Investors have always been interested in emerging markets as a way to earn higher returns (due to higher growth rates than developed markets) and diversify their portfolios. 

 

Since 2021, the Indian stock market has stood tall among other emerging economies. From 2021 to 2024, the MSCI India Index (which covers 85% of the Indian equity market) has outperformed both the MSCI Emerging Market Index (which covers equities in 24 emerging markets) and the MSCI BIC (Brazil, India, and China) Index, as seen below: 

 

Annual performance of MSCI India, MSCI Emerging Markets, and MSCI BIC

Source: MSCI

 

Furthermore, so far in 2025, the NIFTY 50 Index (an index tracking the 50 largest stocks in India) has outperformed (with a YTD of 7.22%) both the S&P 500 Index (YTD of 5.92%) and the FTSE 100 Index (YTD of 6.82%).

 

This recent run has been driven by high economic growth, propelled by pro-growth policies from the Indian government, according to Rashmi Gupta, a private bank portfolio manager at J.P. Morgan. These policies include bankruptcy code reform, corporate tax cuts, infrastructure investment, stable inflation, and macroeconomic stability, among others. 

 

Is it a good time to invest in India, given this current run, or are there reasons why investors should be cautious? We answer this question by considering the following: 

 

  1. What’s driving interest in the Indian equities market?
  2. The risks of investing in India
  3. How to approach investing in India

 

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1. What’s driving interest in the Indian equities market?

 

We will focus first on long-term factors that are driving the interest of investors in the Indian economy as a whole. After this, we will narrow down to the factors that make the Indian equities market attractive to both retail and institutional investors.   

 

Long-term factors driving interest in India

In June 2024, Morgan Stanley published a report explaining why they were bullish on the Indian market. 

 

“India’s macroeconomic stability and other key factors could help send equities 20% higher annually over the next five years,” they said. They even projected that if India kept its momentum, its economy and stock market could become the third-largest in the world by 2027 and 2029, respectively. 

 

Some of the factors that made them optimistic include: 

 

  • High economic growth: Between 2000 and 2024, India posted an annual real GDP growth of 6-7%, according to Gupta. Both the World Bank and the IMF expect this growth story to continue in the near future. 

 

The World Bank expects India’s economy to grow by 6.7% in 2026 and 2027, making it the fastest-growing large economy in the world. This is far higher than the 2.7% global growth forecast for 2025 and 2026. 

 

Similarly, in its April 2025 outlook, the International Monetary Fund projected an average annual growth rate of 6.42% for India between 2025 and 2030.  

 

  • Growing domestic investment: High growth, infrastructure spending, and a booming middle class have led to a rise in private investment in India. Morgan Stanley expects this rise in private consumption and investment to lead India away from primary deficit to primary balance in the near future. 

 

Though Indian households still favour asset classes like gold and real estate over stocks, the policy that allows retirement funds to invest in equities (similar to the 401(k) system in the US) is expected to change this tide. 

 

  • Technology and innovation: Interest in technology-driven innovation is obvious in the large number of startups in the country. These startups have focused on financial inclusion, transition to a green economy, access to credit, and digital transformation, among others. 

 

  • Improving social equity: Poverty reduction, driven by high economic growth, job creation, and higher consumption, is expected to further enhance social equity in India. Also, lower inflation, female feticide, fertility rates, and infant mortality rates continue to contribute to upward mobility.  

 

J.P. Morgan also shared the same optimism in a September 2024 report published by their research team. For them, the long-term drivers of economic growth in India include: 

 

  • Increasing urbanisation and rising wealth: The middle class in India has been growing by 6.3% per annum since 1995, and they are now a third of the population. Also, as seen in the chart below, the working age population is growing and it is expected to keep growing into the 2050s: 

 

Indian working age population, 1990-2100

Source: J.P. Morgan

 

  • Effective regulatory processes: Independent regulators of the capital markets, banking industry, and insurance industry have been working hard to ensure transparency, promote market efficiency, and protect investors. This is leading to greater confidence in the economy, a crucial precondition for attracting foreign capital.  

