Why India’s Market Is Defying Gravity

On paper, India’s current macro set-up should have pushed equity markets much lower. The rupee has remained under pressure, foreign institutional investors have sold heavily, and global capital has been chasing the artificial intelligence boom in North America, Taiwan and Korea. Yet, Indian equities have stayed remarkably resilient, even though they have underperformed some global peers.[EasyDNNnews:PaidContentStart]

This resilience is not merely a short-term anomaly. It reflects a deeper structural shift in the way India’s market is now funded and supported. For decades, foreign flows played a decisive role in shaping market cycles. When FIIs sold, Indian equities usually corrected sharply. That equation has changed. Over the last two years, nearly USD 80 billion has moved out through FII selling, promoter stake sales and private equity exits. In an earlier cycle, such heavy supply would have created significant stress. This time, domestic investors have absorbed a large part of it.

The key reason is the rise of long-term domestic capital. The Employees’ Provident Fund Organisation, the National Pension System and steady Mutual Fund SIP flows have together created a strong liquidity cushion. Indian households are gradually shifting a part of their savings from physical assets and Bank deposits to market-linked products. This has reduced the market’s old dependence on foreign investors. Foreign selling still matters, but it no longer breaks the market in the way it once did.

India has historically enjoyed a valuation premium because of its superior earnings growth. Between 2020 and 2023, Indian corporate earnings expanded faster than most emerging markets, even in dollar terms. That premium is now being tested. Earnings growth has slowed in recent quarters, while markets such as Korea and Taiwan are witnessing upgrades due to their direct exposure to Semiconductors, hardware and AI-led demand.

India does not yet have a large-listed semiconductor or frontier AI hardware play. As a result, global investors are temporarily finding stronger earnings momentum elsewhere. This does not mean India’s long-term case has weakened. It only means the current global cycle is favouring AI-heavy markets. Investor attention may not remain concentrated in AI forever. Once the cycle normalises, India’s steady earnings base, domestic demand and investment-led growth could regain prominence.

The weakness in Indian IT services stocks has also raised concerns. However, the broader technology employment story is more encouraging than listed IT performance suggests. Traditional IT services companies employ around 3.5 million people and are growing slowly. In contrast, Global Capability Centres, or GCCs, now employ nearly 2.5 million people and are expanding at a faster pace. These centres are owned by global companies and often pay 40 to 60 per cent higher salaries than traditional IT firms.

Therefore, while IT stocks may appear dull, technology-driven income creation in India remains healthy. This rising income base can support consumption, housing, travel, financial services and premium lifestyle spending over time.

At the same time, artificial intelligence is creating uncertainty around software and digital business models. Investors should increasingly turn towards companies backed by physical assets such as power plants, hospitals, hotels, airports, ports and infrastructure. These businesses offer tangible capacity, visible demand and long-term cash flows.

Power is a strong example. Rising manufacturing activity, data centres, urbanisation and electric vehicle adoption are driving electricity demand. Private power companies with long-term power purchase agreements can offer predictable cash flows for several years. In an inflationary environment, such assets can protect real value better than many digital businesses. AI may disrupt software, but it cannot replace a hospital, airport or power plant. In fact, AI itself increases the need for power.

The AI cycle may keep North America and East Asia in the spotlight for now. However, India’s structural growth, deepening domestic savings and expanding physical economy continue to build a stronger market foundation. The real question is not whether India is defying gravity. It is whether the market has quietly built a new floor beneath it. This new floor may not eliminate volatility, but it could ensure that market corrections are increasingly seen as temporary setbacks rather than threats to India’s long-term growth story.

RAJESH V PADODE
Managing Director

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