Stock Market Performance: Triple Factors Create Volatility, India Lags Behind Asia

New Delhi: December has seen increased volatility in the Indian stock market, driven by a trio of concerns that have spooked foreign investors. According to market analysts, Foreign Institutional Investors (FIIs) have intensified their selling compared to November, primarily due to the delay in the US-India trade agreement, a rising trade deficit, and negative sentiment surrounding Russian President Vladimir Putin’s recent visit to India.

Asian markets have also experienced profit-taking, which has weighed on India’s performance. FIIs are securing gains after strong returns in markets such as China, Japan, South Korea, and Taiwan in 2025. The Nikkei, Hang Seng, KOSPI, and Shanghai indices have delivered dollar returns of 27.5%, 29.5%, 73.7%, and 16% respectively so far this year.

A key factor behind profit-taking in Japan is the rise in the 10-year government bond yield from 1.70% to 1.95% in just a month. This has increased risks in the yen carry trade, where investors borrow in low-interest currencies to invest in higher-yielding ones. Inflation above 2% and fiscal stimulus under new Prime Minister Takaichi may require additional government borrowing, pushing Japan’s debt-to-GDP ratio, already at around 260%, even higher. This has prompted investors to shift capital from yen-based assets to emerging markets.

Against this backdrop, India’s market has lagged its Asian peers. Indian equities have delivered roughly 10% dollar returns, while the rupee has depreciated 5.7% against the dollar. Volatility in the rupee, combined with uncertainty over the US-India trade deal, has added pressure on exports and widened the trade deficit.

The delayed trade agreement poses risks for corporate earnings and stock market performance in 2026, a factor not yet fully priced into current valuations. However, the recent moderation in the current account deficit, partly due to seasonal demand for gold and silver during festivals and weddings, offers some relief.

By the end of the week, markets showed a slight recovery following the 0.25% Fed rate cut, which was positively received globally. Still, analysts warn that sustainable upside is limited, and further rate cuts in the near term appear unlikely.

India’s market trajectory in the coming months will depend heavily on the timely resolution of trade negotiations with the US and broader global investment sentiment.

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