from the start of 2024 until the markets peaked in late September. Since then, they have sold $25 billion worth, of which $12.31 billion has come since the start of 2025.

Fund managers' allocations to India are at a two-year low, a Bank of America survey released this week showed, with a 19% net underweight position. Only Thailand fared worse among Asian countries.

China's recent performance has also sucked away foreign funds, said Sat Duhra, portfolio manager on the Asia ex-Japan equity team at Janus Henderson Investors.

India's slowing economic growth also means corporate profits will unlikely pick up pace.

Brokerage Jefferies has lowered its full-year profit estimates for 51% of the companies it tracks, while J.P. Morgan says expectations for next fiscal year are still elevated.

"We expect India to be under pressure for a number of quarters in light of weak earnings and lofty valuations which leave little room for error," said Duhra.

WITHERING VALUATIONS?

Despite the markets' tumble, stock valuations are still lofty by some standards.

The Nifty 50's forward 12-month price-to-earnings (PE) ratio is about 20, in line with its 10-year average but still among the highest in Asia.

The small-cap index is in a bear market, about 20% below its previous record, but its PE of 24 remains well above its 10-year average of 16. Same with mid-cap stocks.

And with earnings being reined in, so too will prices.

"The broader markets may struggle to deliver the returns investors have grown accustomed to," said Rishabh Nahar, partner and fund manager at asset manager Qode Advisors.