India's stock market drops - why it's thrown investors into frenzy

India's stock market party is on pause. The local NSE Nifty 50 index is off 8% since a September record amid concerns about a slowing economy and toppy valuations, says Bloomberg. GDP is growing at an annual pace of 5.4%, but that is soft by recent standards.

Inflation and a weak jobs market are taking their toll on India’s 500 million-strong urban population. Consumer goods companies report that the middle classes are cutting spending on everything from cars to soap. Foreign investors pulled a record amount of money out of equities in October, with further net withdrawals in November.

Why India's stock market has thrown investors into a frenzy

The market increasingly rests on domestic savers, says The Economist. Five years ago, just one in 14 Indian households held shares; today it is one in five. India hosted 258 initial public offerings (IPOs) – 30% of the global total by number – in the first three quarters of 2025.

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There is much to celebrate in the country’s “astonishing stock market revolution”, but there are also risks. “Most Indian speculators will never have experienced a downturn”, leaving them dangerously exposed “when one arrives”.

Foreign fund managers are worried about an investment bubble, says Craig Mellow in Barron’s. IPOs are being “advertised on billboards”, while cricket stars hawk “mutual funds”. Still, with “more than 5,000 stocks on offer”, there are “pockets of value” to be found in India for those who do their research.

Some of the frenzy over Indian shares has come from the narrative that the country is “the next China”, says Arthur Budaghyan of BCA Research. This is an oversimplification, he warns. Repeated failure to pass rural land reform will hinder the sort of “breakneck urbanisation that drove China’s period of super-growth”. There is “a blue sky” ahead, “but they may have to go through some storms first”.

During a four-year rally, the Nifty index has more than tripled, says Lex in the Financial Times. More than $35billion in net foreign capital has flowed into Indian stocks over the same period. But on nearly four times book value, compared with an emerging markets average of less than two, Nifty valuations are looking stretched.

India-focused UK funds have been popular with investors over the past year, even as their China-focused peers suffered “consistent outflows”, says Dave Baxter in the Investors’ Chronicle. The fundamental case for India remains compelling: “strong demographics”, a “growing middle class” and a “business-friendly government”.

But further gains depend on continued good news. India “has been a fantastic growth market”, says Rob Morgan of Charles Stanley. But its record is punctuated with some big drops, usually when valuations got ahead of themselves and “sentiment suddenly turned sour”.

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