Indian Stock Markets Face Two-Year Slump as Valuations Weigh on Returns

Indian benchmark stock indices have fallen roughly 13 per cent from their September 2024 peak, when the BSE Sensex Index (BSE:SENSEX) hit an all-time high of 85,836.12 points. Six out of ten stocks in the broader market delivered no positive returns over the subsequent two years, while nearly seven out of ten trailed standard bank fixed deposit interest rates. Foreign institutional investors withdrew a net 5.7 lakh crore rupees ($63 billion) from local shares across 496 trading sessions between September 26, 2024 and October 15, 2026.

The performance divergence underscores the influence of starting price multiples. Stocks trading above 28 times earnings in September 2024 achieved average returns of just 3 per cent over the following two years, whereas lower-valued equities gained 13 per cent on average. While market participants have blamed taxation, including Long-Term Capital Gains tax and Securities Transaction Tax, foreign inflows previously remained strong during periods of rising tax rates when growth valuations were lower. Consistent domestic investment plan inflows have helped absorb foreign selling.

Investors are now turning their focus to upcoming Union Budget consultations after Finance Minister Nirmala Sitharaman agreed on October 13 to hear discussions on equity tax rates. Market participants are watching whether corporate earnings expansion will pick up sufficiently to support current price levels across mid-cap and small-cap indexes.