India’s stock market continues to experience significant volatility and waves of profit booking, wondering around the all-time high for a long-time, primarily triggered by the repeated postponement of a clarity on the US tariff deal. Investor hopes, initially set on an agreement emerging by the end of November 2025, are now pinned on a December-end resolution, creating a climate of uncertainty that dampens market sentiment.
This economic anxiety is set against a challenging geopolitical backdrop this week, highlighted by Russian President Vladimir Putin’s visit. The strengthening of bilateral economic and defence partnerships with Russia raises concerns from US and European perspectives, adding a layer of complexity to the already delicate trade negotiations with Washington.
Recent data confirms that the impact of the US’s steep 50% tariffs on Indian goods, implemented in late August 2025, has been more severe than initially projected. This is significantly impacting India’s external balance sheet:
Current Account Deficit (CAD): India’s CAD is forecast to deteriorate in Q3FY26, reversing the moderation seen in Q2FY26 when it stood at US$ -12.3 billion. The trade balance worsened in October, reaching US$ -21.8 bn, compared to US$ -9.05 bn in October 2024.
Currency Impact: The Indian Rupee (INR) has weakened significantly, crossing the psychological barrier of ₹90 against the US Dollar. Dollar supply by PSUB and RBI‘s liquidity measures have provided some support lately.
Export/Import Dynamics: Month-on-month exports are reducing, while imports are skyrocketing. The decline in exports is attributed to the tariff uncertainty and softer global demand. The surge in imports is driven by high festival and marriage demand for gold and silver, whose international prices have seen a sharp increase this year (though this specific factor is expected to normalize soon).
A trade deal with the US, which accounts for one-fifth of India’s total exports, is widely seen as a prerequisite to stabilize these external challenges. Exports to the US dropped by -9% Year-over-Year (YoY) in October 2025. Overall exports were down by -12% for the month due to the combined effect of tariffs and a softer global economic environment.
FII Outflows & Emerging Market Dynamics
The Indian market’s struggle coincides with increased selling pressure across emerging markets (EMs) in December. After an exceptional run in 2025, particularly within the tech-based sectors of China, South Korea, and Taiwan, valuations and prices in EMs have climbed above their long-term averages. As the year-end approaches, Foreign Institutional Investors (FIIs) are withdrawing capital, a move exacerbated by: The annual holiday season, Persistent US tariff issues, High Federal Reserve interest rates and a strengthening US Dollar.
India has been particularly affected, with FIIs pulling capital due to its premium peer valuations and earnings downgrades in 2025. Although the valuation gap between MSCI India and MSCI EM has narrowed below the long-term average, selling pressure continued through November and early December due to sell-off in EMs.
Looking ahead, FII selling is widely expected to reverse in 2026, driven by anticipated boosts in domestic earnings following local economic reforms. The overall performance of EMs in the near term is likely to be neutral to positive, depending heavily on the Federal Reserve’s 2026 rate cut outlook—more aggressive cuts would likely benefit EMs— and performance of old economy. Persistent challenges in the real estate sector, coupled with a slowing economy and reduced consumption, are raising concerns about the future effectiveness of China’s stimulus measures. While AI sector is at a corrective mode due to rich valuations.
In this context, India is positioned to outperform in the medium to long term, though short-term performance may remain muted as its current valuation stays above the long-term average, and geopolitical developments continue to influence investor sentiment. A certain finalisation of trade deal with US is a precursor to take up the Indian market to new high or wait till Q3FY26 (December) results.
First published in Mint