Securities and Exchange Board of India (SEBI) has said that India’s financial markets are likely to remain resilient in 2026-27, supported by strong domestic economic fundamentals despite heightened geopolitical uncertainty, elevated commodity prices and volatile foreign capital flows.
In its Annual Report 2025-26, SEBI highlighted the strength of India’s domestic economic fundamentals while cautioning that external risks could continue to influence market performance in the coming year. Robust domestic demand, government capital expenditure, a strong services sector, improving inflation dynamics and resilient domestic institutional investment are expected to provide important support to the economy and financial markets.
The assessment comes against a challenging global backdrop, with geopolitical tensions, fluctuations in energy prices and changing global investment patterns creating uncertainty for emerging markets. While India remains relatively well placed compared with several other major economies, the trajectory of crude oil prices, foreign portfolio investment and global conflicts will remain critical factors for investors.
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Indian Economy Recorded Strong Growth in 2025-26
According to the SEBI report, India’s economy demonstrated considerable resilience during 2025-26 despite an increasingly challenging international environment. Real GDP growth was estimated at 7.7 per cent, accelerating from 7.1 per cent in the previous year.
The stronger growth performance was supported by domestic economic activity, with private consumption and investment continuing to play central roles. Private consumption accounted for 56.7 per cent of nominal GDP, while investment contributed 31.9 per cent.
The composition of growth is significant because strong domestic demand can provide a degree of protection against weakness in external markets. When global trade, international investment and exports face uncertainty, a large domestic consumption base can help sustain economic activity.
Government capital expenditure has also remained an important contributor to economic momentum. Public investment in infrastructure and other productive assets can stimulate demand in the short term while improving the economy’s productive capacity over the longer term.
The services sector has provided another important pillar of the Indian Economy. India’s services ecosystem, which includes information technology, financial services, business services, communications and other activities, has helped strengthen domestic economic resilience and maintain India’s position in the global economy.
IMF Projects 6.5% Growth for India in 2026-27
Looking ahead, SEBI cited the International Monetary Fund’s projection that India would grow by 6.5 per cent in 2026-27, significantly above the IMF’s projected 3.1 per cent global growth.
Although the projected growth rate represents a moderation from the estimated 7.7 per cent expansion in 2025-26, India is still expected to grow at more than twice the pace of the global economy.
This relative growth advantage could remain an important factor for investors. Stronger domestic fundamentals can make Indian financial assets comparatively attractive, particularly when global investors are assessing opportunities across emerging markets.
SEBI identified several factors that could support India’s relative outperformance, including:
- Strong domestic economic fundamentals
- Continued domestic demand
- Fiscal consolidation
- Improving inflation dynamics
- Stronger corporate balance sheets
- Resilient investment by domestic institutions
Together, these factors could help cushion Indian markets against external shocks and provide a stronger foundation for long-term economic expansion.
Geopolitical Uncertainty Remains a Major Risk
Despite the favourable domestic outlook, SEBI warned that the global environment is likely to remain uncertain.
Geopolitical tensions have increasingly become an important variable for financial markets because conflicts can affect energy supplies, global trade routes, commodity prices and investor sentiment.
A prolonged conflict in the Middle East could have particularly significant consequences for India because the country remains heavily dependent on imported crude oil. A sustained increase in global oil prices could raise India’s import bill and put pressure on the country’s external accounts.
The report specifically highlighted the risk of crude oil prices rising above USD 100 per barrel. Such a scenario could widen the current account deficit and create additional inflationary pressures.
Higher energy prices can affect the economy through several channels. Fuel costs influence transportation, logistics and manufacturing expenses, while more expensive energy can eventually feed into prices across various goods and services. For consumers, higher inflation can reduce purchasing power, while businesses may face pressure on profit margins.
Crude Oil Prices Could Influence India’s Market Outlook
Energy prices are therefore expected to remain one of the most important variables for the Indian Economy and financial markets during 2026-27.
India imports a substantial share of its crude oil requirements, making international oil prices particularly important for the country’s trade balance and inflation outlook. When crude prices rise sharply, the value of imports increases, potentially putting pressure on the current account.
Higher oil prices can also affect the Indian rupee. A larger import bill increases the demand for foreign currency, potentially adding depreciation pressure on the rupee if capital inflows do not sufficiently offset the demand.
A weaker rupee can, in turn, increase the domestic cost of imported commodities and inputs, creating another channel through which external energy shocks can affect inflation.
SEBI pointed to strategic petroleum reserves, import diversification and targeted fiscal support as important measures that can help India manage these risks and maintain macroeconomic stability.
Indian Equities Faced a Difficult 2025-26
While the broader Indian Economy remained strong, the country’s equity markets experienced a challenging period in 2025-26.
According to SEBI, the Nifty 50 and broader Indian equity indices declined by around 14 per cent in US dollar terms during the year.
Several factors contributed to the weakness. These included sustained foreign portfolio investor selling, rupee depreciation, concerns over market valuations, slower earnings growth and the impact of the Middle East conflict.
The divergence between economic growth and stock-market performance highlights an important point for investors: strong economic growth does not automatically translate into continuously rising equity prices.
Stock markets are influenced by a much wider set of variables, including valuations, corporate earnings, global liquidity, interest rates, currency movements, geopolitical developments and investor expectations.
Consequently, India’s strong domestic fundamentals can support markets over the medium and long term, but short-term market movements may remain volatile.
