The India Paradox: Surging Economy, Sliding Markets

Investors assessing India face a contradiction.

The domestic physical expansion is highly visible: industrial output expands, with bank credit up 19.4% year on year in September and real fixed investment up 11.9% in April-June. The internal growth engine is entirely real.

Yet, a glance at the markets tells an opposing story. Headlines are dominated by capital flight, a sliding currency, and unresolved trade frictions. The stock market has suffered eight consecutive weekly declines—the longest losing streak since 2001.

This is the core dilemma. The underlying economy is growing, but the headline indices fell for eight weeks running. Both realities are happening at once. The domestic engine is firing amid mounting external challenges.

Record FII Selling

From the outside, the environment is severely hostile. Between January and September 2026, foreign portfolio investors net sold ₹2.6 lakh crore (US$27.8 billion) of Indian equities.

Foreign institutional investors continue to sell the fastest-growing major economy in the world.

This external weakness extends to the currency. The rupee is down to ₹96.6 per US dollar (9 October, RBI reference rate), near its record low. This comes after an RBI swap window for FCNR(B) deposits drew about US$133 billion. Against its major trading partners, the rupee’s real effective exchange rate is close to one standard deviation below its long-term average.

The US and India trade deal adds to the external drag. A broader trade agreement with the United States has not been signed. Things are only getting worse on that front: a US law passed in September 2026 authorises tariffs of up to 100% on the largest buyers of Russian crude.

A youth movement demanded the Education Minister’s resignation over the NEET medical entrance exam leak until he resigned. Delhi Police refused permission for a rally at government-designated Jantar Mantar demanding Chief Election Commissioner Gyanesh Kumar’s resignation over electoral roll revisions. The protests add a layer of political uncertainty in India.

All this weighs on the markets. The Nifty 50 is down nearly 14% this year; if it ends the year lower, it would break a ten-year run of gains.

Large-cap indices have corrected sharply.

Zoom out, and the Sensex has returned under 4% a year over five years, before dividends.

Exhibit 1

Economic Expansion

Looking at the economy, the picture inverts.

India’s real GDP grew 7.8% in the April-June quarter. The new GDP series has drawn questions about its accuracy.

Without getting into that debate, other variables, such as industrial and manufacturing data, point the same way. In September, bank credit grew 19.4% year on year and gross GST collections crossed ₹2 lakh crore, up 14.7%. Industrial production grew by 8.0% in August.

On a four-quarter average, manufacturing capacity utilisation stayed above 75% in every quarter of FY2025-26, the first full financial year since FY2011-12.

There are early signs of a recovery in private capex. Private companies account for 70% of the ₹80 lakh crore of new investment announced in FY2025-26.

In the most recent quarter, listed private non-financial companies saw aggregate sales rise 19.4% year on year. The operating profit of manufacturing companies surged 21.3%.

Exhibit 2

The India Paradox

On one side, the Indian economy remains the fastest-growing major economy in the world, anchored by 7.8% GDP growth, strong 19.4% credit expansion and growing manufacturing.

On the other side, India remains highly vulnerable to external pressures. The country relies on imports for 88.7% of its crude oil requirements in FY2025-26. The Indian crude basket averaged US$116 a barrel in September, up sharply from US$70 in September 2025.

On 7 October, the RBI raised the repo rate by 25 basis points to 5.5%, shifting its stance to calibrated tightening.

This is the India paradox: a surging domestic economy withstanding hostile external headwinds. Domestic expansion remains robust, even as sliding markets and external frictions pull in the exact opposite direction.

Both are true, and they act on two different parts of the market, creating an extreme level of polarity.

Read: How Polarised Is India’s Stock Market?