Notwithstanding the relative underperformance of Indian equities, steady foreign investor outflows and persistent global economic uncertainty, the equity market has displayed remarkable resilience.
Volatility remained subdued compared to other markets, said the RBI Financial Stability report.
The stability of the equity market was underpinned by strong demand from domestic institutional investors. Their ownership of stocks has not only surpassed that of foreign investors but also continues to grow. An inflow of ₹7.4 lakh crore inflows from DIIs till December 10 sharply outpaced ₹1.6 lakh crore outflows from foreign portfolio investors, said the report.
FPIs remained net sellers of Indian equities cumulatively for the fifth year in a row as India has been a relative underperformer compared to emerging market peers in terms of risk-adjusted dollar returns during the last two years. However, India has performed better over a longer-term horizon, it added.
Nonetheless, their influence on domestic equity movements has been diminishing, and even during risk events—such as the recent tariff shock—capital outflows have been lower compared to past stress episodes.
Analysis of historical riskoff events indicates that the resilience of the Indian equity market improved despite foreign investor selling pressures during identified episodes. Within the FPI categories, banks, investment advisors and unregulated funds have shown relatively higher sensitivity to global risk sentiment recording
larger outflows.
Study indicate that the recent FPI outflows can be attributed to cyclical profit booking rather than structural shift in FPI outlook for Indian equities.
Indian equities have been trading at a premium compared to other emerging markets. Recent market corrections, however, have narrowed the valuation gap bringing it closer to the 10-year average of 70 per cent from 100 per cent in September 2024.
Nonetheless, valuations have returned to the high end of the historical range with markets recovering from the tariff shock and trading near their lifetime highs.
The implied equity risk premium (ERP), a key barometer of the price of risk in equity markets, has increased since September 2024 for all Nifty indices, said the report.
Though, Nifty 50 cumulative returns since March 2022 have been primarily driven by earnings, returns of midcaps and smallcaps are driven more by compression of ERP than by earnings growth.
Moreover, risk to earnings growth remains in an environment of relatively slow nominal GDP growth, with forward earnings per share (EPS) consensus estimates for Nifty 50 for 2025 and 2026 showing a decline, it added.