Why India Underperformed in 2025

Our Head of India Research and Chief India Equity Strategist Ridham Desai addresses a big debate: whether India stocks are poised for a recovery after underperforming other emerging markets in 2025.

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Welcome to Thoughts on the Market. I’m Ridham Desai, Morgan Stanley’s Head of India Research and Chief India Equity Strategist. 

Today: one of the big debates in Asia this year. Can Indian equities recover their strength after a historic slump?   

It’s Wednesday, January 14th, at 2pm in Mumbai.

India ended 2025 with its weakest relative performance versus Emerging Markets since 1994. That’s right – three decades. The reason? A mid-cycle growth slowdown, rich valuations, and the fact that India doesn’t offer an explicit AI-related trade. Add in delays on the U.S. trade deal plus India’s low beta in a global bull market, and you’ve got a recipe for underperformance. 

But we think the tide is turning.  

Valuations have corrected meaningfully and likely bottomed out in October. More importantly, India’s growth cycle looks poised for a positive surprise. Policymakers have gone all-in on reflation, deploying a mix of aggressive measures to revive momentum. The Reserve Bank of India has cut rates, reduced the cash reserve ratio, infused liquidity and gone in for bank deregulation which are adding fuel to the fire. The government has front-loaded capital expenditure and announced a massive ₹1.5 trillion GST rate cut to encourage people to spend more on goods and services. 

All these moves – along with improving ties between India and China, Beijing’s new anti-involution push, and the possibility of a major India-U.S. trade deal – are laying solid groundwork for recovery. Put simply, India’s once-tough, post-pandemic economic stance is easing up. And that could open the door to a major shift in how investors see the market going forward. 

India’s macro backdrop is also evolving. The reduced reliance on oil in GDP, the growing share of exports, especially in services, the ongoing fiscal consolidation – all indicate a smaller saving imbalance. This means structurally lower interest rates ahead. And flexible inflation targeting, and volatility in both inflation and interest rates should continue to decline. 

High growth with low volatility and falling rates should translate into higher P/E multiples. And don’t forget the household balance sheet shift toward equities. Systematic flows into domestic mutual funds are evidence of this trend. 

Investor concerns are understandable, but let’s keep them in context. More companies raising capital often signals growth ahead, not just high valuations. Domestic investment remains strong, thanks to a steady shift toward equities. India’s premium valuations reflect solid long-term growth prospects and expectations for lower real interest rates. On the policy front, efforts to boost growth are robust, and we see real growth potentially surprising to the upside. While India isn’t a leader in AI yet, the upcoming AI summit in February could help address concerns about India’s role in tech innovation. 

What key catalysts should investors watch? Look for positive earnings revisions, further dovishness from the RBI, reforms from the government including privatization, and the long-awaited U.S. trade deal. But also keep an eye on key risks – slower global growth and shifting geopolitical dynamics. 

So, after fifteen months of relative pain, could India be on the cusp of a structural re-rating? If growth surprises to the upside – and we think it will – the story of 2026 may just be India’s comeback. Stay tuned.

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