The year 2025 served as a defining stress test for Indian equity markets. A combination of global macro uncertainty, geopolitical tensions, volatile commodity cycles, shifting monetary policy expectations, and the imposition of a steep 50% tariff by the United States on select Indian exports created an environment where risk appetite was frequently challenged. Yet, despite these headwinds, Indian markets demonstrated remarkable resilience. Rather than breaking down, markets consolidated, absorbed shocks, and recalibrated expectations—an outcome that speaks volumes about the underlying strength of India’s economic and financial ecosystem.
What stood out most was not spectacular returns, but durability. Domestic participation, institutional maturity, and macro stability ensured that even as global investors reduced exposure, the Indian market structure remained intact. This period of digestion has meaningfully improved the setup as we head into 2026.
Market Performance in 2025: Leadership of Largecaps, Reset in Broader Markets
In performance terms, 2025 clearly belonged to large-cap stocks. The Nifty 50 delivered steady, though unspectacular, returns and decisively outperformed the broader indices. Largecaps benefited from relatively predictable earnings, strong balance sheets, global revenue exposure, and superior access to capital. In uncertain times, these attributes attracted both domestic and selective global capital, reinforcing their leadership.
In contrast, the Nifty Midcap 100 and Nifty Smallcap indices went through a phase of correction—both in valuation and time. After multiple years of outsized outperformance, these segments entered 2025 with elevated expectations and stretched multiples. The absence of incremental liquidity, coupled with rising risk aversion, resulted in prolonged sideways movement and selective price declines. Importantly, this was not a disorderly collapse but a healthy normalization, allowing fundamentals to catch up with prices.
This divergence reversed the trend of previous years, when mid and small caps consistently outperformed. From a long-term perspective, such rotation is essential for market sustainability and reduces the risk of asset bubbles.
FPI Outflows and IPO Liquidity Absorption
A major overhang on markets in 2025 was the scale of foreign portfolio investor (FPI) outflows. Nearly ₹1,65,000 crore was withdrawn from Indian equities over the year. Higher global interest rates, an attractive risk-free return environment in developed markets, currency volatility, and trade-related concerns all contributed to this sustained selling pressure.
While domestic institutional investors (DIIs) and retail investors absorbed a large part of these flows, the impact was clearly visible in market breadth, particularly in mid and small caps where marginal liquidity matters most. Volatility increased, and participation narrowed.
Adding to this was an exceptionally active IPO calendar. Primary market fundraising reached multi-year highs, drawing liquidity away from the secondary market. While IPOs are a sign of economic confidence and entrepreneurial activity, their sheer volume during a period of FPI outflows meant that available domestic liquidity was spread thin. This disproportionately affected mid and small caps, where investor participation declined and price discovery slowed.
Economic Fundamentals: Growth, Stability, and Policy Support
Despite equity market volatility, India’s economic fundamentals remained robust through 2025. Real GDP growth continued to hover in the 6.5%–7.0% range, keeping India among the fastest-growing large economies globally. Growth has been supported by a combination of public capital expenditure, improving private investment sentiment, formalization of the economy, and resilient domestic consumption.
Crucially, low and well-anchored inflation has emerged as a powerful growth-supportive factor. Consumer price inflation has remained within the RBI’s comfort band, allowing policymakers greater flexibility. Stable inflation preserves purchasing power, supports real consumption growth, and creates room for accommodative monetary policy.
Liquidity support from the Reserve Bank of India has also been a key positive. Through calibrated liquidity operations and a balanced policy stance, the RBI has ensured that systemic liquidity remains adequate without compromising macro stability. This has supported credit growth, particularly in retail, MSMEs, and infrastructure-linked sectors, reinforcing the economic growth cycle.
INR Depreciation: A Net Positive for Growth
A widely debated issue in 2025 has been the depreciation of the Indian Rupee. While many market participants instinctively view currency weakness as a negative, the reality is more nuanced. INR depreciation has indeed weighed on short-term capital flows and FPI sentiment. However, from an economic growth perspective, its impact has been largely positive.
At a time when the Chinese Yuan has appreciated, the relatively weaker INR has improved India’s export competitiveness. This has benefited sectors such as IT services, pharmaceuticals, textiles, chemicals, and engineering goods. Export-linked earnings have remained resilient, helping offset global demand uncertainties. Given India’s aspiration to increase its share in global manufacturing and services trade, currency competitiveness is an important tailwind rather than a structural risk.
Liquidity Migration: AI and Commodities Take Center Stage
Another defining trend of 2025 has been the migration of speculative capital away from broader equities. Globally, a significant portion of risk capital has moved into AI-related stocks, particularly in developed markets. Domestically and internationally, commodities such as gold, silver, and platinum have also attracted strong inflows amid geopolitical uncertainty and currency volatility.
This shift drained liquidity from mid and small cap equities, exacerbating their underperformance. However, this also means that froth has been meaningfully reduced. Valuations are now more reasonable, participation is healthier, and the market is better positioned for sustainable gains when liquidity conditions improve.
Outlook for 2026: Constructive and Balanced
Looking ahead to 2026, the outlook for Indian equities appears constructive. Multiple macro and micro factors are aligning in favor of a positive market environment.
Lower interest rates, both domestically and globally, are likely to support valuations and earnings growth. A pickup in consumption—driven by GST efficiency, tax buoyancy, potential tax rationalization, and improving rural demand supported by normal monsoons—should provide a strong earnings tailwind. Sectors linked to consumption, financials, manufacturing, and infrastructure are particularly well placed.
A potential India–USA trade deal remains a powerful optionality. Any progress on tariff reductions or trade normalization could materially improve sentiment and unlock export-led growth across multiple sectors.
Returns, Upside, and Risks
In this backdrop, a base-case expectation of 10–12% returns for the Nifty in 2026 appears reasonable. Midcap and smallcap indices are also likely to deliver similar returns, supported by earnings growth and more reasonable valuations.
Upside surprises could come from stronger-than-expected earnings growth or an early trade agreement with the US. On the downside, risks include a sharp correction in US technology stocks or prolonged delays in trade negotiations. Even so, India’s strong domestic fundamentals suggest that returns in the 10–12% range should still be achievable.
Conclusion
2025 was a year of consolidation, correction, and recalibration for Indian equities. Markets absorbed significant shocks without losing structural strength. As we move into 2026, the foundation looks stronger—valuations are healthier, inflation is low, liquidity conditions are supportive, and economic growth remains robust. With the right balance of patience and discipline, Indian equities are well positioned to deliver steady and sustainable returns in the year ahead.