India’s Markets Poised for Domestic Resilience Amidst Global Headwinds, Says Sebi
India’s economic momentum is anticipated to draw significant strength from domestic factors in 2026-27, yet the persistent shadow of global risks threatens to exert continued pressure on its financial markets. This is according to the Securities and Exchange Board of India (Sebi)’s annual report for 2025-26, which highlights a nuanced outlook for the nation’s financial landscape.
Sebi’s comprehensive assessment indicates that while resilient economic fundamentals are expected to underpin the stability of financial markets, a confluence of geopolitical uncertainty, elevated commodity prices, and volatile foreign capital flows could temper an otherwise optimistic trajectory.
The regulator’s report follows a challenging period for Indian equities, with both the Nifty 50 and broader indices registering a decline of approximately 14% in US dollar terms during the 2025-26 fiscal year. This downturn was largely attributed to sustained foreign portfolio investor (FPI) selling, a depreciating rupee, lingering valuation concerns, and a moderation in earnings growth. The ongoing conflict in the Middle East further exacerbated global market pressures, adding to the headwinds faced by Indian markets.
However, a crucial mitigating factor emerged from the domestic front. Despite the arduous market conditions, domestic institutional investors (DIIs), particularly mutual funds, played a pivotal role in providing a significant “cushion” through robust investment flows, underscoring the growing strength of local capital.
Strong Domestic Economy Provides Support
The broader Indian economy demonstrated remarkable resilience in 2025-26, defying a difficult global backdrop. The report points to several key drivers supporting this robustness: strong domestic demand, strategic government capital expenditure, and a thriving services sector. These elements collectively propelled economic activity forward.
Real GDP growth for the year was estimated at an impressive 7.7%, an increase from 7.1% in the preceding year. Private consumption and investment continued to be fundamental contributors, accounting for 56.7% and 31.9% of nominal GDP, respectively. Looking ahead to 2026-27, the International Monetary Fund (IMF) projects India’s growth at 6.5%, significantly outpacing the global growth forecast of 3.1%.
Sebi attributes India’s anticipated relative outperformance to its strong domestic fundamentals, coupled with ongoing fiscal consolidation efforts, improving inflation dynamics, strengthened corporate balance sheets, and the sustained resilience of domestic institutional investment.
Middle East Conflict, Oil Prices Remain Key Risks
Despite the domestic strengths, the outlook remains highly susceptible to developments in the global economy. A prolonged Middle East conflict, in particular, poses substantial risks to India. This is especially true if crude oil prices were to consistently remain above $100 per barrel.
Such a scenario, the report warns, could lead to a widening of India’s current account deficit and an escalation of inflationary pressures. Therefore, commodity prices continue to be a significant area of concern. Higher crude prices would inevitably inflate India’s import bill, further straining the current account and introducing upside risks to inflation.
To counteract these potential vulnerabilities, Sebi emphasizes the importance of strategic petroleum reserves, diversification of import sources, and targeted fiscal support as critical measures for maintaining macroeconomic stability.
Record FPI Outflows
Foreign investor activity emerged as a major source of downward pressure on Indian equities throughout 2025-26, with FPI equity outflows reaching an unprecedented $19.7 billion during the year.
However, Sebi also identifies potential opportunities arising from a global restructuring of supply chains, which could significantly benefit India. The report suggests that a sustained resolution of the Middle East conflict and a normalization of energy prices would serve as the most crucial near-term catalysts for a recovery in foreign capital flows.
In conclusion, Sebi’s assessment paints a picture of Indian markets operating with a relatively robust domestic foundation for 2026-27. Nevertheless, their ultimate performance will remain intricately linked to broader geopolitical developments, the trajectory of energy prices, and the ebb and flow of international capital.
