Inside India newsletter: India’s economic growth is smashing forecasts, but its biggest stocks aren't feeling the love

In this article DIXON-IN AMBER-IN .

NSEI @LCO27G Hello, this is Priyanka Salve, writing to you from Singapore. Welcome to the latest edition of "Inside India" — your one-stop destination for stories and developments from the world's fastest-growing large economy.

India's quarterly economic growth has exceeded expectations several times over the past year, defying a bleak global trade environment, high energy prices and geopolitical uncertainties. But this has failed to boost the country's key stock benchmarks, which have been among the worst-performing major indexes globally. I spoke with experts to understand what's behind that disconnect.

Any thoughts on today's newsletter? Share them with the team. The big story India is beating growth expectations even as major economies such as the U.S., China and Japan are seeing a slowdown. But the country's key stock benchmarks are struggling to reflect that strength, hinting at a festering disconnect between markets and the economy.

On Monday, the Indian economy surprised with a 7.8% growth in the June quarter, leading global brokerages to upgrade their economic forecasts for the country. Analysts also underscored that all cylinders of the Indian economy were firing, with high-frequency indicators showing that consumption and investment in the country were holding up.

Global brokerages Morgan Stanley and Citi raised their economic growth forecasts for India to 7.3% for the year ending in March 2027 from 6.7% and 6.9%, respectively, estimated earlier. Celebrating the economic outperformance, Indian Prime Minister Narendra Modi said on Monday that "Doomsayers were doomed, and India bloomed … yet again."

But when the markets opened on Tuesday, the Nifty 50 bled red, seeming like the biggest skeptic of the country's robust economic growth outlook. The index, which has dropped 8% since the start of the year, clocked another weak session, closing slightly lower. Since January, India's benchmark indexes have been among the worst-performing across major global equity markets.

Experts told CNBC that large-cap stock indexes such as the Nifty 50 are heavily concentrated on stocks of financial services and IT companies, which do not capture heightened economic activity in emerging sectors such as manufacturing, fintech and consumer tech.

"The headline indices have been held back by weakness in some large-cap names, while small- and mid-cap stocks have performed much better," Dhiraj Relli, managing director and chief executive of HDFC Securities, told CNBC.

Large banks in India are taking fewer lending risks, while non-banking financial companies, which are underrepresented in the Nifty 50, are extending loans to unserved segments such as micro-enterprises, rural consumers, and used-vehicle buyers, several experts said. IT service companies, meanwhile, are facing revenue and margin pressure amid global AI adoption, they said.

IT and financial services firms together make up about 45% of the Nifty 50's weightage. Since the start of the year, the Nifty Bank index has declined more than 4% so far this year, while the Nifty IT index is down nearly 18%.

The story of India's economic performance is moving outside of the large-cap benchmarks and more into mid- and small-caps, Garima Kapoor, deputy head of research and economist at Elara Capital, told CNBC's "Inside India."

There has been a disruption in the way India consumes and banks, which has increased the opportunity size for small- and mid-cap companies, Kapoor said, adding that profit pools are "materially" shifting from large-caps to mid-caps. Underlying shift India's recent success in electronic manufacturing has also not been captured by top indexes.

Earlier this year, India became the world's second largest mobile manufacturer, with more than 300 production units as compared to just two in 2014. Electronic manufacturing companies such as Dixon Technologies and Amber Enterprises, whose stocks are up 20% and 16% since the start of the year, are not part of the benchmark stock indexes.

Mid-cap and some small-cap stocks "have greater exposure to manufacturing, fintech, consumer technology, and other emerging sectors that are capturing a growing share of economic activity," Mohammad Hassan, head of APAC equities dividend forecasting at S&P Global Market Intelligence, told CNBC.

The average earnings growth of Nifty 50 companies was 11% in the June quarter, while mid-caps reported 31% growth from a year ago, according to data shared with CNBC by Indian broking firm Ambit Capital. In the financial year ending March, profits of Nifty 50 companies rose by an average of 12%, while those for Nifty Midcap 150 grew by 44%.

Mid-cap companies are also investing more in building new capacity, Nitin Bhasin, head of institutional equities at Ambit Capital, told CNBC. The capex of listed Indian companies has more than doubled to 14.5 trillion rupees ($152.6 billion) over the last six years ending in March 2026, Ambit Capital said in a report in August.

The share of mid-cap companies in that has increased to 20% from 14% while that of 100 large-cap companies has fallen from 78% to 72%, the report showed. As a result of these shifts, in the last year, while the Nifty 50 has declined by more than 2%, the Nifty Midcap 150 index is up 10%, as per LSEG data.

Midcap and small cap indexes are "more direct proxies for domestic economic acceleration," and a growing number of these firms are crossing major market cap milestones of $1 billion, Relli of HDFC said, adding that "A large part of India's economic activity comes from sectors and businesses that are either unlisted or have limited representation in the major equity indices."

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