Five reasons India's stock market is sinking even when its economy is growing

India's economy is growing at an enviable rate of over 7% despite global energy shocks, rising interest rates, tariff uncertainties and weather-related disruptions.

But the world's fastest growing major economy also has one of the worst performing major equity markets in 2026. The correction in Indian stocks has, in fact, only intensified in recent weeks.

The benchmark Sensex and Nifty indices, which represent the country's largest companies, have inched up slightly since Monday after posting losses for eight straight weeks - the longest losing streak in 25 years, according to Reuters.

Indian mom-and-pop investors who put their money into the Nifty have seen their wealth erode by about 15% this year. In comparison, they would have made 62% returns on Korea's Kospi index since January or 170% in the last two years.

On aggregate, the money foreign investors have put into Indian markets in the past decade - after subtracting what they sold or withdrew - is nearing zero. In the past two years alone, foreign institutional investors have withdrawn a staggering $40bn, according to data from Bernstein Research.

It is the large pool of domestic institutional and retail money, flowing into instruments like mutual funds, that have helped the markets avoid a sharper fall.

Domestic assets under management of mutual funds have grown from about $125bn in 2016 to some $900bn this year, with the number of Indians parking money in stocks and mutual funds more than tripling to 150 million individuals.

This makes the recent fall in the markets more worrying - since households, already struggling from a weak job market, high inflation and faltering consumption, are now seeing their equity savings take a beating too.

So, what's gone wrong?

Here are five reasons India's booming economy isn't lifting its stock market.

Crude oil prices have hovered between $90 and $100 a barrel as the disruption to shipping through the Strait of Hormuz enters its eighth month, far longer than analysts had expected. Moreover, there's little visibility on when normalcy will return.

"This single variable tends to influence the markets quite negatively," Hari Shyamsunder, a fund manager with Franklin Templeton Asset Management India, told the BBC. "Markets can absorb crude between $70 and $90, but when prices move above $100 a barrel, it starts putting stress on macro-economic variables such as inflation and also company earnings and margins."

India imports over 90% of its requirements - nearly half of its crude oil imports, along with a large share of its liquified petroleum gas (LPG) and liquified natural gas (LNG) shipments, come through the Strait of Hormuz.

While Delhi has diversified its energy sources, tapping Russian oil markets, US President Donald Trump recently threatened up to 100% tariffs on countries doing trade with Moscow, further complicating matters.

In India, AI, or the new economy broadly, is a major missing piece of its growth story.

"Many of India's large caps [big companies] represent a bygone economic era," Bernstein Research said in a note recently. "Most are not investing in the future, but consolidating their past, often expecting policy to continue shielding them from global competition."

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And its smaller companies are yet to reach a scale that will attract foreign institutional funds.

While Indian companies are investing in data centres and chip fabrication, the country has not produced a global giant like OpenAI, Anthropic or even China's DeepSeek - this is where the largest share of the profits in the AI value chain lie.

Foreign investor interest will only return to India meaningfully if it can build globally competitive industries in these emerging areas, according to Bernstein.

"We are seeing early signs of this in areas such as space, defence, semiconductors, and deep-tech innovation, but most remain too small to materially influence capital allocation decisions over much of this decade."