Indian market volatility increased at the start of December with an increase in FIIs selling compared to November. FII have become more cautious against India due to postponement of the US-India deal, the increase in the trade deficit, and the bias against President Putin’s visit. In the second week, profit-booking by FIIs intensified across Asian markets, driven by rising Japanese bond yields and a tendency to lock in gains after strong 2025 performances by peers such as China, Japan, South Korea, and Taiwan. The Japanese 10yr yield increased to 1.95% from 1.70% a month back, triggering the risk of reversal in the yen carry trade due to the appreciation of the yen currency. The Bank of Japan (BOJ) is expected to hike rates because persistent inflation remains above the 2% target. New Prime Minister Takaichi’s stimulus plan is anticipated to necessitate more debt issuance, further ballooning the country’s debt-to-GDP ratio, which is currently 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 gave a dollar return of 27.5%, 29.5%, 73.7%, and 16.0% respectively, year-to-date.
Indian stock market performance compared to its Asian peers
India has grossly underperformed Asian peers with a dollar term return of about 10%, 5.7% is the depreciation of INR. As FII’s view could turn cautious on Asian assets, it could have a cascading effect, being a part of the same basket with a decent pie. Concurrently, the Indian market is already undergoing a correction phase due to increased INR volatility, with the exchange rate crossing 90.4 INR to a new low. This pressure is intensifying because of a lack of clarity regarding the finalization of the India-US trade deal, which is negatively affecting exports and expanding the trade deficit. As Foreign Institutional Investors (FIIs) profit booking mode could expand for emerging markets, while the near-term future performance of India is 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 delay is contributing to downward pressure on the INR. However, the current account deficit may ease in the coming months, as a significant portion of the recent shortfall was driven by seasonal demand for gold and silver during festive and wedding seasons.
By the end of the week, minor improvement in the market trend was visible after the 25-basis point Fed rate cut, which was received positively by the global market. However, the likelihood of a sustained positive impact appears limited, as prospects for additional near-term rate cuts based on incoming data remain low.
India’s near-term performance will heavily depend on the outcome of the trade talks that happened with the US delegation in New Delhi on December 10-11. The narrative from both counterparts has been more positive, as reported in the latest media sources, which we have been hearing in the last 1-3months. It is important to note that these talks are structured into two phases: Phase 1 aims to resolve immediate tariff and market access issues, while Phase 2 focuses on a comprehensive agreement, which could happen by March 2026, plausibly postponing the immediate gain to the economy and stock market.
The forecast for 2026 indicates a potentially better performance than 2025. This optimistic outlook is based on two primary expectations: FIIs are expected to reverse their selling trend as India’s premium valuations relative to other emerging markets rationalize. Domestic corporate earnings are projected to significantly revamp, starting from the December 2025 quarter. 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.
First published in Mint
