Why now: the confluence of factors
The revival in Emerging Markets did not happen in isolation. It was driven by a combination of macroeconomic and market factors that aligned at the same time. One of the biggest tailwinds was the weakening of the US dollar, with the dollar index declining by around 9% in 2025. Historically, a softer dollar has created favourable conditions for Emerging Market assets by easing external financing pressures and improving capital flows.
Valuations also played a critical role. Emerging Market equities entered the year trading at a forward price-to-earnings multiple of around 13x for CY2026, offering a meaningful discount to developed markets. After years of being under-owned by global investors, the asset class had room for both fresh inflows and valuation re-rating.
At the same time, earnings growth across several Emerging Market economies improved, supporting stronger equity market performance. Inflation trends were equally important. By late 2025, inflation across EM ex-China economies had moderated from 8.2% year-on-year in early 2024 to nearly 6.1%. This allowed central banks in many Emerging Markets to begin easing monetary policy without materially destabilising currencies. Developed markets, by contrast, remained more constrained. While geopolitical tensions, including the US-Iran conflict, temporarily interrupted the rally, the structural drivers behind the move remain intact and are likely to reassert themselves after periods of consolidation.
The India story: ghayal hu isliye ghatak hu (I’m wounded, so I’m dangerous)
India, notably, did not participate meaningfully in the broader Emerging Market rally of 2025. The MSCI India Index delivered returns of only around 4% in US dollar terms, weighed down by currency weakness, slower earnings growth, tariff-related pressures, and relatively higher domestic interest rates. Foreign investors withdrew nearly USD 35 billion over the last 24 months, bringing foreign ownership in Indian equities to a 15-year low of around 16%.
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Yet this underperformance may now be creating the base for the next phase of recovery. India enters this period with stronger domestic macro fundamentals and multiple levers of support already in motion. Fiscal measures such as income tax adjustments, GST rationalisation, and the rollout of the 8th Pay Commission are expected to support household consumption and spending power. A more supportive monetary stance, coupled with continued reforms, could help sustain GDP growth around 7%, led increasingly by domestic demand.
Importantly, the market correction and consolidation witnessed in 2025 have also helped moderate valuations. India is no longer simply seen as an expensive structural story. It is increasingly becoming a more reasonably valued growth market with improving earnings visibility.
What the consensus may be missing
The prevailing narrative around India is well known: underperformance in 2025, foreign outflows, and slower earnings momentum. However, that view may be overlooking several structural developments that can materially reshape the next cycle.
One such factor is India’s sovereign rating upgrade. In August 2025, S&P Global Ratings upgraded India’s long-term sovereign rating from BBB- to BBB. This widens the universe of global fixed income investors who can allocate to India and strengthens the country’s standing in international capital markets.
Another underappreciated driver is the rapid expansion of Global Capability Centres. India now hosts more than 1,800 GCCs employing nearly two million professionals. These centres are increasingly engaged in higher-value work such as product engineering, artificial intelligence, cloud infrastructure, and cybersecurity. This strengthens India’s position in the global services value chain while also supporting employment and income growth.
Retail participation in financial markets has also transformed the investment landscape. Demat accounts rose to 22.5 crore by March 2026, compared with around 4 crore in 2020. A large share of these new investors comes from smaller cities through digital platforms, creating a broader domestic investor base that has helped absorb volatility during periods of foreign selling.
Trade integration is another evolving strength. In January 2026, India and the European Union announced a trade agreement covering over 90% of goods, with implementation expected by early 2027. Agreements with the UK, New Zealand, and Oman have also progressed, while tariff discussions with the United States have moved in a constructive direction.
Finally, India’s growth remains anchored by domestic consumption. Private Final Consumption Expenditure grew 7.7% in FY26 and accounts for nearly 56.7% of GDP. This internal demand engine gives India a resilience that many export-dependent economies lack.
Key takeaway
For investors, the message is increasingly clear. The earlier view that India is expensive but structurally attractive is evolving into something more compelling. Valuations have adjusted, earnings are improving, and multiple catalysts are already in place. This is not a market waiting for a trigger. The triggers may already have arrived, and the market may simply not have fully priced them in yet. Emerging Markets are back, and India could well be next.
(The author Vipul Sanghvi is CEO & Co-Head Institutional Equities, Systematix Group. Views are own)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)