Indian equities have struggled to keep pace with global peers in 2025, despite aggressive domestic buying and supportive policy measures, as heavy foreign outflows, record promoter exits and a weakening rupee weigh on sentiment.
While domestic institutional investors (DIIs) have pumped in record sums, valuations remain stretched, leaving markets vulnerable to sluggish earnings growth and global headwinds.
The divergence is stark, Indian benchmarks have gained barely 3 per cent in 2025 so far, trailing both developed markets like the S&P 500 and emerging market peers tracked by the MSCI EM Index.
Analysts warn that surging DII inflows, large-scale IPOs and persistent foreign selling have created a supply overhang, succumbing the market to corporate earnings and limiting upside despite a supportive policy backdrop of rate cuts, fiscal relief and sweeping GST reforms.
DIIs Spiking Valuations
In spite of the pressure from high US tariffs, weak earnings guidance and ongoing selling by foreign investors, domestic institutional investors (DIIs), undeterred by these immediate obstacles, have invested heavily into equities through 2025, consistently acquiring Indian stocks rapidly, leading to bloated valuations.
DIIs purchased stocks valued at Rs 5.13 lakh crore over the last eight months, according to NSE data, reaching 97 per cent of the total annual inflow of Rs 5.26 lakh crore noted in 2024 and nearly tripling the Rs 1.81 lakh crore inflow observed in 2023. Should this trend persist throughout the next four months, inflows may surpass Rs 6 lakh crore for the first occasion.
DII ownership in the June 2025 quarter increased by 170 basis points compared to last year, reaching a record high of 19.4 per cent. On the other hand, foreign selling has exceeded Rs 1.60 lakh crore, lowering their stake in the Indian equity market to an unprecedented 15-year low.
“The important reason for the underperformance of the Indian market is the poor earnings growth, which dipped to around 5 percent in FY25. The market has run ahead of fundamentals. Promoter selling and big IPOs could be easily absorbed by the DIIs flush with funds and the exuberance of investors, however the market is a slave of earnings,” said VK Vijayakumar, Chief Investment Strategist, Geojit Investments.
Promoters’ Pumping
75 companies with valid approvals intend to raise Rs 1.16 lakh crore through initial public offerings (IPOs) this year, while an additional 95 are pending approval to collect Rs 1.64 lakh crore. A number of big ones still need to submit their documents.
This has instilled confidence in companies such as Tata Capital and LG Electronics India to prepare for significant IPOs. A rise in block deals and qualified institutional placements (QIPs) has occurred as promoters and major investors aim to sell at elevated valuations.
As per Prime Database, multiple high-value IPOs have received approval from Sebi, including LG Electronics (15,000 crore), Credila Financial Services (15,000 crore), Dorf Ketal Chemicals India (15,000 crore) and Physics Wallah (4,600 crore).
Several notable promoter departures in 2025 have been significant. At Bharti Airtel, Pastel sold shares valued at 12,879.97 crore, while Indian Continent Investment divested 11,227.05 crore. The Chinkerpoo Family Trust divested its share in InterGlobe Aviation for 10,407.68 crore, while Samayat Services LLP withdrew 10,220.40 crore from Vishal Mega Mart.
Private equity and venture capital participants have also been realising profits. The largest transaction was made by ANTFIN (Netherlands) Holding BV, which divested its interest in One 97 Communications for 3,980.76 crore. TPG Asia VIISF Pte divested shares in Sai Life valued at ₹2,675.64 crore
“The underperformance is largely due to supply overhang rather than weak fundamentals. Nearly 60 per cent of IPO proceeds in 2025 were routed to existing shareholders rather than into company coffers. Hyundai Motors India’s massive Rs 27,856 crore OFS, promoter exits worth over Rs 40,000 crore in just two weeks of June, and government divestments pushing public holdings to a six-quarter low of 9.9 per cent have added to this pressure,” said Nikunj Saraf, CEO, Choice Wealth.
This “supply storm” explains why Indian indices gained only 3.5 to 4.5 per cent year-to-date (YTD), while global peers surged. S&P 500 gained 12 per cent, Hang Seng gained 29 per cent, he added.
Emerging Market Theory
The Indian stocks lag behind other emerging markets (EMs). The MSCI EM Index has achieved positive returns for eight straight months in 2025, increasing by 17 percent YTD.
In comparison, Indian stocks, representing the third-largest share in the EM index, declined for a second consecutive month in August and have risen in only four of the eight months this year. The Nifty 50 benchmark has increased by under 3 percent year-to-date, significantly trailing the EM index.
“FTSE India is now trading at a PE premium of 56 per cent to the EM index (PE), compared to an average premium of 44 per cent. During September 2024, the Indian market traded at a 97 per cent PE premium to EM, and now, after the correction, it is trading at a 56 per cent premium, which looks attractive compared to the past,” said Neeraj Chadawar, Head – Fundamental and Quantitative Research, Axis Securities.
Weakening Rupee
The rupee slipped 8 paise to close at an all-time low of 88.18 (provisional) against the US dollar on Tuesday, weighed down by uncertainty over Indo-US trade talks, foreign fund outflows and weak domestic equities.
The local currency, which had already revisited its intra-day record low of 88.33 on Monday, opened soft at 88.14 and touched an intraday low of 88.20 before settling lower for the second straight session.
The rupee breaching Rs 88.22 per dollar, with annual weakness of 5.05 per cent, has eroded equity returns for dollar-based investors. Even modest positive equity gains are wiped out when currency losses are factored in. The weakness stems from US tariffs, worsening current account balances, and RBI’s heavy forex interventions (over USD 50 billion in 2025), highlighted Saraf.
“With FIIs still cautious and maintaining their selling stance, volatility is expected to remain. For the near term, the trading range for the rupee can be seen between 87.85 to 88.40,” said Jateen Trivedi, VP Research Analyst – Commodity and Currency, LKP Securities.
Domestic Flaws
Indian stock markets have barely rallied despite several domestic measures to push growth. Income tax bonanza in the 2025 Union budget, 150 basis points repo rate cut by the Reserve Bank of India and GST reforms to eliminate 28 per cent and 12 per cent tax slabs also failed to uplift the long-term sentiments.
Domestically, the key risk lies not in the intent of policy but in the pace of its transmission. While rate cuts, fiscal relief, and capital spending are already in motion, delayed reflection in corporate earnings could keep investor sentiment cautious, highlighted Chadwar.