 

  • Strong infrastructure push by the government: The government has worked on railways, metro rail projects, airports, waterways, among others, over the past decade. It planned to spend $1.4 trillion on infrastructure projects between 2024 and 2029 through the National Infrastructure Pipeline (NIP).

 

  • Supply chain diversification: As businesses look to diversify supply chain risk and reduce reliance on China, India’s labour cost advantages make it a favourite destination. 

 

As the chart below shows, manufacturing as a portion of GDP is rising, and the government expects annual exports of $1 trillion by 2030. 

 

India’s manufacturing share of GDP

Source: J.P. Morgan

 

  • Sustainable and pro-industry policies: “Pro-growth policies include bankruptcy code reform, corporate tax cuts, and reduced caps on foreign ownership in major sectors,” according to Gupta.

 

  • Growing renewable energy capacity: As of September 2024, India had a renewable energy capacity of 197.20 GW. Nine months later, they had increased this to a 226.75 GW capacity, according to the Ministry of New and Renewable Energy. This shows a strong commitment to its plan to achieve net zero by 2070. 

 

Achieving this will require massive investments ($360 billion, according to J.P. Morgan) that will further boost the economy. 

 

Factors driving interest in the Indian equities market 

 

Is it good to invest in stocks in India? 

 

For some investors, the answer is yes. So, what are the reasons behind this optimism?

 

  • Attractive earnings: First is the attractive earnings of Indian companies. 

 

“Corporate earnings are starting to reflect India’s high GDP growth,” said Gupta. “Indian companies have seen double-digit earnings growth in 2024, and the consensus among analysts is that this trend should continue.”

 

While GDP grew by a CAGR of 10.5% between FY 2020 and FY 2025 (ending in March 2025), the profits of Indian companies grew by a CAGR of 30.3%, nearly 3X, according to Ionic Wealth, a wealth management firm. Corporate profits as a share of GDP also grew from 1.9% in FY 2020 to 6.9% in FY 2025. 

 

Growth in corporate profits and corporate profits as a % of GDP in India

Source: Twitter

 

  • Correlation between the equity market and the economy: The sectors that drive growth in the real economy are also the ones that lead in the equity market. 

 

“Some equity markets don’t reflect the real economy—technology drives U.S. market returns, even though consumption dominates the economy,” said Gupta. “In India, the market really reflects the economy. For example, banks are the backbone of the economy and financials make up more than a quarter of India’s investible universe.”

 

  • Strong local participation, especially through mutual funds: Inflows by local investors into the Indian stock market reached a record $72 billion in FY2025, the Financial Times reported. 

 

“The massive inflows by what the markets regulator once called 'elusive' retail investors have taken domestic holdings to more than 26 per cent of the market, compared with foreigners’ 17 per cent as of December 31,” they noted. 

 

The majority of these inflows are in the form of participating in systematic investment plans (SIPs) offered by mutual funds. Assets under management (AUM) by mutual funds in India were ₹72.2 lakh crore ($865 billion) as of May 2025, according to the Times of India, a news agency. 

 

  • High growth: We have seen how the MSCI India Index outperformed the MSCI Emerging Markets Index between 2021 and 2024. 

 

The chart below also shows the Nifty 50 outperforming the S&P 500 Index since 2021: 

 

Nifty 50 vs S&P 500, 2021-2025

Source: Financial Times

 

(Past performance is no guarantee of future performance)

 

  • A deep, liquid, diversified, and mature market: The Indian stock market has a market cap of about $5.5 trillion, according to Aberdeen Investments, an investment management company.  

 

Also, the National Stock Exchange (NSE) has 2,629 listed companies, and the Bombay Stock Exchange (BSE) has 5,595 listed companies, according to Appreciate Wealth, a digital investment platform in India.

