AI generated image, used only for representational purpose India’s economic momentum is set to have domestic strength on its side in 2026-27, but global risks may keep the pressure on.In its annual report 2025-26, the Securities and Exchange Board of India (Sebi) said that resilient economic fundamentals are expected to support financial markets, while geopolitical uncertainty, high commodity prices and volatile foreign capital flows could continue to weigh on the outlook,Sebi’s assessment comes after a challenging year for Indian equities. The Nifty 50 and broader indices declined by around 14% in US dollar terms during 2025-26, as sustained foreign portfolio investor (FPI) selling, rupee depreciation, valuation concerns and slower earnings growth weighed on the market. Globally, Middle East conflict added to the pressure.However, despite the difficult market conditions, domestic institutional investors, particularly mutual funds, provided a significant cushion through strong investment flows.
Strong domestic economy provides support
The broader economy remained resilient in 2025-26 despite the difficult global backdrop, the report said. Robust domestic demand, government capital expenditure and the services sector were among the factors supporting economic activity.Real GDP growth was estimated at 7.7% during the year, compared with 7.1% in the previous year. Private consumption and investment continued to be significant contributors, accounting for 56.7% and 31.9% of nominal GDP, respectively.For 2026-27, the IMF has projected India’s growth at 6.5%, against global growth of 3.1%.Sebi said India’s relatively strong domestic fundamentals, along with fiscal consolidation, improving inflation dynamics, stronger corporate balance sheets and resilient domestic institutional investment, are expected to support its relative outperformance.
Middle East conflict, oil prices remain key risks
The outlook, however, remains exposed to developments in the global economy. A prolonged Middle East conflict could pose risks to India, particularly if crude oil prices remain above $100 per barrel.Such a situation could widen the current account deficit and increase inflationary pressures, according to the report.Commodity prices therefore remain a key area of concern. Higher crude prices could raise India’s import bill, put pressure on the current account deficit and create upside risks to inflation.Sebi said strategic petroleum reserves, diversification of imports and targeted fiscal support are expected to remain important in maintaining macroeconomic stability.
Record FPI outflows
Foreign investor activity remained a major source of pressure on Indian equities during 2025-26. FPI equity outflows reached a record $19.7 billion during the year.At the same time, Sebi pointed to potential opportunities arising from a restructuring of global supply chains, which could benefit India.The report said a sustained resolution of the Middle East conflict and normalisation of energy prices would be among the most important near-term catalysts for a recovery in foreign flows.The assessment leaves Indian markets with a relatively favourable domestic backdrop for 2026-27, while their performance remains closely linked to geopolitical developments, energy prices and international capital flows.
