Why the Indian Stock Market May Be Entering a Long Phase of Low Returns
The story of India’s macroeconomic fundamentals is currently not conducive to any stock market rally.
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From their peak in September 2024 (26,277 on 27 September), the Nifty 50 has been hovering about 5-10 percent down for the last nearly two years (barring an aberrational recovery in December 2025). Fragility is writ large on all stocks, with every unfavourable domestic or external news sending the Nifty 50 into a tailspin.
Foreign portfolio investors (FPIs) are selling non-stop (net sales Rs 1.7 trillion in 2025, Rs 1.9 trillion in first four months of 2026). Domestic institutional investors (DIIs) and mutual funds, whose counter-purchases have saved stock markets from collapse, are losing steam. Retail investors are confused about the future and have begun holding off inflows in systematic investment plans (SIPs).
International stock markets have been quite upbeat, making the Indian stock market the worst-performing in 2025 and big laggards in 2026.
Profitability Drivers Missing
Growing corporate profitability, real or anticipated, is the primary driver of stock markets. If the market participants see high profit growth (as in case of Taiwanese semi-conductor companies; Chinese electric vehicle, solar, and computer companies; or American oil companies currently), they buy these stocks. If they expect any new profit spinners (AI mania, currently; dotcoms earlier), they flock to such stocks to capture price increases even if the real profits were years away.
Almost no Indian company has any such profitability driver currently.
Most of the listed companies produce mature and traditional products (steel, aluminium, cement, foodstuffs, non-electric cars, etc), with stable but low profit margins, which don’t excite stock-buyers. Excellent profit-spinners (IT services companies) have got into low profit growth groove, attracting short-sellers more.
Start-ups, which raised expectations of excellent future profits, are also struggling to protect their market share and low profit margins. Indian companies are totally absent (at best bit players) in AI, semiconductor chips, and energy transition products space, the new profitability tropes.
These cuts helped the corporates in retaining larger share of sales as post-tax profits. Their impact is done by now. The government has also exhausted all its giveaway tax levers. Any further misadventure will cripple public finances badly.
No wonder there is little enthusiasm in foreign investors for Indian stocks. The domestic investors, both retail and institutional, are also exhausted. The profitability drivers make for a sombre reading of the stock market ticker.
Gush of Supply Drying
Irrespective of performance on total stock market returns (capital gains plus dividend) or profitability ratios (price-earning or PE), stock prices may still rise if there a lot of new funds inflow. The investors, driven by the lure of rising stock prices, rush in to pick the upside before it is too late (greed and the fear of missing out or FOMO drives the crowd).
The Indian stock market witnessed this phenomenon in 2021 and 2024. In the last few months, gold funds drew in large, uninformed crowds that have no idea why gold prices have been rising for the last two years, and, in what conditions, the party would be over.
The government can also spruce up fresh demand for stock market investments by providing budgetary support for capital expenditures of commercial public sector enterprises (PSEs) and jacking up procurement from private companies (about 70-75 percent of capital expenditure, about Rs 12 trillion in 2026-27, results in procurement from private sector).
The government can also artificially prop up profitability of listed PSEs by placing orders at higher profit margin). Squeeze in fiscal resources, and poor performance of the investments made (railways, BSNL, defense purchases), is slowing the capital expenditure engine as well.
Macro Story Not Conducive
Macroeconomic fundamentals—growth, inflation, fiscal deficit, current account deficit, capital account inflows, foreign exchange reserves etc—make up or down investors’ (both domestic and foreign) sentiments. A good macroeconomic fundamentals story lifts up investment sentiments. A poor one downs the spirits.
Indian macroeconomic fundamental story is getting jaded by the day. India’s internationally comparable GDP growth (measured by the International Monetary Fund in current US dollars) was low, almost negative, in 2025-26, thanks to more than 10 percent rupee depreciation.
The West Asia war and our unmitigated dependence on oil and gas imports as well as on solar cells and modules imports (the entire energy chain) are going to soon make the inflation gorilla come out of its administered price leash, further worsening macroeconomic fundamentals.
The government's finances are at its weakest in many years. Fiscal deficit of 4.4 percent for 2026-27 is no longer defendable. A downward revision of nominal GDP in new 2022-23 series has already sent it upwards. Reduction in excise duties by a half, rising import cost of fertilisers and grant of more and more concessions will disturb the fiscal math further. It is quite likely that the government will have to increase the borrowing programme.
India’s macroeconomic fundamentals story is currently not conducive to any stock market rally.
A Long Pause Likely
Absence of any good profitability driver, exhaustion of domestic supply, and weakening of macroeconomic fundamentals is likely to keep the FPIs disinterested in the Indian stock market for the next couple of years.
Retail and, by extension, mutual funds, purchases of equities in the Indian stock market is also likely to slow down further. The fear of booking losses may not turn them into massive stock-sellers or stop SIP flows completely. Yet, a major reduction in supply of new money will keep the stock market price movement down or sideways only.
All pointers do indicate unmistakably that a reversal for better in the Indian stock market is unlikely anytime soon. The investors should be ready for low or no return for quite some time as the stock markets take a pause for next two-three years.
(Subhash Chandra Garg is the Chief Policy Advisor, SUBHANJALI, and Former Finance and Economic Affairs Secretary, Government of India. He's the author of many books, including 'The $10 Trillion Dream Dented, 'We Also Make Policy', and 'Explanation and Commentary on Budget 2025-26'. This is an opinion piece, and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)