 

Regarding diversification, the Indian stock market has a variety of sectors, including financials, technology, consumer and fast-moving consumer goods, healthcare, industrials, energy, among others. 

 

Strong regulations by the Securities and Exchange Board of India (SEBI), institutional presence, and rising retail participation are all factors that contribute to the market’s maturity.  

 

2. The risks of investing in India

 

Nevertheless, analysts continue to point to certain risk factors that should make investors cautious about India. 

 

Some of these risk factors concern the economy as a whole, while others relate to the Indian stock market. 

 

Our focus will be on the latter. Some of these risk factors include: 

 

  • High valuations: Indian stocks have high valuations compared to historical trends and other emerging markets. 

 

“India has always tended to be a high-priced market because earnings have grown at a high pace (not least due to inflation), but valuations at these levels make me a little cautious,” said Cris Sholto Heaton, an investment analyst at Money Week, a financial publication. 

 

If we put numbers to the valuation issue, the Nifty 50 is trading at a 60% premium to the Hang Seng Index (the benchmark index of Hong Kong stocks) and a 70% premium to other emerging markets in Asia, according to Vivek Subramanyam, CEO of TH Global Capital, an investment bank.

 

  • Competition with regional peers: Hong Kong is one regional peer that has been attracting attention. They also have a strong demographic that can support local consumption and investment but their stocks have lower valuations compared to India. 

 

Interestingly, NIFTY 50’s 7.22% YTD and BSE SENSEX’s 6.63% YTD are far lower than that of Hong Kong’s Hang Seng Index (23.06% YTD) and South Korea’s Kospi Index (29.85% YTD). If the valuation and return differential persists, investors may start shifting attention away from India to its peers. 

 

  • Foreign investor outflows: Since September 2024, foreign investors have been pulling funds out of India and going back to China, according to Reuters. Within the six months between October 2024 and March 2025, a total of $29 billion were liquidated from the Indian stock market, a record high.

 

Net purchase and sale of Indian stocks by foreign portfolio investors

Source: Reuters

 

Slowdown in corporate earnings and economic growth in FY2025 were the primary causes of these outflows.

 

  • Exchange rate risk: Emerging markets tend to have varied sources of uncertainty and volatility. One of them is the exchange rate. 

 

A rising dollar (pounds, Euros) and a falling rupee will increase the cost of production of import-dependent companies, which can reduce their earnings if they can’t pass the cost on to final consumers. It is no wonder that the fall in earnings that precipitated foreign investor outflow coincided with the fall of the rupee against the US dollar. 

 

  • Interest rate risk: Also, rising interest rates in the US can cause outflow of funds from India (and emerging markets in general) while falling rates will have the opposite effect. Similarly, while rise in local rates can attract investors, it can also reduce the profit margins of local companies. And while falling local rates can increase profit margins, it can reduce foreign outflows. 

 

  • Geopolitical tensions: India has been pursuing protectionist policies in selected industries (especially agriculture), refusing to open them to subsidised imports from the US. In response, the US has threatened a 26% reciprocal tariff on Indian exports. 

 

If a trade deal is not agreed between Trump and Prime Minister Narendra Modi, Indian exports to the US could decline as their competitiveness reduces. 

 

However, recent statements from Trump suggest that a deal is close to being finalized. Though, given the way the whole tariff business has been conducted, it remains to be seen if a deal means the end of all tensions.  

 

3. How to approach investing in India

 

Given all these factors, is it a good time to invest in India?

 

Yes, but ... 

 

ndia is a long-term play

 

One of the points that analysts interested in India have emphasised is that India is a long-term play. 

 

“We think India is among the most attractive long-term opportunities, as part of a diversified global equities portfolio,” said Gupta. “If nothing serious goes wrong with the economy, India will be a growing share of global portfolios in the years ahead, even if there are setbacks,” said Heaton.

 

“India is a long-term play,” concluded CNBC after interviews with three investment managers. 

