Indian equities lag EM peers in 2025 after five-year outperformance; DIIs cushion market volatility, shows RBI FSR

Equities

• Indian equities lagged behind EMs and AEs in 2025 after strong 2020-2024 gains.
• Domestic investors' ownership and inflows exceeded foreign investors in 2025.
• Market volatility stayed low, with NSE VIX at 10.9, well below global peers

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India’s equity market performance has been modest in 2025 compared with its emerging market peers, following a five-year period of sustained outperformance since 2020, according to the Reserve Bank of India’s (RBI) Financial Stability Report, December 2025.

The report showed that while Indian equities delivered strong gains between 2020 and 2024, rising to an index level of 173.2 compared with 157.2 for advanced economies (AEs) and 96.7 for emerging markets (EMs), the trend reversed in 2025.

During the year, EM equities rose sharply to 128.2, while AEs climbed to 119.3, significantly outperforming India, which ended 2025 at 101.1, indicating near-flat returns.

The RBI attributed India’s relative underperformance to tepid corporate earnings growth amid relatively slow nominal GDP growth, higher valuations, sustained foreign portfolio investor (FPI) outflows, adverse tariff outcomes, and depreciation of the Indian rupee.

Earnings momentum weakened steadily through the year, with trailing 12-month EPS growth declining from above 20 per cent in mid-2024 to just 7.6 per cent by September 2025. The central bank also noted that India’s equity performance was dragged down by limited AI-driven trades and a lower beta compared with other Asian markets.

Despite this relative underperformance, the RBI highlighted the remarkable resilience of Indian equities in the face of steady foreign investor outflows and persistent global economic uncertainty.

Market volatility remained subdued compared to global peers, with the NSE VIX closing at 10.9 in December 2025, well below the CBOE VIX at 15.8. Realised volatility also stayed contained, with Nifty 50 volatility at 7.7, compared with 15.1 for MSCI EM and 11.3 for MSCI World.

The report pointed out that the impact of sharp corrections in US markets, which historically transmitted strongly to Indian equities, has remained muted in recent years. Data indicate reduced co-movement and a declining beta of Indian markets with the US, with the one-year rolling beta of Nifty 50 versus the S&P 500 falling to around 0.04, while the five-year rolling beta has also trended lower.

The stability of Indian equity markets has been underpinned by strong and persistent demand from domestic institutional investors (DIIs). Their ownership of Indian equities has surpassed that of foreign investors and continues to rise, according to the RBI.

Between 2021-22 and 2025-26, DII flows increased at an average annual rate of 7.6 per cent, while FPI flows declined at an average of 0.7 per cent per year. In absolute terms, during the calendar year till December 10, 2025, Rs 7.4 lakh crore of net inflows from DIIs sharply outweighed Rs 1.6 lakh crore of net outflows by FPIs.

Reflecting this shift, assets under custody held by DIIs rose to Rs 83 lakh crore by September 2025, overtaking FPIs at Rs 75 lakh crore.