The ‘simple and predictable story’ of long-term India Investing
It is a story of 6-7% real GDP growth which results in double-digit nominal GDP growth. Indian corporations convert the nominal macro growth to revenues and profitability, which is rewarded in the stock markets.
Table 1: Simple Story of India Investing
| % CAGR | 1 Year | 5 Years | 10 Years | 15 Years | 20 Years |
| Real GDP | 8.2 | 7.8 | 5.8 | 6.4 | 6.9 |
| Nominal GDP | 8.7 | 12.5 | 9.8 | 11.2 | 12.3 |
| EPS: BSE-500 Index | 9.6 | 20.1 | 11.8 | 10.0 | 10.0* |
| BSE-500 Index Total Returns | -4.7 | 20.4 | 14.3 | 11.9 | 13.6 |
The table above is a beautiful reflection of that simple story of steady, consistent, real and nominal GDP growth, its conversion into corporate earnings and the reflection in market returns over time periods.
I wrote about it in a previous Global India Insight column “Predictable India”. This manifests even in dollar terms for the foreign investor, as the India rupee depreciates at an average rate of 2-3% per annum.
The Mechanics of the “Simple Story”
Table 2: India underperforms over last 1 year, but outperforms over the long-term
| In USD | 1 Year | 5 Year | 10 Year | 20 Year | 25 Year |
| MSCI ACWI | 22.9% | 11.7% | 12.3% | 8.7% | 7.7% |
| MSCI EM | 34.4% | 4.7% | 8.9% | 6.4% | 8.9% |
| MSCI India | 4.3% | 10.8% | 10.2% | 8.7% | 11.0% |
Table 1 is the link between GDP growth, earnings, and market returns in INR.
Table 2 is India’s relative performance against Emerging markets and world index in USD.
The 2025 divergence: Why India under-performed
The long-term trend is clear.
However, both tables show the divergence in the last 1-year return.
The Nominal GDP and hence earnings growth has been muted and that reflects in market returns in INR.
The Indian rupee has fallen sharply in a year when the US dollar has been weak, thus further impacting reported US dollar returns relative to other countries.
Worst year of underperformance in 25 years
Indian equities had its worst calendar year under-performance against Emerging market equites since the start of the century.
A big reason for this was the continued outflows from the Indian markets from foreign investors. Foreign Investors sold USD 19 billion in 2025. Their cumulative net flows in the last five years is a negative USD 10 billion.
A big reason for their large net sales in 2025 was attributed to the ‘India is not AI theme’ and thus money was reallocated from India to AI themed markets of Korea, Taiwan and China.
While that is indeed true that India does not have high technology capability in AI/Chips/Robotics. It thus also calls into question India’s bewildering high valuations for some basic domestic business which are not globally competitive on product quality and technology.
However, I also noted that India goes through these global mood swings, but the real India investing story is the table 1. A realistic, sensible allocation to India with reasonable expectations is a good way to think about long-term India investing.
The India underperformance has other domestic reasons of slower GDP growth, single digit earnings growth, higher valuations, and capital gains tax which remains a major impediment in attracting fresh foreign capital.
Net FDI flows are down to zero, due largely to outward FDI and exits by private equity and venture capital investors. (read the FDI Story). This has meant that the capital flows have turned negative and that has led to larger than average depreciation of the Indian rupee. The worrying thing has been that the Indian rupee has fallen against the dollar in a year when the US dollar has been remarkably weak. This has meant that the Indian rupee has fallen more against other developed and emerging market currencies.
Geopolitical friction: The Trump-Modi factor
Trump Effect: An added pressure has been India’s bewildering change of relationship with the US, especially post the India-Pakistan conflict. India has refused to credit US for their intervention in the India-Pakistan ceasefire and since then things have snowballed into India being amongst the highest tariffed country. 11
PM Modi remains the only G-20 PM to not have met Trump at the White House post liberation day.
