India has emerged as one of the weakest-performing major markets this year, caught in a pronounced twin sell-off across both equities and currency markets. The sharp rise in global oil prices has significantly increased India’s import bill, widening the country’s trade deficit and intensifying inflationary pressures. In an unusually candid assessment, the Modi administration has warned of a potential “lost decade,” highlighting mounting structural vulnerabilities facing the economy. Elevated equity valuations, sustained foreign capital outflows, and persistent depreciation of the Indian rupee have further reinforced a negative feedback loop across financial markets. Meanwhile, India’s limited exposure to the global artificial intelligence (AI) investment theme has reduced its ability to attract international capital, resulting in a notable deterioration in the performance of India-focused equity funds this year.
Underlying Economic Resilience
Despite market weakness, India’s underlying economy continues to demonstrate resilience. First-quarter GDP growth reached 7.8%, exceeding market expectations and reflecting strong momentum in infrastructure spending and manufacturing expansion. Under the government’s “Make in India” initiative, private-sector investment and industrial upgrading have gradually gained traction, while tax reductions for the middle class have boosted disposable income and supported double-digit growth in domestic consumption. Furthermore, the latest round of U.S.-India trade negotiations resulted in a reduction of reciprocal tariffs from 25% to 18%, improving export visibility and reducing external policy uncertainty.
Energy Dependence and Geopolitical Exposure
Nevertheless, India’s macroeconomic outlook remains highly vulnerable to energy-related risks. As the world’s third-largest energy consumer, India imports approximately 85% of its crude oil requirements and more than half of its liquefied natural gas (LNG) demand. The country’s energy supply chain is heavily dependent on the Strait of Hormuz, making it particularly exposed to geopolitical disruptions in the Middle East. Following the escalation of tensions between the United States and Iran, rising geopolitical risks have increased the likelihood of both supply disruptions and price spikes. The surge in global oil prices has pushed India’s annual trade deficit to approximately US$330 billion, significantly increasing imported inflation while steadily eroding foreign exchange reserves. These developments have become a central source of financial market instability. In response, the Modi government has issued rare domestic warnings regarding long-term economic risks, removed fuel price controls, curbed gold imports, and introduced measures to prevent capital flight. Simultaneously, India has intensified strategic cooperation with European and Nordic countries in an effort to diversify geopolitical, trade, and energy risks.
Inflation Pressures and Policy Shift
The rise in energy costs has not only exacerbated inflationary pressures but has also contributed to a significant deterioration in India’s external balances. Recognizing these challenges, the Reserve Bank of India (RBI) has adopted a more cautious policy stance. While keeping interest rates unchanged for now, the RBI has revised its GDP growth forecast downward from 6.9% to 6.6% and raised its inflation projection to 5.1%, reflecting the accumulating impact of higher energy costs on the broader economy. Market participants increasingly expect the central bank to resume monetary tightening in the coming months, which could further constrain financing conditions and corporate investment activity.
Foreign Outflows and Structural Economic Weaknesses
For several years, India was among the most favored destinations for foreign investors, supported by strong economic growth prospects and favorable demographic trends. Massive capital inflows pushed equity valuations to a substantial premium relative to other emerging markets. However, over the past year, global portfolio rebalancing and rising risk aversion have triggered significant foreign selling. Foreign ownership of Indian equities has declined to approximately 17%, the lowest level in nearly 15 years. The resulting capital outflows have weighed heavily on large-cap stocks and undermined currency stability. The Indian rupee has depreciated by more than 6% against the U.S. dollar year-to-date, approaching historical lows and further accelerating capital outflows. This has created a classic negative cycle of capital flight, currency depreciation, and deteriorating investor confidence. Consequently, Indian equities have fallen nearly 14% this year, significantly underperforming most major global markets.
Structural challenges within India’s economy have also become increasingly apparent. The country’s industrial base remains concentrated in relatively low value-added sectors and lacks sufficient capacity to offset rising energy import costs. While services account for a substantial share of economic activity, the manufacturing sector remains comparatively underdeveloped, leaving the economy more vulnerable to global cyclical fluctuations and supply-chain realignments. More recently, earnings disappointments among several large Indian corporations have triggered valuation corrections across high-multiple stocks, adding further pressure to equity markets.
Missing the AI Investment Boom
At the same time, India has struggled to participate in the global AI-driven investment boom. As the United States, Japan, South Korea, and Taiwan continue to benefit from expanding AI ecosystems and globally competitive technology champions, India lacks a comparable group of leading AI and semiconductor companies capable of attracting substantial international capital. Consequently, India has become less attractive within global asset allocation strategies. More concerningly, domestic investors have increasingly redirected capital toward overseas AI-focused funds, with cumulative outflows exceeding US$4 billion. This trend has further weakened local market liquidity and undermined valuation support.
Policy Interventions with Limited Impact
To stabilize financial markets, Indian authorities have implemented a series of defensive measures. These include deploying more than US$50 billion in foreign exchange reserves to support the rupee, raising gold import duties to 15% to reduce foreign exchange leakage, tightening banks’ foreign currency exposure limits, restricting speculative short-selling activities, and introducing incentives to attract foreign investment into the bond market. However, these measures are largely tactical in nature and are designed primarily to contain volatility rather than address underlying structural weaknesses. Excessive reliance on foreign exchange intervention may deplete reserve buffers, while administrative controls risk distorting market mechanisms and suppressing domestic demand. Combined with the slow pace of structural reform, these policies are unlikely to significantly improve long-term investor confidence.
Diverging Institutional Outlooks
Looking ahead, views among major institutions remain divided. Bank of America and Goldman Sachs maintain relatively cautious outlooks, warning that if energy-related risks persist, the rupee could weaken toward 98 per U.S. dollar, GDP growth could slow to 5.9%, capital outflows may exceed US$30 billion, and foreign exchange reserves could approach critical thresholds. In contrast, Morgan Stanley and the International Monetary Fund (IMF) remain more constructive, arguing that India’s domestic demand base remains resilient and that capital inflows could recover once external shocks subside and structural reforms regain momentum.
Fund Performance and Long-Term Potential
According to Lipper data, there are currently 25 registered equity India funds available for sale in Taiwan. As of June 9, these funds have posted an average decline of 11.5% year-to-date, with average losses of 6.4% over the past three months, 10.7% over the past six months, and 9.9% over the past year. Nevertheless, the average three-year return remains a respectable 19.1%, reflecting India’s longer-term growth potential. Whether India can regain favor among international investors will ultimately depend on developments in Middle East geopolitics, the trajectory of global oil prices, and, most importantly, the government’s ability to implement meaningful structural reforms that enhance competitiveness and restore market confidence.
Figure 1: Performance of Equity India
Source：LSEG Lipper, as of 2026/6/9, in TWD
