The MSCI Emerging Markets Index recorded a total return of 33.6% in 2025, sharply outperforming the S&P 500, which returned 17.9%, and the MSCI World Index, which gained 21.6%. This marked the strongest outperformance of Emerging Markets over US equities in nearly two decades, signalling a shift in global capital flows.
The turnaround was driven by a convergence of macroeconomic and financial factors. A weakening US dollar played a crucial role, with the dollar index declining by around 9% during 2025, easing external financing pressures and supporting capital inflows into Emerging Markets. Attractive valuations further strengthened the case, with Emerging Market equities trading at a forward price-to-earnings multiple of approximately 13 times for calendar year 2026, representing a significant discount to developed markets.
Earnings growth across several Emerging Market economies improved, reinforcing equity performance. Inflation trends also supported the rally, with inflation in Emerging Markets excluding China moderating from 8.2% year-on-year in early 2024 to nearly 6.1% by late 2025. This allowed central banks to adopt more accommodative monetary policies without destabilising currencies, unlike developed markets that remained constrained. Although geopolitical tensions, including the United States–Iran conflict, caused temporary disruptions, the underlying structural drivers of the rally remained intact.
India, however, diverged from this trend. The MSCI India Index delivered a modest return of around 4% in US dollar terms in 2025. The underperformance was attributed to currency weakness, slower earnings growth, tariff-related pressures, and relatively elevated domestic interest rates. Over the past 24 months, foreign investors withdrew nearly USD 35 billion, reducing foreign ownership in Indian equities to approximately 16%, a 15-year low.
Despite this, India’s subdued performance may now form the foundation for a stronger rebound. The country enters 2026 with solid domestic macroeconomic fundamentals and multiple supportive policy measures underway. Fiscal initiatives, including income tax adjustments, goods and services tax rationalisation, and the implementation of the 8th Pay Commission, are expected to boost household consumption and spending capacity. A more supportive monetary policy environment, alongside ongoing structural reforms, is projected to sustain gross domestic product growth at around 7%, increasingly driven by domestic demand.
Market corrections and consolidation during 2025 have also moderated valuations, repositioning India from an expensive structural story to a more reasonably valued growth market with improving earnings visibility.
Several structural developments further strengthen India’s outlook. In August 2025, S&P Global Ratings upgraded India’s long-term sovereign rating from BBB- to BBB, expanding the pool of global fixed-income investors and enhancing the country’s credibility in international capital markets.
India’s expanding network of Global Capability Centres represents another significant driver. The country now hosts more than 1,800 such centres, employing nearly two million professionals and increasingly focusing on high-value sectors such as product engineering, artificial intelligence, cloud infrastructure, and cybersecurity. This evolution is strengthening India’s position in the global services value chain while supporting employment and income growth.
Retail investor participation has also transformed the domestic financial ecosystem. Demat accounts surged to 22.5 crore by March 2026, up from approximately 4 crore in 2020, with a significant portion of new investors emerging from smaller cities through digital platforms. This broadening investor base has played a stabilising role during periods of foreign capital outflows.
Trade integration remains a key pillar of India’s growth trajectory. In January 2026, India and the European Union announced a trade agreement covering over 90% of goods, with implementation expected by early 2027. Parallel agreements with the United Kingdom, New Zealand, and Oman have progressed, while tariff negotiations with the United States continue constructively.
India’s economic resilience is further anchored in strong domestic consumption. Private Final Consumption Expenditure grew by 7.7% in the financial year 2026 and accounts for nearly 56.7% of the country’s gross domestic product, providing stability that many export-dependent economies lack.
As global capital begins to diversify beyond traditional strongholds, India’s combination of policy support, structural reforms, expanding domestic participation, and improving valuations positions it as a key contender for renewed investor interest. The underperformance of 2025 may ultimately serve as the foundation for a stronger and more sustainable growth cycle in 2026.
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