More than just a blip: Are Indian markets headed towards a permanent reset?

Despite muted returns, valuations remain stretched. The Nifty 50 is trading at about 19.9 times FY2027 estimated earnings and 17.4 times FY2028 earnings, levels that Kotak said remain elevated given recent market performance.

• Indian equities lag global peers, with Nifty 50 down nearly 3% month-to-date
• Valuations remain elevated despite muted returns and foreign investor outflows
• Retail investor behavior seen as key for future market direction

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Indian equity markets have continued to lag global peers at the start of 2026, extending a prolonged phase of underperformance that began last year. The sustained weakness, despite steady domestic inflows, brings up the debate over whether the ongoing correction is cyclical or signals a deeper reset in market valuations.

In a recent strategy note titled “New year, old story”, Kotak Institutional Equities said the current phase could mark a turning point for Indian equities. “The recent correction could either be a temporary blip or the start of a permanent reset in market multiples to more realistic levels,” said Sanjeev Prasad, Managing Director and Co-Head of Strategy at Kotak Institutional Equities, adding that several sectors may still face further de-rating, either through price correction or time.

More to India’s underperformance

In the report, Prasad notes that investors often point to high market multiples, lower valuations in other markets, and a shortage of hi-tech companies as reasons for the weakness in the Indian market. Yet, a deeper issue may be at play. “Growing disruption across sectors, coupled with limited investment by Indian companies to address these threats, is likely to drive a structural decline in multiples, bringing valuations in line with business fundamentals rather than historical highs. So far, this adjustment has been delayed by price-insensitive retail buying,” the report suggests.

Most sectors have seen negative returns over the past one month, with metal, PSU stocks and IT emerging as the worst performers. Over a three-year horizon, returns remain uneven across sectors. Auto, PSU, healthcare and capital goods have delivered strong gains, while metals, banks and autos have also posted healthy long-term returns. In contrast, IT and real estate have significantly underperformed.

India trails global peers across time frames

India has underperformed most major global and emerging markets over the past one, three and six months, as well as on a one-year basis. While markets such as Korea, Brazil and Taiwan have delivered double-digit gains over shorter horizons, the MSCI India index has posted flat-to-negative returns over the same periods .

Domestic indices have also delivered modest returns over the past year. The Nifty 50 has gained about 8 percent over the last 12 months, while broader indices such as the NSE Midcap 150 and Smallcap 250 have significantly underperformed on a three-month and year-to-date basis .

As of January 29, the Nifty 50 is down nearly 3 percent month-to-date, the MSCI Index is down nearly 1.8 percent for the same period. In 2025, the Nifty 50 rose 10.7%, but lower than global markets such as the Nasdaq which rose 22%. The MSCI Emerging Markets index also grew nearly 30%.

Valuations remain elevated

Despite muted returns, valuations remain stretched. The Nifty 50 is trading at about 19.9 times FY2027 estimated earnings and 17.4 times FY2028 earnings, levels that Kotak said remain elevated given recent market performance.

India also continues to trade at a sizeable premium to emerging markets. One-year forward price-to-earnings multiples for the Nifty remain significantly higher than the MSCI Emerging Markets index, even as relative returns have weakened over the past year.

Kotak said that while high valuations are often cited as the primary reason for underperformance, structural issues may be playing a larger role. “The lack of meaningful investment by Indian companies to counter rising disruption threats could eventually lead to a structural correction in market multiples,” Prasad said.

Foreign selling continues, domestic money cushions fall

The report notes that investor positioning remains sharply divided. Foreign portfolio investors (FPIs) have remained net sellers of Indian equities in 2026, with outflows of about $3 billion so far this calendar year, extending last year’s selling trend.

On the other hand, domestic institutional investors (DIIs) have continued to buy equities, with inflows of around $5.6 billion so far in 2026, largely driven by mutual fund investments. These steady domestic flows have helped limit downside in headline indices, even as foreign investors stay cautious.

But Kotak said the behaviour of retail investors will be critical for market direction going forward, especially if foreign selling persists.

Retail participation has been a key support for the market over the past two to three years. Price-agnostic investments through mutual funds have sustained valuations across several sectors, even as trailing returns have weakened.

However, the report highlights recent data that shows that returns for systematic investment plans (SIPs) have moderated sharply. Equity SIPs that began after 2023 have delivered low double-digit or even single-digit internal rates of return, raising questions over how long retail investors will continue to deploy money aggressively.

Earnings stabilise, but risks remain

The one positive, Prasad notes is that on the earnings front, there are early signs of stabilisation. Net profits of 19 Nifty 50 companies that have reported results so far for the third quarter of FY26 are up about 5 percent year-on-year and around 3.7 percent ahead of expectations, according to Kotak estimates.

Kotak expects Nifty 50 earnings to grow 8.3 percent in FY26, followed by a stronger recovery of 17 percent in FY27 and 14.4 percent in FY28. Still, risks remain uneven across sectors. The brokerage flagged automobiles and auto components as vulnerable to rising metal prices, while consumer discretionary segments (excluding autos) could face continued pressure due to subdued household demand.