India’s valuations retreat from peaks, yet remain above regional peers

As global fund managers recalibrate portfolios at the start of 2026, valuations have once again moved to the centre of the investment debate. Indian equities present a nuanced picture. They are cheaper relative to their own recent history, yet continue to command a premium over most regional peers in Asia.

The Nifty, after a year of muted returns and sustained foreign investor outflows, is now trading at a price to earnings ratio of 22.75 times, below its five-year average of 24.51., according to data compiled by ET. This marks a meaningful cooling-off in valuations and offers a silver lining after a period of underperformance versus global markets.

This moderation in valuations reflects the reality of 2025 for Indian equities, a year marked by cautious earnings growth, global risk aversion and nearly 15 months of intermittent foreign institutional investor selling. In that sense, India no longer looks stretched relative to its own past.


However, when viewed through a regional lens, Indian equities still appear expensive. Most emerging Asian markets trade at significantly lower multiples. China, Korea and Hong Kong are valued in a broad range of 12 to 18 times earnings, according to ET data.

This persistent valuation premium underscores India’s positioning as a structural growth story rather than a deep value play. Strong domestic consumption, infrastructure-led capital expenditure and relative macro stability continue to justify higher multiples, but they also raise the bar for earnings delivery.

At the other end of the spectrum lie US equities, which are the most expensive among major markets. Despite concerns around stubborn inflation, economic uncertainty and trade-related disruptions, Wall Street continues to trade at elevated valuations, powered by the relentless rise of large technology and AI-linked stocks. The resilience of US markets has diverted global capital away from emerging markets, including India, over the past year.

Looking ahead into 2026, expectations are building that global investors may once again turn their attention to India. Valuations being below long-term averages improve the risk-reward equation, but they may not be enough on their own to trigger large inflows. A sustained pickup in earnings growth, progress on a US–India tariff arrangement, or even signs of fatigue or cracks in the crowded US AI trade could act as catalysts for a reassessment.

For now, India sits in a middle ground. It is no longer expensive relative to its own history, yet still commands a premium over regional peers. Whether this premium narrows or is reinforced in 2026 will depend less on valuation comfort and more on the return of earnings momentum and global capital flows.

Also read: January jinx weighs for Nifty bulls: 80% failure rate in last 10 years linked to FII selling

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