Record Foreign Portfolio Outflows Weighed on Markets
One of the most significant pressures on Indian equities during 2025-26 was foreign portfolio investor (FPI) selling.
SEBI reported that FPI equity outflows from India reached a record USD 19.7 billion during the year.
Foreign investors can have a substantial influence on emerging-market financial markets because large inflows or outflows can affect equity prices, currency markets and overall liquidity.
Sustained foreign selling can also place pressure on the rupee and contribute to greater volatility. This was particularly relevant during a period when global investors were reassessing emerging-market exposure amid geopolitical uncertainty, changing valuations and concerns about earnings growth.
However, the impact of foreign selling was partly cushioned by domestic institutional investors.
Domestic Institutional Investors Provide Market Cushion
Domestic institutional investors, particularly mutual funds, played an important stabilising role during the period.
Strong domestic investment flows helped offset some of the pressure created by foreign portfolio outflows. This growing domestic participation is significant for India’s financial markets because it can reduce excessive dependence on international capital.
A stronger domestic investor base can provide markets with a relatively stable source of liquidity during periods when global investors become risk-averse.
For the Indian Economy, the expansion of domestic financial participation also reflects broader trends in household savings and financialisation. As more savings move into mutual funds and other market-linked instruments, domestic capital markets can become increasingly important channels for investment and capital formation.
Global Supply Chain Shift Could Create New Opportunities
Despite the risks facing India, SEBI also identified potential opportunities arising from changes in global supply chains.
Companies around the world have increasingly sought to diversify manufacturing and sourcing networks, reducing excessive dependence on individual countries or regions.
This restructuring could create opportunities for India to attract investment, expand manufacturing capacity and strengthen its role in global supply chains.
If India can continue improving infrastructure, logistics, manufacturing capabilities and the overall business environment, the shift in global supply chains could contribute to future investment and employment.
Such developments could also complement the government’s emphasis on capital expenditure and domestic production.
Middle East Conflict Resolution Could Boost Foreign Flows
SEBI identified a sustained resolution of the Middle East conflict and a normalisation of energy prices as potentially important near-term catalysts for the recovery of foreign investment flows into India.
A reduction in geopolitical uncertainty could improve global investor sentiment and encourage investors to return to emerging markets.
Lower and more stable crude oil prices would provide an additional benefit. Reduced energy costs could help contain inflation, improve the external balance and reduce pressure on the rupee.
For India, a combination of easing geopolitical tensions, stable energy prices and stronger global risk appetite could therefore create a more supportive environment for equities and other financial assets.
Inflation and Fiscal Consolidation Remain Important
Another important element of SEBI’s assessment is the improvement in India’s inflation dynamics.
Maintaining price stability is crucial for sustainable economic growth. Lower and more predictable inflation provides households with greater purchasing-power stability while allowing businesses to plan investment and production more effectively.
Fiscal consolidation is also expected to strengthen India’s macroeconomic position. Responsible fiscal management can improve investor confidence and create greater room for the government to respond to unexpected economic shocks.
However, maintaining this balance can be challenging when external shocks, such as an oil-price surge, increase costs for consumers and businesses.
Stronger Corporate Balance Sheets Offer Support
SEBI also pointed to stronger corporate balance sheets as one of the factors supporting India’s relative economic performance.
Healthier corporate finances can encourage companies to invest, expand capacity and take advantage of improving demand. SEBI Stronger balance sheets can also make businesses more capable of absorbing temporary increases in costs or periods of weaker market conditions.
Corporate investment, alongside government capital expenditure and household consumption, can therefore remain an important component of India’s growth story.
What Could Shape Indian Markets in 2026-27?
The outlook for Indian markets will likely depend on the interaction between strong domestic fundamentals and external risks.
On the positive side, India’s projected 6.5 per cent growth, resilient domestic demand, improving inflation conditions, stronger corporate balance sheets and domestic institutional investment provide a solid foundation.
On the risk side, geopolitical conflicts, crude oil prices above USD 100 per barrel, foreign capital outflows, currency depreciation and global market volatility could create pressure.
Investors will therefore closely monitor several indicators during 2026-27, including crude oil prices, inflation, the rupee’s movement, FPI flows, domestic institutional investment, corporate earnings and global economic growth.
Indian Economy Remains Relatively Well Positioned
SEBI’s assessment presents a cautiously optimistic picture of the Indian Economy.
India enters 2026-27 with stronger domestic foundations than many economies facing similar global challenges. The country’s large domestic consumption base, investment activity, services sector and growing institutional investor SEBI participation provide important sources of resilience.
At the same time, India’s integration with the global economy means it cannot remain completely insulated from international shocks. SEBI Energy prices, geopolitical developments and global capital movements can have significant consequences for inflation, the current account, the rupee and financial markets.
The key challenge for policymakers will therefore be to preserve domestic momentum while managing external vulnerabilities.
If SEBI geopolitical tensions ease, energy prices stabilise and foreign investment flows recover, Indian markets could receive an additional boost. Conversely, SEBI prolonged conflicts and sustained high crude prices could test the economy’s resilience.
Overall, SEBI’s Annual Report 2025-26 suggests that the Indian Economy remains fundamentally resilient, even as the external environment becomes more complicated. With domestic growth projected to remain significantly above the global average, India is expected to retain its position as one of the world’s major growth engines in 2026-27.
For SEBI ,financial markets, however, the path ahead is unlikely to be completely smooth. Domestic economic strength may provide the foundation, but geopolitical developments, commodity prices and international capital flows will continue to determine how that strength translates into market performance.
