Growth in market size came from several simultaneous developments: an increasing number of listed companies, rising market value among existing ones, and sustained inflows of domestic capital. Regular monthly contributions into domestic mutual funds became a stable source of buying across the past decade, and the scale and persistence of that flow changed the market's capital structure. Steady domestic inflows affect valuation directly. Where buying demand is stable while the supply of investable securities grows more slowly, valuations tend upward. Indian earnings multiples have run above most emerging markets for a sustained period, and part of that gap is explained by capital structure rather than by growth expectations alone.
Growth expectations themselves have a foundation. A young population, continuing urbanisation and the scale of infrastructure investment support relatively high nominal growth rates. Worth noting alongside this is that the historical relationship between economic growth and equity returns is weaker than intuition suggests. Growth can be funded by new share issuance that dilutes existing holders rather than appearing in per-share figures. Foreign participation operates within an explicit framework. Foreign investors must register, holdings face caps in certain sectors, and tax treatment and repatriation follow specific rules.
These conditions have been progressively relaxed over two decades, and they still constitute an operating environment different from developed markets, forming part of what index classification assesses. Sector composition differs from most emerging markets. Indian indices weight financials, information services and consumer staples more heavily, with resources and heavy industry weighted comparatively lightly. This produces lower correlation with commodity cycles than most emerging markets and higher correlation with domestic consumption and credit cycles. Price differences between domestic and overseas listings offer a technical observation point. Some companies list in both places, and the two prices need not converge given restrictions on capital movement.
The existence of such gaps itself reflects the degree of capital account openness and serves as one indicator of market integration. Currency is a continuing consideration. The rupee has depreciated against major currencies over long historical periods, with causes including inflation differentials and current account position. Returns measured in local currency therefore differ systematically from returns measured in foreign currency, and that difference accumulates considerably over long horizons. Combining these characteristics produces one conclusion. India's risk and return profile resembles other emerging markets less closely than the classification implies. Treating it as one cell in an emerging market basket ignores those differences.
Assessing it separately requires handling valuation, currency and institutional questions that are largely unrelated. One further consideration involves index inclusion itself. Weight in global indices has risen partly through improved accessibility rather than through market growth alone, and further increases in inclusion factors would generate mechanical buying by tracking funds. Anticipating such flows is a distinct question from assessing the underlying businesses, and the two get conflated frequently in commentary. A further consideration concerns the domestic investor base. Sustained retail inflows have supported valuations, and flows of that kind respond to recent returns. Should returns weaken for an extended period, the mechanism that supported valuations on the way up would operate in reverse. The resulting dynamic differs from what fundamentals alone would produce.