The relationship between the Indian and US stock markets has evolved significantly, reflecting the distinct economic landscapes and market dynamics of each country. Recently the rolling 1years correlation equation of India to the US stock market has reduced to 0.10 after peaking at 0.96 in Sept 2024. Over the past six months in particular, the two markets have exhibited divergent behaviour, moving in opposite directions—a departure from their historical pattern. 

If we go by the long-term correlation of India to the U.S., it is relatively high at 0.97 in the last 10 years, which is as perfect, while it is relatively low at 0.70 in the century. Generally, the equation is as positive when the equity market moves in tandem based on the development of each regional economy, like India and the US economy, which have done well in the last 10yrs, providing a CAGR of 12% and 10%, respectively.

However, this relationship tends to fluctuate in response to shifts in domestic economic conditions, political developments, geopolitical tensions, and changing investor sentiment between risk-on and risk-off. Recently, the correlation between the Indian and U.S. stock markets has remained relatively low, suggesting that the two markets are moving more independently. For instance, in Q4CY24, amidst global market volatility, the S&P 500 rose by 3%, while the Nifty 50 experienced a significant decline of 4%, largely driven by India’s premium valuations and corporate earnings downgrades. 

In contrast, year-to-date 2025 (Jan to April end), the U.S. market has declined by 6%, whereas the Indian market has edged up by 1%. Notably, in April alone, the Indian market surged by 9%, significantly outperforming global indices following the pause on reciprocal tariffs announced on April 9. India’s relative outperformance so far in 2025 suggests that much of the downside risk has already been priced into domestic equities. More importantly, it also reflects the market’s resilience amid global trade uncertainties, indicating reduced vulnerability to external tariff-related pressures.

Following a period of consolidation in the Indian stock market from September 2024 to March 2025, the recent positive divergence in its performance can be attributed to several key factors. Firstly, the Indian economy is exhibiting stronger growth, supported by robust domestic demand and proactive government measures to enhance infrastructure and drive investment. Corporate earnings are also projected to improve in FY26 compared to FY25, adding to investor confidence. Secondly, India’s economy is heavily skewed towards the services sector, which accounted for ~55% of GDP in FY25, while the manufacturing sector contributes a comparatively smaller share of around 17%. This sectoral composition makes the Indian stock market less exposed to global tariff-related disruptions and more responsive to service exports and domestic consumption trends. 

However, India’s role in the world manufacturing sector is likely to multiply in the long-term as managers are looking for alternative suppliers. Similarly, on the other hand, the US economy, which is experiencing growth slowdown today, is likely to impact the India services sector, like IT, in the short to medium-term. The US stock market is heavily influenced by the performance of large multinational corporations, such as technology companies making it susceptible to policy fluctuations, thus slowing the world market too.

U.S. economic data for Q1 2025 points to signs of a potential slowdown; however, this is largely viewed as a short-term effect stemming from a buildup of inventories ahead of anticipated tariff hikes. While some improvement is expected in the upcoming quarter, sustainability remains uncertain due to unresolved trade-related disruptions. The imposition of steep tariffs—such as the 145% levy on Chinese imports and sector-specific duties of 25% on automobiles, metals, and other key goods—combined with a 90-day pause on reciprocal tariffs, has created considerable uncertainty for businesses seeking to secure alternative suppliers. This uncertainty is likely to lead to higher input costs, which may eventually be passed on to consumers, thereby fuelling inflationary pressures. 

After the recent strong performance of the domestic market, Nifty50 trades above 24,000, market gains are trimmed in the near-term. Despite growing global optimism and heightened expectations surrounding a potential trade agreement between the US and India, broad indices remain largely flat due to escalating tensions along the LoC. The recent rally has triggered profit booking and a rotation across sectors, like from broad indices & banks to IT stocks lately. Neither the muted Q4 results is providing supportive to maintain the last month’s optimism. Nevertheless, renewed momentum in US-China trade negotiations and a weakening dollar are seen as positive drivers for EMs like India, in the medium-term.

In this evolving global trade landscape, India may be positioned more favourably. The sharp decline in correlation between Indian and U.S. stock markets suggests that India is increasingly moving on a differentiated trajectory. With a resilient domestic economy, expanding manufacturing prospects, and limited exposure to direct tariff risks, India could outperform other global markets in the medium term, particularly if global supply chain realignments continue to shift in its favour.

The author, Vinod Nair is Head of Research at Geojit Financial Services.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making investment decisions.