India's stock market has been experiencing significant volatility since the start of December. This increase in volatility is largely attributed to the cautious approach of Foreign Institutional Investors (FIIs) due to several factors, including the postponement of the US-India trade deal, a widening trade deficit, and the implications of President Putin's visit.
In the second week of December, FIIs intensified their profit-booking across Asian markets. This move was driven by rising Japanese bond yields and a tendency to lock in gains after strong performances in 2025 by countries like China, Japan, South Korea, and Taiwan. The Japanese 10-year yield increased to 1.95% from 1.70% a month prior, triggering concerns of a reversal in the yen carry trade due to the appreciation of the yen currency.
The Bank of Japan (BOJ) is expected to hike rates due to persistent inflation above the 2% target. Additionally, the new Prime Minister's stimulus plan is anticipated to lead to more debt issuance, further increasing the country's debt-to-GDP ratio, which is already around 260%. This environment could lead to profit-booking in emerging markets through the unwinding of yen-based exposure.
The Nikkei, Hang Seng, KOSPI, and Shanghai indices have given dollar returns of 27.5%, 29.5%, 73.7%, and 16.0% respectively year-to-date. In comparison, the Indian stock market has underperformed its Asian peers with a dollar term return of about 10%, with 5.7% being the depreciation of the Indian Rupee (INR).
The Indian market is undergoing a correction phase due to increased INR volatility, with the exchange rate crossing 90.4 INR to a new low. The lack of clarity regarding the finalization of the India-US trade deal is negatively affecting exports and expanding the trade deficit. As FIIs are in profit-booking mode, the near-term future performance of India is expected to be dented.
A timely finalization of the India-US trade deal is crucial for supporting market sentiment and economic growth, as the US accounts for the largest export market with one-fifth of total exports. The delay in the trade deal is expected to negatively impact corporate earnings growth and the stock market in 2026—a risk not fully factored into current market valuations.
The forecast for 2026 indicates a potentially better performance than 2025, based on two primary expectations:
The realization of this positive forecast is highly contingent on the finalization of the India-US tariff deal, which remains a critical factor for market direction in 2026. The recent talks between India and the US delegation in New Delhi on December 10-11 have been more positive, with the narrative from both counterparts indicating a potential resolution to immediate tariff and market access issues.
However, it's essential for investors to remain cautious and consult with certified experts before making any investment decisions, as market trends can be unpredictable and subject to various factors.
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