Why is Indian equity market falling when global peers are hitting new highs?

At a time when the US equity market is hitting new highs and major Asian indices are going through a strong bull run phase, the Indian market has come under a severe bearish spell. Take this, Korea’s Kospi has gained 193% in one year while Taiwan Weighted is up almost 100%. Japan’s Nikkei, the US’ Nasdaq and China’s Shanghai Composite have advanced 66.5%, 40% and 25%, respectively.

Compared to all this, India’s Nifty50 is down more than 6% in one year. In the last two sessions, benchmarks -- BSE Sensex and Nifty50 have fallen nearly 3% each due to a rise in global oil prices and persistent FII selling.

While the West Asia crisis remains a primary factor dragging Indian stocks lower, analysts point to the absence of a robust AI and semiconductor ecosystem as a less-discussed headwind. IT sector stocks crashed again on Tuesday following OpenAI’s announcement of "The Deployment Company," a new business unit designed to provide direct, hands-on enterprise AI implementation. This launch is the latest aggressive move in the past 3-4 months, as AI giants shift from tools to end-to-end services, threatening the billable-hour models sustaining global IT.

“India’s market weakness compared to global equities is mainly due to a mix of lack of new age play (AI, Semiconductor, Memory etc), relatively moderate earnings growth for benchmark indices, valuations, unfavourable taxation and sector composition in the benchmark,” said Sunny Agrawal, Head - Fundamental Research at SBI Securities.

He added that markets like the US, Taiwan and Korea are benefiting from the global AI and semiconductor boom, while India does not yet have large AI, chip or global technology companies that can attract similar flows. The majority of the money flow is getting diverted towards the likes of Nvidia, SK Hynix, Samsung etc., which are reporting extraordinary earnings growth of 50-100% and have a significantly large profit pool, leading to massive outperformance.

Foreign portfolio investors (FPIs) saw record outflows of Rs 1.8 lakh crore in FY26.

Agrawal also stated that India’s tax and regulatory environment has become relatively less favourable for foreign investors. “Higher capital gains taxes, tighter derivative rules and higher transaction costs have reduced trading activity and near-term attractiveness,” he said.

Short-term capital gains on listed equities rose to 20%, while long-term gains above Rs 1.25 lakh are taxed at 12.5%. Further, SEBI hiked minimum lot sizes from Rs 5 lakh to Rs 15-20 lakh, limited weekly options to one per exchange and raised margins for short options by 2% starting November 2024. Another big blow can be seen in this year’s budget when STT on futures were hiked from from 0.02% to 0.05%, and on options from 0.1% to 0.15%, effective April 2026, significantly lifting costs for derivatives traders.

Tanvi Kanchan, Associate Director, Anand Rathi Share and Stock Brokers, said that three forces converged simultaneously. First, the earnings disappointment began long before the West Asia conflict. Nifty 50 EPS growth was barely 6% in FY25 after four years of 24% CAGR from FY21 to FY24. Second, the currency drag. The rupee fell sharply from Rs 85.6 per dollar in April 2025 to Rs 94.65 in March 2026. On May 12, the rupee hit record low of Rs 95.63.

“For a foreign investor, that 10.6% depreciation is not a footnote, it is the entire return wiped out. And finally, the ongoing West Asia conflict from late February 2026 turned a slowdown into a rout. Brent crude crossed $110 per barrel. India imports 85% of its crude, so elevated oil prices simultaneously widen the current account deficit, pressure the rupee further, raise inflation, and delay RBI rate cuts,” stated Kanchan. All these developments are a big negative for the equity market.

According to Aditya Agrawal, Chief Investment Officer at Avisa Wealth Creators, Korea, Taiwan, and Japan are benefiting from semiconductor and AI supply-chain exposure, whereas India remains more domestic-demand driven and currently lacks a large listed AI/chip ecosystem to attract global thematic flows.

“India has not missed the AI race structurally, but it is behind in terms of large-scale semiconductor manufacturing, AI infrastructure, and globally dominant tech platforms making it less attractive in the current AI-led market cycle,” added Agrawal.

Experts believe that despite the ongoing exodus, FII will return to India due to strong fundamentals. Kanchan said that the return of FIIs is expected to be heavily skewed towards H2 FY27. “H1 corporate earnings will still be impacted by the war scenario, and FII flows would improve only when the rupee stabilises and earnings growth picks up. Three preconditions must be met: de-escalation of the West Asia conflict, cooling of Brent crude prices, and stabilisation of the rupee against the dollar,” she said.

Owing to the ongoing correction and relentless FII selling, India's weight in the MSCI Emerging Markets Index has declined to around 12% by May 2026 from peaking at nearly 21% in September 2024. Taiwan has emerged as the largest constituent at approximately 25%, overtaking China. China and South Korea currently hold weights of about 19% each. Over the same period that India's MSCI index declined 16% in dollar terms, China's Shanghai Composite rose 50%, Taiwan's market gained 77%, and South Korea's Kospi surged 124%

“India gave around 9% return in 2025 in dollar terms, the worst relative underperformance versus emerging market peers in three decades. Markets of this quality and this size do not stay in that position indefinitely. The underperformance itself creates the conditions for the reversion,” said Kanchan.