Despite, PM Modi’s recent phone overtures (phone calls and posts on X, there has been no reduction in the 25% extra penal rate for imports from Russia. Trump has recently remarked on news that India has reduced Russian Oil imports, “PM Modi wants to make me happy, He knows that I’m not happy and he is doing that to make me happy” 12
India’s largest private refiner also issued a statement on no new imports from Russia. A US senator remarked in the same interaction that punitive tariffs on India are having the desired impact and thus will push for the Russian Sanctions Act in the US congress which can potentially tariff countries buying Russian oil and uranium by a bigger amount. 12
The relationship with Donald Trump remains fickle and uncertain. With no trade deal in sight yet and no reduction in India’s tariff rates, the impact on external trade remains concerning.
The outlook for 2026: Reassessing growth assumptions
Although, exports have not been impacted all that much, but the overall capital flow and India investing sentiment has surely taken a hit. 13
On a relative fair valuation basis, given the large nominal depreciation, overall dollar weakness and India’s contained inflation and deficits, the INR is already undervalued.14
However, we have seen when sentiment sours, the INR can remain under-valued. We are inclined to guide for a higher annual depreciation over the coming year.
What about India’s simple long-term investing story
It is always good to question and re-assess long-term assumption. Over the last year, two simple assumptions of the long-term India growth story have been under question.
I wrote about what ails India Nominal GDP growth and will it get back to its double-digit average growth level. I did show our assessment of why we believe India can continue to grow in double digits in nominal terms and 6.5% in real terms.
The other relevant aspect for foreign investors is the annual rate of rupee depreciation. We have guided a 2-3% annual rate of depreciation of the Indian Rupee against the US Dollar. Although, as we witness it, the depreciation rate is never a linear relation, and it goes through phases of some appreciation, stability, and sharp depreciation. Over the last decade, the pace of depreciation has been higher at 3.3% per annum. It yet averages around the 3.0% annual level over the past 25 years. (read: INR-Fragile or Resilient)
Nominal growth should increase on the back of an improvement in private capex. We see first signs of continued double digit growth in projects announced and implemented. With 15 states now announcing cash transfer schemes for women, this now amounts to over 1% of GDP and should boost incomes and hence consumption. Rise in gold and silver prices also tends to be a wealth effect for Indians. Combined with the rate cuts, liquidity infusions and credit norms relaxation provided by the RBI, we would expect trend GDP growth to surprise on the upside.
Broad consensus earnings growth for FY 27 is slated to be in double digits. Valuations in the large cap space seem a bit more reasonable now than from a year ago. Indian mid and small caps who happen to be the biggest beneficiary of the large fund inflows seem to have lost some momentum and retail flows into direct equities and mutual funds seems to have peaked. Given that earnings growth isn’t as strong, the valuation rationale for mid and small cap funds doesn’t seem as comfortable as the large caps.
Indian policy makers, politicians and the government need to take a hard look on certain structural aspects of growth, investment, sentiment, foreign investor interest, tax policy, rule of law, competitive intensity etc to attract long-term capital to boost growth, employment and incomes.
The simple, predictable story of Indian public equities can continue for the next decade but it cannot be taken for granted,
Arvind Chari is a Chief Investment Strategist and has been with Quantum Advisors India group since 2004. Arvind has over 20 years of experience in long-term India investing across asset classes. Arvind is a thought leader and guides global investors on their India allocation.
This article is for educational and discussion purposes only and is not intended as an offer or solicitation for the purchase or sale of any investment in any jurisdiction. No advice is being offered nor recommendation given and any examples are purely for illustrative purposes. The views expressed contain information that has been derived from publicly available sources that have not been independently verified. No representation or warranty is made as to the accuracy, completeness, or reliability of the information.
The views and opinions expressed in this article are my personal views and should not be construed of the Firm. There is no assurance or guarantee that the historical result is indicative of future results, and the future looking statements are inherently uncertain and cannot assure that the results or developments anticipated will be realized.