 

“Most investors in Indian stocks are investing for the long term, which is a good thing,” according to Aberdeen Investments. “They are buying into the growth potential of the world’s fastest-growing major economy, one that is reaping the benefits of major reforms launched a decade ago.”

 

All the fundamentals driving interest in India are poised to drive medium-to-long-term growth in the equity market. Thus, institutional investors interested in India must approach it with long-term investment objectives.

 

Be selective

 

High valuations in itself is not an issue as long as the stock can justify it. For example, a high P/E ratio might not be a red flag if the growth potential of the company substantiates it. 

 

Moreover, the share price of a stock with higher valuation can still run ahead of the one with a lower valuation in both the short and the long run. 

 

Thus, an active approach – selecting individual stocks – may be the better approach given current dynamics. “The recent slowdown and ongoing recovery in growth make now a good time to selectively buy Indian equities in the medium to long-term,” according to Subramanyam.

 

For him, the focus should be on companies with superior earnings and recurring revenues (whether they are large-cap, mid-cap, or small-cap). 

 

Companies with strong balance sheets and cash that can be used for R&D, advertising, and productivity-improving initiatives purposes should be the focus, according to Pramod Gubbi, co-founder of Marcellus Investment Managers, an investment management company, in an interview with CNBC. 

 

The technology sector has many gems, according to Kevin Carter, founder of EMQQ Global, a financial services firm, in an interview with CNBC. “Indian internet companies offer stronger growth momentum and attractive valuations than their emerging market peers, despite being a tad more expensive,” he said. 

 

For Morgan Stanley,  investors should focus on businesses with durable competitive advantages. In India, they believe such investment opportunities are primarily consumer-focused plays (travel, retail, luxury, healthcare), large lenders and life insurance providers, green energy and utilities, IT and non-IT professional services, and industrials (energy, defense, mobility, railways, power plants, steel, and cement). 

 

The main point to note from these analysts is that an active or selective approach might be preferable to a passive (index-tracking) one. 

 

Diversification is key

 

Given what we have seen about regional peers like Hong Kong and South Korea, it seems obvious that India cannot be the only emerging market play. 

 

“While we have been overweight India for some time, other emerging market equities also offer strong expected returns and earnings, different drivers of returns and less expensive valuations,” said Gupta. “It’s important for portfolios to have diversified return and risk drivers and low correlations to each other.”

 

In essence, age-old diversification still remains the best risk management strategy. This might mean buying individual stocks across emerging markets or active funds (mutual funds and actively-managed ETFs) that focus on emerging markets.  

 

So, is it a good time to invest in stocks in India? 

 

Yes, as long as you are approaching it with a long term mindset, an active strategy, and a commitment to a diversified portfolio. 

 

Investing in emerging markets or global markets requires that you keep an eye on important developments due to the many uncertain factors that affect them. 

 

At cio investment club, we provide you with a group of asset managers, asset owners, and other financial experts who are also keeping abreast of emerging markets like India (among others). 

 

Through the sharing of ideas and insights that take place in this club, you can be better informed about these markets and make improved portfolio decisions. 

 

We also organise exclusive roundtables and investment breakfasts where you can network and interact with industry players. 

 

Do you want to be a part of a community where you can gain more insights into emerging equities markets? Register today to become a part of the cio investment club. 

 

Takeaways

  • Driven by pro-growth government policies, macroeconomic stability, and robust corporate earnings growth, India has outperformed many emerging and developed markets in recent years.
  • High corporate earnings, a stock market correlated with the broader economy, strong growth, growing local participation, depth, liquidity, and diversification are factors behind investors’ interest in India’s stock market.
  • Risks such as expensive valuations, competition from other Asian markets like Hong Kong and South Korea, foreign investor outflows, exchange rate fluctuations, and unresolved trade tensions with the U.S. could dampen short-term performance.
  • Analysts advise approaching Indian equities with a long-term mindset, favoring selective stock picking over passive investing. A diversified emerging markets portfolio — not one overly concentrated in India — helps manage risks while capturing growth opportunities.

 

 

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