India has been posting robust economic numbers lately. Corporate profit growth hit a 10-quarter high. Goods exports and private investment are up double digits year over year. The rupee has stabilized.

Only stocks missed the memo. The iShares MSCI India exchange-traded fund continues to dither, down 10% year to date and nearly 20% from a peak two years ago. Summer volatility in the tech-forward emerging markets, Taiwan and South Korea, hasn't helped India much.

"Profit growth and valuations are presenting a better proposition," says Rob Brewis, global emerging markets investment manager at Aubrey Capital Management. "But we're not sure what the catalyst is for a rally."

Prime Minister Narendra Modi's government has coped admirably with the fallout from the Iran war, which wreaked havoc with India's supplies of oil, gas, and fertilizer. The state, flush with more than $700 billion in currency reserves, has absorbed much of the energy price shock by reducing taxes, keeping the annual inflation rate below 5% so far.

The Reserve Bank of India got more creative to stop the rupee's bleeding. It opened a program for "nonresident Indians" around the world to deposit dollars in Indian banks at interest rates around 6%, then swapped those dollars into rupees that the banks could lend at an average 9%.

The maneuver raked in more than $120 billion, double its initial target. "India basically dodged the Hormuz crisis with extremely effective policy," says Arthur Budaghyan, chief emerging markets strategist at BCA Research.

Equities' poor performance has a lot to do with market composition. Six of the top 15 index names are banks, which are still on the back foot from a growth and profits slowdown last year. Management civil war has riven the biggest of all, HDFC Bank, since a 2023 merger with its parent company.

Both the chairman and CEO have stepped down this year, aggravating a 30% plunge in the share price. "Banks' inherent problem is a changing guard in management," says Rita Tahilramani, an investment director at Aberdeen Investments.

Two more blue chips, Infosys and Tata Consultancy Services, are information-technology outsourcers that have been caught in the global "SaaSpocalypse."

Banks "could do well the next few quarters" as they lend out their windfall from the diaspora, says Venkat Pasupuleti, portfolio co-manager for India at Dalton Investments. Meanwhile, he is digging deeper into more-dynamic mid-cap stocks. Shares in financial-technology firm Paytm (traded under its parent company, One97 Communications) have surged more than half since June 1, with investors betting that it may be able to charge for transactions on the state-backed Unified Payments Interface, Pasupuleti notes.

Brewis is focusing on retail players consolidating fragmented markets across a population of 1.5 billion. Picks include optical chain Lenskart Solutions and online beauty-products dealer Nykaa (parent company FSN E-Commerce Ventures).

Modi & Co. can't finesse $100-a-barrel crude oil forever if the Iran war drags on, Tahilramani warns. Inflation has already crept up more than a percentage point since the conflict started on Feb. 28. A subpar El Niño-affected summer monsoon could pressure food prices. "These interesting economic numbers are not durable if the oil price continues to be very high," she says.

Interest-rate hikes by the U.S. Federal Reserve could force the RBI to tighten, constraining Indian growth, Pasupuleti adds. "The underlying Indian economy has very serious momentum," he concludes. "Global macro remains very challenging."

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