- India’s GDP grew 7.8% in Q1 FY27, but Indian equities remained under pressure.
- Weak stocks may not mean lower risk appetite; investors may be shifting capital to other assets.
- USD/INR movements add currency risks for both Indian and foreign investors.
The Indian economy continues to show strong signs of growth, but the stock market is not experiencing the same positive trend. This has left investors wondering what is really happening with the market. Although risk appetite is not disappearing, investors may be showing a shift in interest, with global assets, gold, and crypto becoming more preferred options.
Strong GDP Growth, Weak Equity Returns: The Contradiction
According to the Ministry of Statistics and Programme Implementation (MoSPI), India’s real GDP surged 7.8% year-on-year in Q1 FY27 (April-June 2026). This represents a significant rise of 6.9% from last year’s first quarter.
Despite this growth, Indian equities are under pressure. The Nifty 50 dropped by 2.3% in the September series through September 9. Foreign investors have increasingly sold their Indian shares, with about ₹10,397 crore in Nifty index futures dumped in the first nine trading sessions.
In addition, FPIs withdrew around ₹20,974 crore from Indian equities through September 18. This brings the total FPI outflows to ₹2.45 lakh crore, according to CDSL data. During the whole of 2025, the FPI outflows were comparatively lower at ₹1.66 lakh crore.
Is India Actually Becoming More Risk-Averse?
Notably, the recent weakness in Indian equities does not necessarily mean that investors are completely avoiding risk assets. Some domestic investors are still showing interest in putting money into market-linked assets. For example, India’s mutual fund industry had about ₹87.08 lakh crore in assets under management as of August 31, 2026. Equity, hybrid, and solution-oriented schemes alone accounted for around 21.62 crore folios.
At the same time, foreign investors have been reducing their exposure to Indian equities. This reveals that there is a major distinction between risk aversion and asset performance. If investors are still putting money into mutual funds, equities, crypto, or other risk assets, then the weakness in the stock market does not reflect the country’s overall approach to risk assets.
One of the main possibilities is the way investors opt for investments. They may be becoming more selective with investment options. While high valuations, currency risks, global interest rates, and geopolitical tensions could impact the Indian stock market, it could make investors less attracted to equities.
The Rising Cost of Taking Risk in Indian Markets
Currently, Indian investors are facing higher costs in taking market risks. The current tax and transaction costs could reduce the returns from short-term trading. In detail, equity investors face about 20% tax on short-term capital gains, while long-term capital gains are taxed at 12.5% on gains above ₹1.25 lakh.
Where Does Risk Capital Go When Equities Lose Their Appeal?
The decline in Indian equities does not mean that investors are moving into cash. They may be looking for other options like gold, overseas stocks, bonds, and crypto, which could offer more returns.
Amid inflation, geopolitical tensions, and currency weakness, gold is becoming the most favored asset in India. Despite increased volatility, crypto is also being opted for by investors to manage risks and earn returns.
Gold, Global Assets and Crypto: Risk Substitution or Risk Reduction?
When investors move money into gold, it could be seen as a defensive approach, as the metal is often seen as an asset with lower risks. At the same time, investments in global equities or crypto could be understood as the investors’ willingness to take risk, but from outside the domestic market.
It is important to note that crypto investments give a different outlook. If people are interested in putting funds into Bitcoin and other cryptocurrencies despite large price swings, it gives the idea of risk substitution rather than risk aversion. This means that investors are ready to take risks elsewhere.
Why USD/INR Matters for Indian Investors Going Abroad
Currency risk is one of the main factors that matter for Indian investors’ foreign investments. This means that their final returns in INR will depend on the asset performance as well as the movement of the rupee. For example, if an investor buys a dollar-backed asset when USD is ₹90, and sells it later when it is ₹95, the value of the rupee will decide exactly how much he receives. Even without a gain in the asset, a weaker rupee could show much higher paper gains. This makes the rupee particularly important when Indian investors put money into global markets.
The FII Question: Is Foreign Capital Seeing the Same Risk-Return Problem?
Foreign investors have turned cautious towards the Indian stock market for several reasons. Higher US interest rates and bond yields make dollar-based assets more attractive. At the same time, higher crude oil prices and currency risks make Indian shares less attractive.
Similar to Indian investors’ overseas exposure, foreign investors’ Indian investments pose the same currency risk. When they invest in an Indian stock, its INR value could show high gains even if there is not much change in the dollar-denominated value.
(adsbygoogle = window.adsbygoogle || []).push({});What Would Confirm a Shift in India’s Risk Appetite?
To confirm a shift in India’s risk appetite, a weak stock market is not enough. FII and domestic flows, mutual fund flows, derivatives activity, gold demand, and crypto investment could give more ideas on the overall sentiment of Indian investors. Even if less money flows into Indian equities, the risk appetite remains strong if other high-risk assets continue to gain capital.
Related: Nifty’s Rare Close at the Day’s Low: Why One Bad Session Isn’t the Pattern Traders Think It Is
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