Can Indian stock markets rebound in 2026? – plus 2 fund ideas

2025 was a good year for emerging markets, and our market outlook for 2026 highlights them as one of the themes for the coming year and a sector that could continue to outperform.

Last year broad emerging market indices outperformed developed market peers for the first time since 2020. Positive performance came from the likes of China, Korea, Taiwan, and Brazil all delivering strong returns. But there was one notable exception – India.

So, why was the Indian stock market different and could it rebound in 2026?

This article isn’t personal advice. If you’re not sure an investment is right for you, ask for financial advice. Remember, all investments and any income from them can rise and fall in value, so you could get back less than you invest. Past performance isn’t a guide to the future.

The Indian stock market in 2025

Heading into 2025, India was coming off a period of strong growth, having performed better than their emerging market peers for the previous four years.

This positive period pushed valuations of Indian companies higher, particularly of medium-sized companies, potentially making them less attractive to investors. As a result, foreign investors withdrew over $17bn from India in 2025 to reinvest in countries where they felt companies had more appealing valuations. This put a downward pressure on share prices.

For the first time, domestic institutional investors, like Indian pension funds and insurers, now have a greater ownership of the stock market than foreign counterparts. Foreign outflows were also offset to some degree by an increase in domestic retail investors moving into the stock market instead of holding cash.

Valuations began falling in the second half of 2025. Indian companies have tended to be valued at a premium to their emerging market peers, and this premium has been decreasing over the last few months. At the same time, broader emerging markets valuations have been increasing, driven by the year’s strong performance.

A key theme of global stock market performance in 2025 was advancements in artificial intelligence (AI). Other emerging economies, like Taiwan and Korea, are home to companies playing a crucial role in AI supply chains. These companies grew strongly as demand for their products increased. India is home to fewer such businesses, so missed out on this increased spending.

In contrast, the larger technology companies in India, like Infosys and Tata Consultancy, are providers of outsourced IT services. These companies have come under pressure from AI adoption by their customers and weaker performance over the past year reflects this uncertainty. If the AI theme continues to dominate positive stock market returns, we think it’s likely India will continue to lag some emerging market peers. However, if there was to be a decline in AI enthusiasm this year, India could be well-placed to withstand the turbulence.

India also found itself in the crosshairs of President Trump and his tariff policy.

Following an initial 25% levy, implemented in early August, tariffs on imports to the US from India were doubled to 50% in late August. This additional rate coming after India continued purchasing Russian oil. Indian exports to the US have been volatile ever since, as the two countries aim to reach a trade agreement.

More broadly, emerging markets tend to perform well when the US dollar is weaker. This is because the cost of servicing dollar-denominated debt eases, which is good for both governments and companies. This was the case in 2025, providing a tailwind to emerging markets performance. However, one currency to underperform the dollar last year was the Indian rupee, serving as another headwind to the domestic market’s performance.

The year to come

The Indian economy continues to grow.

In the year to September 2025, the country saw GDP growth of 8.2%. This was ahead of expectations and comes amid a supportive economic backdrop that could benefit investors.

Inflation dropped sharply in 2025, driven by a decrease in food prices, now sitting below the Reserve Bank of India’s target of between 2% and 6%. This allowed for a series of interest rate cuts throughout the year. The government also implemented a range of tax cuts in September, to encourage consumer spending in the face of uncertainty caused by US tariffs.

India has a buoyant Initial Public Offering (IPO) market. In the first three quarters of 2025, the country averaged one new listing a day. It was the fourth largest market for companies going public when adjusting for company size, trailing only stock exchanges in Hong Kong and the US. With thousands of listed companies in India, there’s no shortage of opportunities for investors.

While Indian stock market performance has lagged peers over the short term, company valuations are lower today than they were in mid-2025.

With plenty of opportunities, supportive monetary and fiscal policies, and long-term demographic tailwinds, the case for investing in India is compelling. Whether 2026 will see the stock market return to form is hard to predict but, for those taking a long-term view, it could be a good time to invest in India. That said, investors should be aware India remains a volatile, higher-risk emerging market.

2 fund ideas to invest in India

Investors seeking exposure to India have plenty of options.

The Wealth Shortlist features funds chosen by our analysts for their long-term performance potential.

Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest and make sure any new investment forms part of a long-term diversified portfolio.

For more details on each fund, its charges and specific risks, please see the links to their factsheets and key investor information below.

Investing in emerging markets is higher risk and investors should expect volatility. A fund invested in a single emerging market like India should only make up a small amount of a well-diversified investment portfolio.