For stock market investors who have ridden the wave of an unyielding bull run since the pandemic-induced crash of March 2020, the year 2025 has served as a sobering reality check. It has been defined by a stark decoupling of Indian equities from their global peers, driven largely by geopolitical friction and a harsh protectionist turn in US trade policy.
As the year draws to a close, however, a confluence of monetary easing, fiscal support and renewed domestic demand suggests that the worst may be over.
Year-to-date, the headline numbers for India’s large-cap indices suggest a deceptively calm market. As of December 16, the benchmark BSE Sensex has risen close to 8 per cent, while the NSE Nifty50 has posted gains of 9 per cent, even hitting fresh highs in December.
These figures mask the significant pain felt in the broader markets. The mid-cap and small-cap segments—often the darlings of retail investors—have remained under immense pressure. The mid-cap index is down around 1 per cent year-to-date, while the small-cap index has suffered a much sharper 9 per cent decline.
This performance stands in stark contrast to the euphoria witnessed elsewhere in Asia and the west. South Korea’s Kospi index has surged by over 66 per cent, while Hong Kong’s Hang Seng index has gained over 28 per cent year-to-date. Among major developed markets, Japan’s Nikkei 225 gained more than 25 per cent, and in the US, the S&P 500 is up 16 per cent. The Nasdaq has risen close to 20 per cent, fuelled by continuing investor euphoria surrounding artificial intelligence stocks.
A primary reason for India’s underperformance was the relentless selling by foreign investors. Until December 15, Foreign Portfolio Investors (FPIs) had withdrawn over Rs1.61 lakh crore from the Indian equity market. This massive outflow sharply contradicts the uptick in FPI investments seen in 2024 (Rs427 crore).
However, the Indian market displayed remarkable resilience due to the deepening maturity of the domestic investor base. While Foreign Institutional Investors (FIIs) were aggressive sellers, domestic investors continued to pour funds into the market. This domestic support was channelled primarily through mutual funds. Aided by robust equity inflows—with close to Rs30,000 crore entering the market a month via systematic investment plans alone—the mutual fund industry’s assets have swelled, providing a cushion that prevented a precipitous market crash.
There were several challenges that worried investors. The 50 per cent tariffs imposed by the US placed Indian exporters at a significant competitive disadvantage. Labour-intensive sectors were among the hardest hit, specifically gems and jewellery, fisheries, and textiles. Furthermore, the prevailing uncertainty regarding the conclusion of bilateral talks and the signing of a definitive India-US trade deal weighed heavily on investor sentiment and delayed private sector capital expenditure.
Simultaneously, global uncertainties led to a slowdown in technology spending, impacting the demand for India’s software exporters. Domestically, the economy faced a demand slump, particularly in urban markets. This weighed heavily on consumer-facing companies.
Recognising the strain, the government announced sizeable income tax relief, largely benefitting the middle class. This was followed by a Goods and Services Tax (GST) rate cut in September covering a wide range of goods, which has begun to provide a lift to consumption figures.
The most significant catalyst for the markets, however, has been the dramatic shift in monetary policy. A significant drop in Consumer Price Index (CPI) inflation allowed the Monetary Policy Committee to slash the benchmark repo rate by a massive 125 basis points, bringing it down to 5.25 per cent from 6.50 per cent.
These measures have collectively brightened the outlook as the economy heads into 2026. Furthermore, the anticipated wage increase for government employees, following the implementation of the 8th Pay Commission in 2026, is expected to provide another substantial boost to the consumer economy.
Financial institutions are increasingly bullish on India’s prospects. Nomura has projected that the Nifty50 will touch 29,300 by the end of 2026, an upside of around 13 per cent from current levels. Emkay Global Financial Services holds a similar view, pegging the Nifty50 at 29,000. HSBC is even more optimistic, forecasting the Sensex to touch 94,000 by the end of next year—an 11 per cent rise.
“The worst of the earnings downgrades seems to be behind us and recent results have boosted our confidence in the growth outlook,” said Prerna Garg, associate, equity strategy at HSBC. She said the underperformance of 2025 had corrected expensive valuations and India’s premium over other emerging markets were returning to “normal levels”.
Analysts, however, caution that near-term volatility may persist, particularly given the unresolved narrative around US tariffs. “India’s medium-term outlook remains remarkably resilient. Despite near-term volatility, the alignment of softer rates, improving consumption and stable policy direction creates a strong foundation for the country’s multi-year growth cycle,” said Nirav Sheth, CEO, institutional equities, Emkay Global.
With India’s valuation premium moderating and the corporate earnings outlook improving, there is a growing consensus that the foreign capital may return. “With the good macros, earnings recovery and low cost of capital, markets next year should be better,” said Neelesh Surana, chief investment officer at Mirae Asset Investment Managers (India). He said the full impact of the GST rate cuts was expected to play out through 2026.
However, Surana sounded a note of caution regarding the geopolitical landscape. While the high tariffs might not derail the overall India growth story, the three impacted sectors—textiles, seafood, and gems and jewellery—are labour-intensive. Any major delay in a trade deal could have a second-level impact on employment and the broader economy.
Looking ahead, experts recommend a selective approach. Saion Mukherjee, head of India equity research at Nomura, said FII flows could improve at the margin in 2026, particularly if there is a moderation in the global rally. He urged investors to avoid “narrative-driven” sectors where there is a risk of no returns or significant correction. “We prefer segments/stocks where expectations run low and there is a reasonable possibility of prospects improving or concerns easing,” he said.
HSBC’s Garg favoured sectors driven by domestic demand. She pointed out that financials stood out for their steady growth. On the other hand, consumer discretionary, including autos, is expected to benefit from lower rates.
As 2026 approaches, the Indian market appears to be transitioning from a period of correction and consolidation to one of renewed opportunity, underpinned by a potent mix of policy support and earnings recovery.