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Do the economy and markets go hand in hand? Mostly yes, but not always. There are times when the two can diverge, with the stock market moving in a direction that appears disconnected from the underlying economic fundamentals. To understand it better, look at the Indian economy and its stock market. India's GDP grew by of 7.8% in the first quarter of FY27, exceeding expectations, the International Monetary Fund (IMF) said. The country's factory output, measured by the Index of Industrial Production (IIP), rose to 8% in August, higher than the revised 7.4% expansion in July, and the 4.7% growth recorded a year earlier. Now, look at the Nifty 50. The benchmark index is down 13% year-to-date (YTD). The market is clearly less impressed by the resilience of the Indian economy and more concerned about elevated oil prices due to the US-Iran conflict, rising global bond yields and heavy foreign capital outflows. FPIs have sold off Indian stocks worth ₹2,50,103 crore so far this year, as per NSDL data. India’s current market situation highlights an important distinction between economic growth and equity-market performance. Apurva Sheth, Head of Market Perspectives & Research at SAMCO Securities, underscored that equity markets are influenced not only by current economic fundamentals but also by valuations, global liquidity, foreign investor flows and expectations of future earnings. According to Sheth, the recent correction in Indian equities reflects a combination of factors, including elevated crude oil prices, global risk aversion, higher bond yields and selling by foreign portfolio investors. For an oil-importing economy such as India, sustained increases in crude prices can put pressure on the import bill, inflation, corporate margins and the currency. At the same time, a market correction does not necessarily imply that India’s underlying growth story has weakened, Sheth emphasised. "Stock prices can decline even when the economy is expanding, particularly when investors reassess the premium valuations they are willing to pay for future earnings. Therefore, the divergence between economic growth and market performance should not be viewed as contradictory," said Sheth. "It is better understood as a repricing of financial assets against a backdrop of otherwise resilient domestic economic activity. The key variables to watch will be crude prices, earnings growth, foreign flows, valuations and global financial conditions,” Sheth added. Uttam Kumar Srimal, Deputy Head - Fundamental Research at Axis Direct, said equity performance is being constrained by global factors, including elevated US bond yields, higher crude prices, geopolitical uncertainty, a weaker rupee, and significant FPI outflows. "The disconnect between strong domestic growth and weak market performance is driven by subdued global risk appetite and sentiment, rather than any structural deterioration in India's economic growth story," said Srimal. A country's GDP measures, and the market measures, the share of that activity reaching shareholders, which is being curtailed by higher oil prices. Vivek Iyer, Partner and CIO at Rational Equity Asset Management, expects crude oil to remain above $100 for the rest of the decade due to underinvestment in supply and rising demand. "The market is spending this year abandoning the consensus view of oil as a spike to be waited out. India is importing close to 90% of its crude, and every $10 on the barrel is adding $15 to 17 billion, about 0.4% of GDP, to the import bill. Someone is paying for that. Passing it to the consumer would break demand and the GDP print," Iyer explained. The market appears to be pricing that transfer. Iyer emphasised that every $10 of crude above $90 is taking 3% to 4% off Nifty earnings growth, so at $105 to $110, the street is losing most of the double-digit FY27 growth it is still underwriting. Foreign investors are observing it. With US 10-year bond yields at over 5.2% and the rupee at 96, a dollar investor earns more risk-free than the Nifty's earnings yield. "The economy will keep printing decent numbers because the system is protecting the consumer and the headline; the market will keep struggling because the cost of that protection is landing on the companies in the index. Until earnings estimates stop falling, the two will coexist, and the price of a barrel is reconciling them," said Iyer. Read all market-related news here Read more stories by Nishant Kumar Disclaimer: This article is for educational purposes only and does not constitute investment advice. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. 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