India won the emerging market race again in FY25. Will it become a safe haven too?

India became the best emerging market economy in 2024-25 for the fourth consecutive year despite facing turbulence in the second half of the year due to weak exports, sliding stock market capitalization and depreciating rupee, showed the Mint’s Emerging Markets Tracker. 

While stock markets emerged as one of the weak links in the second half of the year, a quick rebound in equities from disruption caused by the tariffs announcements by US President Donald Trump has seemingly made India a safe haven.

“India would be seen as a safe haven in certain terms among EMs and Asian economies as its economy is domestic demand driven,” said Gaura Sengupta, chief economist, IDFC First Bank. “Our exposure to the tariff tension compared to other Asian countries is on the lower side.”

Unlike previous years, India struggled to maintain its top position throughout the year, even falling to sixth rank in August and seventh in February—but a strong performance at the beginning of the year helped the country outpace its peers like China and the Philippines. 

India maintained its first rank for the first four months, but the flight of foreign investors from September onward, particularly to China after its economic stimulus programme, brought India down. The optimism, however, seems to be returning to India as the country is better placed in terms of economic growth as well as potential hit from the US tariffs. The trade war between China and the US seems to have shifted confidence back to India from China.

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External turbulence

India’s strong lead over its EM peers weakened mainly due to turbulence in the external environment—stock market crash, currency depreciation and exports. When it comes to overall economic growth and manufacturing Purchasing Managers’ Index, India scored the highest (100) throughout the year. Its performance on inflation was also among the strongest. These scores are based on seven high-frequency indicators across nine emerging market economies. On each indicator, the best-performing economy gets a score of 100, the worst one gets zero, and the others get linearly interpolated relative scores.

However, there was clear evidence of decline in the second half of the year in stock market capitalization where the average score fell to 40.7 from 63.3 in the first half. The average score for exports also declined to 31.5 from 40. While the outlook for exports remains uncertain amid tariff-related disruptions and expectations of a global growth slowdown, stock markets are making a comeback. BSE Sensex has crossed the 80,000-mark in late April after having fallen from over 85,000 in late September 2024.

On the other hand, China, India’s closest rival, maintained a good score due to its fairly strong economic growth. By maintaining its growth at 5%, meeting its target, the country proved that despite its problems, like lacklustre domestic demand and falling property prices, it can grow. Multiple fiscal stimuli in the second half of the year helped the country achieve a good score on stock market capitalization as well. However, uncertainty has gripped China, an export-dependent country, due to the full-blown trade war with the US.

Bright outlook

There is no doubt over India’s supremacy in GDP growth. Even as global uncertainties are expected to pull India’s growth down in FY26, other emerging market peers will remain behind. As per the latest projections by the International Monetary Fund, India's GDP growth is seen at 6.2% in FY26. In comparison, China is expected to grow by 4% in 2025, and ASEAN-5—Indonesia, Malaysia, the Philippines, Singapore, and Thailand—are expected to grow only 3.6%. On the inflation front, India is on the downward path and is expected to keep the year-on-year price rises close to the medium-term aim of 4.0% in FY26.

For India’s growth outlook, how well the country is navigating the risks from the external environment to currency, stock markets, and exports will be decisive. The sharp depreciation in the rupee between October 2024 and February 2025 was likely due to a delayed easing of the central bank’s control over the currency. Nevertheless, India maintains a massive foreign exchange reserve ($686 billion as of 18 April) to address volatility in the rupee. As for stock markets, India has already outpaced the emerging markets in recovery from disruption caused by Trump’s tariffs, signalling the return of optimism to the country, even though its volatile nature could very well put India at a disadvantage, the way it did in FY25.

“The stock market reaction is a mix of both what will happen to the domestic economy and perhaps some amount of optimism around the India-US trade deal. But its near-term movements can be volatile,” said Sakshi Gupta, principal economist at HDFC Bank. “Looking at our overall growth projections for the coming year by various international agencies vis-à-vis our peers gives a hard and a more definitive sense of how our growth prospects are being viewed,” Gupta added. Since India’s growth prospects are bright compared to the EM peers, the performance of exports and stock markets holds the key to the country’s position in this year’s race.

Also Read: Will lower tariffs lure back FPIs from other emerging markets?