Reflecting a sharp disconnect between the economy and the stock market, India’s resilient macroeconomic fundamentals are being overshadowed by global liquidity pressures, leaving stocks under strain. While the Nifty has lost 13% so far this year, corporate earnings, industrial production, manufacturing output and credit growth data point to economic resilience rather than weakness.

“We are seeing a stark dichotomy in India,” Abhay Laijawala, chief investment officer, India, Lighthouse Canton. “The real economy is demonstrating strong resilience, decoupling from a hesitant stock market that remains weighed down by global macro anxieties and disinterested foreign institutional investors.”

For now, the stock market appears to be prioritising global liquidity over domestic economic momentum.

India’s industrial production growth in August was the second-highest reading in 29 months, after 8.8% in June. The July number was revised upward to 7.4%. Manufacturing, which accounts for about 76% of the index, grew 9%, marking its third consecutive month of growth of at least 8%. Output during April-August rose 6.7%, compared with 4.2% a year earlier.

The data point to a recovery led by manufacturing and capital formation rather than merely by consumption. “The question is who is right – the tape or the real economy?” Laijawala said. “And if the economy and earnings are right, when will the tape take notice?”

Markets are pricing the next shock

The weakness in equities is not being driven primarily by a collapse in domestic activity. Instead, investors are responding to a combination of higher crude prices, rising global bond yields, currency risk and persistent foreign selling.

Rajesh Singla, CEO and fund manager at Alpha AMC, said the economy grew 7.8% in April-June and Nifty 50 revenue rose more than 18% in the first quarter. But markets, he said, are pricing the future cost of money.

“The disconnect is real, but it comes from what markets are pricing and not from weak fundamentals,” Singla said.

The seven-month-old Iran war has pushed up crude and bond yields, renewing concerns about inflation and interest rates. With the US 10-year yield above 5%, global investors can earn more from safer assets and demand a higher return from riskier markets.

Foreign flows have intensified the pressure. FIIs have been net sellers for seven straight weeks, while the Nifty fell 3.1% last week. Domestic investors have absorbed much of the selling, but foreign capital remains concentrated in the largecaps that influence the benchmark index.

“The market is not ignoring good news. It is discounting what comes next,” Singla said.

Earnings are the next test

The economy’s resilience has not yet translated into a broad-based stock market rerating because investors are increasingly focused on the quality and durability of earnings. Analysts said Q1 profit growth lagged revenue growth because margins were squeezed by higher input costs. The benefit from earlier price increases and older inventory is also fading.

That makes the upcoming earnings season particularly important. Strong revenue growth will not be enough if companies are unable to protect margins against higher energy and input costs.

Analysts say investors would need to look beyond headline profit growth and track order books and execution in capital goods and engineering, volumes in metals, cement and power-linked businesses, credit demand from industry and margin resilience.

The September data on manufacturing purchasing managers’ indexes, goods and services tax collections, auto sales and bank credit will offer an early indication of whether the August momentum has carried forward.

If those indicators and the earnings season confirm the strength seen in industrial production and credit, they could provide evidence that India is entering a manufacturing- and investment-led growth cycle.

When can stocks catch up?

The fund managers do not expect the market to recover on domestic data alone. A sustained rebound will require the global macro pressure to ease.

Neeraj Gaurh, director and fund manager at Anand Rathi AMC, said the market is shifting from a liquidity and valuation expansion phase to an earnings-led phase. Double-digit earnings growth and nominal GDP growth of 10-10.5% remain intact, but valuations in parts of the mid- and smallcap universe are still elevated.

For foreign investors to return, Gaurh said the rupee would need to stabilise, global capital would need to diversify away from concentrated US AI infrastructure investments and crude oil would need to remain below $85-90 a barrel. A stabilisation or decline in global bond yields would also help lower the cost of capital.

Singla identified three potential triggers: a US-Iran ceasefire that reopens the Strait of Hormuz, a peak in US yields and evidence from second-quarter results that companies can protect margins.

Valuations may already be providing some support. The Nifty is about 13% below its peak while FIIs have withdrawn about ₹2.8 lakh crore this year.

“Once the macro pressure eases, even modest buying from FIIs can move a market this lightly positioned,” Singla said.

India has experienced similar periods when global liquidity overwhelmed domestic earnings.

Between late 2021 and mid-2022, the Nifty fell about 18% even as earnings grew strongly. In October 2023, when the US 10-year yield approached 5%, foreign investors sold nearly ₹23,000 crore of Indian equities in a single month.

The US 10-year yield reached 5.01% on Oct. 23, 2023, before easing to about 3.9% by late December. As the Federal Reserve signalled that rate cuts could be on the horizon, the Nifty and Sensex reached fresh records. The Nifty gained 5.52% in November and 7.94% in December 2023.

“Flow-driven market declines are swift to reverse, when the variables turn,” Laijawala said.

But the duration of the current shock remains the key risk. India’s oil tolerance threshold is about $90 a barrel, according to Lighthouse Canton. If prices remain higher for an extended period, the impact could move from valuation pressure into earnings by squeezing margins and widening the external deficit.

Until then, investors will be watching US long-bond auctions, Brent crude above $100, the rupee and weekly foreign flows. For long-term investors, the weakness may create opportunities in select largecaps, renewable energy, AI infrastructure, electrical equipment, defence and banks.

But with the timing of a global stabilisation uncertain, Laijawala’s advice is cautious: “Phased accumulation is more prudent than a single entry.”