Indian markets display worst show in three decades in 2025, trail Asia and EM peers: Jefferies

After years of standing out as a global favourite, India’s stock market had a tough 2025. The domestic equity market “suffered its worst relative performance” in 30 years so far in 2025, both in an Asian and emerging market context, according to the latest report by Jefferies.

The MSCI India Index, a key benchmark designed to measure the performance of the large- and mid-cap segments of the Indian equity market, has risen just 2.2% in U.S. dollar terms on a total-return basis year to date, sharply lagging the 25.9% gain in MSCI AC Asia Pacific ex-Japan and the 29.9% rise in MSCI Emerging Markets.

The report noted that a slowing earnings cycle, a weakening rupee and heavy foreign outflows have combined to leave Indian stocks trailing their Asian and emerging market peers by a wide margin.

“This performance reflects the reality of a cyclical deceleration, with MSCI India earnings growth slowing to an estimated 10% in FY26 ending March 31, 2026, as well as a 5.3% depreciation of the rupee against the U.S. dollar so far in 2025, with the currency breaking the psychologically critical 90 level in December,” Jefferies said in its report.

The report said it was surprised by how sharply the rupee has weakened but expressed hope that the currency may be near a bottom, citing strong macro indicators. India’s external position remains supportive, with the current account deficit for FY26 seen at just 0.6% of GDP, near a 20-year low. Foreign exchange reserves stood at a comfortable $687 billion as of December 5, enough to cover about 11 months of imports.

Jefferies cautioned that a major risk to the rupee remains the 50% tariffs imposed by the U.S. since August, despite ongoing hopes of a trade agreement. These tariffs could further widen India’s trade deficit, which rose 11.3% year-on-year to a record $282 billion in the first 11 months of 2025. While the weaker rupee may have helped improve export competitiveness, Jefferies said the currency is still not particularly cheap on a long-term basis. The real effective exchange rate has fallen about 11% from its November 2024 peak to an 11-year low, but it remains around 12% above the lows seen in September 2013.

The report also pointed to a more dovish stance by the Reserve Bank of India as a possible contributor to the rupee’s recent weakness. “Another potential explanation for the renewed rupee weakness is that the RBI has turned unambiguously dovish since Sanjay Malhotra took over as governor in December 2024, following the significant monetary and credit tightening implemented by his predecessor.”

The RBI has cut the policy repo rate by 125 basis points (bps) since February to 5.25%, with the last 25-bps cut on December 5, as inflation has been running well below the central bank’s formal target of 4% ±2% (that is, 2–6%).

According to the report, foreign direct investment inflows remain strong in gross terms, even though net inflows have been hit by continued private equity exits and a rise in overseas investments by Indian companies. Gross FDI rose 13% year-on-year to $81 billion in FY25 and increased a further 16% to $50 billion in the first half of the current fiscal year. Net FDI, however, fell sharply from $10 billion in FY24 to just $1 billion in FY25, before improving to $8 billion in the first six months of FY26.

Outbound direct investment jumped 69% to $28 billion in FY25 and rose another 34% to $16 billion between April and September 2025. The year has also been marked by record net foreign selling of Indian equities worth $17.8 billion.

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