Securities and Exchange Board of India (File Photo) India's financial markets could continue to find support from the country's relatively strong domestic economic fundamentals in 2026-27, but external risks may keep volatility elevated, according to the Securities and Exchange Board of India's (SEBI) Annual Report 2025-26. The regulator highlighted geopolitical tensions, high commodity prices and unpredictable foreign investment flows as key factors that could influence the direction of Indian markets over the coming year. Despite a difficult global backdrop, India's economy showed considerable resilience in 2025-26, supported by domestic consumption, public capital spending and continued strength in services. India's real GDP growth was estimated at 7.7 per cent in 2025-26, compared with 7.1 per cent in the preceding year. Strong domestic activity remained central to this expansion, with private consumption and investment continuing to play an important role. Private consumption accounted for 56.7 per cent of nominal GDP, while investment represented 31.9 per cent. The combination of domestic demand, government-led capital expenditure and a robust services sector helped the economy withstand challenging international conditions. SEBI also pointed to several factors that could help India maintain relatively strong growth in 2026-27. These include fiscal consolidation, improving inflation conditions, healthier corporate balance sheets and sustained participation from domestic institutional investors. The International Monetary Fund has projected India's growth at 6.5 per cent for 2026-27, substantially above its 3.1 per cent forecast for global economic growth. Despite India's strong domestic foundation, SEBI cautioned that developments outside the country could have a significant impact on the economy and financial markets. A prolonged conflict in the Middle East remains a major concern, particularly if it keeps crude oil prices above USD 100 per barrel. India relies heavily on imported crude, meaning a sustained increase in energy costs could push up the country's import bill and put pressure on the current account deficit. Higher oil prices could also create additional inflationary pressure, potentially complicating the macroeconomic environment. Strategic petroleum reserves, diversification of energy imports and targeted fiscal measures could therefore become important tools for managing the impact of elevated commodity prices. Indian stocks experienced a challenging 2025-26, with the Nifty 50 and broader market indices falling by around 14 per cent in US dollar terms. Several factors contributed to the pressure. These included persistent foreign portfolio investor selling, weakness in the rupee, concerns over market valuations, slower corporate earnings growth and uncertainty linked to the Middle East conflict. Foreign investor selling reached an unprecedented level during the year, with FPI equity outflows from India touching USD 19.7 billion. However, domestic institutional investors helped limit the impact of overseas selling. Mutual funds and other domestic institutions continued to bring substantial investment into the Indian equity market, providing an important source of stability.