India becomes the only emerging market to post negative returns in three months

Indian markets came under heavy pressure on Friday (August 29), with stocks, bonds, and the rupee selling off sharply. The Nifty 50 logged its biggest weekly decline in five months, while the rupee hit a record low of 88.31 per US dollar.

Persistent capital outflows and US President Donald Trump’s decision to double tariffs — raising fears of slower GDP growth if the measures stay in place — have weighed on investor sentiment. The weakening currency contributed to a 5% slide in the Nifty 50 over the past three months, making India the only emerging market to deliver negative returns in this period.

In contrast, China’s CSI 300 Index gained 17.4%, Korea’s Kospi rose 15.5%, and Taiwan’s TAIEX advanced 10.3%. The rupee has depreciated over 3% in three months — the steepest drop among Asian currencies.

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Foreign portfolio investors (FPIs) have been steadily trimming exposure, citing slower earnings growth, high valuations, and geopolitical risk. FPIs sold another $1 billion worth of shares on Friday, taking year-to-date outflows to $15.2 billion. Domestic investors, however, have stepped in, with mutual funds and other local institutions deploying $58 billion during the same period, cushioning the fall.

Market participants believe overseas investors are unlikely to return in force until corporate earnings pick up, providing comfort on valuations. Analysts expect Nifty 50 EPS growth of about 9% in FY26.

Valuation gaps remain stark. The Nifty 50 trades at 22.4× forward earnings, versus 14.5× for China’s CSI 300 and 10.4× for Korea’s Kospi, according to Bloomberg. Still, analysts argue India’s higher long-term growth prospects and superior return on equity (RoE) justify a premium. Sectors such as automobiles, consumer staples, insurance, hospitals, and banking consistently deliver higher return ratios than peers in China, Indonesia, or Korea.

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"There are multiple credible reasons to justify India's high valuations, and most of these may remain intact in the near term," HSBC wrote in an investor note. "Still, long-term risks around growth and falling RoE need to be acknowledged."

Meanwhile, bond yields surged as stronger-than-expected economic data dampened hopes of near-term rate cuts. The benchmark 10-year yield climbed 11 basis points intraday before settling at 6.57%, up four basis points from the previous close.

Source: Bloomberg