India trails global equities as MSCI India falls 13% in CY26; are stocks turning attractive after the correction?

Indian equities have emerged as one of the weakest-performing major markets globally in calendar year 2026, with the benchmark market trailing most developed and emerging peers amid sustained foreign institutional investor (FII) outflows, slowing corporate earnings and heightened geopolitical uncertainties.

According to a Motilal Oswal report, the MSCI India Index has declined 13% in USD terms so far in CY26, making it one of the poorest-performing major markets globally. In contrast, the MSCI Emerging Markets (EM) Index has gained 23%, while South Korea (+87%), Taiwan (+57%) and Japan (+34%) have delivered stellar returns, buoyed by the global AI-driven technology and semiconductor rally. Only Indonesia has fared worse, with a 39% decline.

FII selling weighs on Indian equities

The report attributes India's underperformance primarily to sustained foreign portfolio outflows. FIIs have pulled out nearly USD 29 billion from Indian equities in CY26, extending their selling streak to four consecutive months through June. Elevated valuations at the start of the year, moderating earnings growth, uncertainty over global trade policies and geopolitical tensions in West Asia prompted investors to shift capital to relatively cheaper markets.

Domestic institutional investors (DIIs) have partly cushioned the impact, pumping over USD 50 billion into equities so far this year. However, their buying has not been sufficient to offset the scale of foreign selling.

The benchmark Nifty 50 rebounded 1.4% in June after consolidating in May, closing the month at 23,866 despite witnessing sharp intra-month volatility. Even so, the index remains down 8.7% in CY26, reflecting the challenging market environment.

The report also highlights the divergence within the domestic market. Over the past 12 months, large-cap stocks have declined around 6%, underperforming both mid-cap stocks, which have gained about 3%, and small-caps, which are down only 1%.

Over a five-year period, mid-caps have generated a compound annual growth rate (CAGR) of 18%, significantly outperforming the 8.7% CAGR delivered by large-caps. Small-caps have also outpaced large-caps with a 14.1% CAGR, underscoring investors' preference for companies offering stronger earnings growth.

Economic fundamentals remain resilient

Despite the subdued equity market performance, India's macroeconomic fundamentals continue to strengthen. The economy grew 7.7% year-on-year in FY26, exceeding expectations and improving from 7.1% in FY25, driven primarily by strong growth in services, financials, real estate, information technology and professional services.

Corporate profitability has also reached record levels. The profit-to-GDP ratio for the Nifty 500 universe climbed to an all-time high of 5.2%, while the ratio for listed India Inc. touched 5.7%, its highest level in nearly two decades.

"Notably, for the listed India Inc., the ratio stood at 5.7%, an 18-year high. The year-on-year increase in the profit-to-GDP ratio for the Nifty-500 was led by automobiles, oil & gas, metals, NBFC lending, capital goods and insurance," the report said.

Correction improves valuations

The recent market correction has also made Indian equities more reasonably valued. The Nifty currently trades at 18.8 times one-year forward earnings, below its long-term average of 21 times, indicating that much of the valuation premium has moderated. The brokerage notes that nearly two-thirds of sectors are now trading below their historical average valuations.

While capital goods, PSU banks, metals, oil & gas, healthcare and utilities continue to trade at a premium to their long-period average valuations, sectors such as private banks, consumer, technology and retail are available at a discount.

Motilal Oswal believes the twin corrections, both in terms of prices and India's relative performance against emerging markets, have created a healthier base for future returns. With concerns over a prolonged oil price shock and escalating tensions in the Middle East easing, the external environment has also become more supportive.

Rather than expecting a broad market rally, the brokerage expects the next phase of the market to be driven by company-specific fundamentals, where earnings delivery and execution will matter more than overall index movements.

What could trigger the next rally?

According to the brokerage, the outlook for Indian equities now hinges on several key catalysts. A revival in foreign portfolio inflows, supported by lower global interest rates and improving risk appetite, could provide a meaningful boost to market sentiment. A recovery in corporate earnings during the second half of the fiscal year, coupled with GDP growth above 7%, sustained government capital expenditure, resilient domestic consumption and continued domestic liquidity, could further support equities.

Reflecting its constructive medium-term outlook, Motilal Oswal remains overweight on automobiles, PSU banks, diversified financials, manufacturing and industrials, consumer discretionary and new-age digital platforms. It remains underweight on oil & gas, private banks, metals, consumer staples, information technology and commodities and utilities.

While Indian equities have lagged global peers this year, the brokerage believes the combination of stronger macroeconomic fundamentals, healthier valuations and robust domestic institutional participation has created conditions for a gradual turnaround.