Indian Stock Market has witnessed extraordinary developments over recent months, creating shocking data points that typically surface only during periods of deep macroeconomic stress. However, these developments are unfolding against a fundamentally robust and resilient macro environment, creating an unprecedented disconnect between market mathematics and investor mood.

Unprecedented Market Shocks Defy Logic

The Indian rupee's apparent 4.50% decline against the US dollar masks a more severe reality. With the US dollar weakening nearly 10% globally, the rupee's underperformance against other currencies reaches 14-15%. Against the Euro specifically, the rupee has depreciated over 16%, ranking among the worst globally.

Foreign institutional investor selling reached unprecedented levels, with headline outflows of $18-19 billion in 2025. Combined with $8 billion primary market inflows and $18 billion selling in October-November 2024, FIIs have pressed sales exceeding $44 billion over 15 months in secondary markets - a scale rarely witnessed in Indian market history.

Broader Market Carnage Amid Index Resilience

While Nifty and Sensex remain near all-time highs, delivering 9%+ returns in rupee terms, massive carnage has struck broader markets. Nearly 50% of broader market stocks have declined 40-50%, with many retracting to 2023 levels. In dollar terms, Indian market returns remain in low single digits, contrasting sharply with global markets delivering 20%+ returns, including South Korea's remarkable 80% surge driven by AI-related flows.

Bond markets have not escaped the turmoil. Despite RBI cutting rates by 125 basis points since February 2025, injecting liquidity through OMOs, and reducing CRR, the 10-year G-sec yield has climbed back to 6.60-6.70% - almost identical to pre-easing cycle levels.

Strong Fundamentals Contradict Market Distress

Indian macroeconomic fundamentals, measured by twin deficits, forex reserves, GDP growth, and inflation outlook, position the country as one of the global economy's shining spots. The administration has unleashed unprecedented reform momentum, converting tariff challenges into opportunities for accelerated structural growth enhancement.

The Math vs Mood Disconnect Explained

The disconnect began during the September 2024 quarter when economic growth slowed due to election-related capex pauses, heavy monsoons, and tight liquidity. Markets initially ignored these factors, but Q2 earnings triggered a reality check given elevated valuations. FII selling of $18 billion in October-November 2024 initiated a vicious cycle where fundamentals took a backseat to indiscriminate risk asset selling, particularly in small and midcaps.

Recovery Catalysts for 2026

Several tailwinds could reshape markets in 2026. The AI trade reset presents opportunities as incremental capital flows into AI likely slow due to valuation concerns, benefiting India as an AI diversification theme. The rupee depreciation cycle appears to be peaking, with REER at 98 versus long-term average of 102-103, suggesting 2-3% appreciation scope.

With nearly half of broader market stocks down 40-50%, abundant opportunities exist across renewables, auto ancillaries, precision engineering, and pharma/CDMO sectors. The resilience of domestic flows, combined with potential FII return, could reignite momentum, though 2026 will likely blend value and momentum strategies rather than the one-way rally of 2024.

After a year of consolidation and correction, Indian Equity Markets are entering 2026 with cautious optimism, according to Pranav Haridasan, Managing Director and CEO of Axis Securities. The executive discusses market dynamics, sectoral opportunities, and key risks that could shape the year ahead.

Market Recovery After Consolidation Phase

Haridasan contextualizes the current market environment following a phenomenal three to four-year run that consolidated during the past year. Mid and small-cap segments experienced corrections due to stretched valuations and slower earnings growth, which aligned with economic performance fundamentals.

The market has absorbed significant capacity through new IPOs and broadened its base. While excesses have corrected and may have slightly undershot, Haridasan notes that markets are in better shape than the previous year. Macroeconomic fundamentals have improved, with reasonable visibility of earnings growth expected for the next financial year.

Impact of RBI Rate Cuts on Financial Sector

The recent RBI rate cut aligned with market expectations, presenting a mixed outlook for financial institutions:

Haridasan emphasizes that market focus has shifted from rate cuts to trade deal developments. Currency stabilization and improved FPI sentiment depend on trade deal completion, which could restore confidence among domestic investors.

Sectoral Outlook and Market Segment Performance

The CEO expects large-cap stocks to lead initially if FPI interest returns, citing tremendous value opportunities with expected earnings recovery and lower risk profiles. Financials could experience extended outperformance during this phase.

For mid and small-cap segments, Haridasan notes structural changes with emerging sectors and widening stock bases. The first one to one-and-a-half quarters will likely favor large caps, with mid and small caps catching up as confidence returns.

Promising Sectors for 2026

Several sectors present turnaround opportunities:

• Financials: Remain attractive despite near-term challenges
• Make in India themes: Defence and manufacturing plays, pending trade deal clarity
• Consumption: Benefiting from GST cuts and tax reductions putting more money in consumer pockets

The upcoming budget could prove crucial, with five to seven landmark legislations passed during the year and ongoing reforms targeting developed economy status by 2047.

IPO Market Dynamics and FPI Behavior

A notable divergence has emerged with FPIs selling in secondary markets while selectively buying IPOs. Haridasan attributes this to value-driven decision making, as FPIs view recent IPOs as structurally positive growth stories for India.

The 2026 IPO cycle is expected to remain value-driven, with continued demand from both domestic and foreign investors for reasonably priced offerings. Haridasan hopes for well-distributed IPO calendar throughout the year rather than concentrated spurts.

Commodity Markets and Portfolio Hedging

Gold and silver reaching record highs reflects both hedge trading and macro uncertainty signals. Haridasan notes global concerns including exaggerated AI stock valuations, with commodities serving as reasonable hedges against equity investments.

Some commodity movements are structural, driven by genuine demand in areas like chip manufacturing. The executive distinguishes between transactional business and portfolio hedging, suggesting that typical large commodity moves followed by consolidation have likely already occurred.

Key Risk Factors for 2026

Global geopolitics represents the single biggest risk for Indian markets in 2026, continuing from the previous year. The unpredictable nature of geopolitical developments, including the delayed India-US trade deal, creates ongoing uncertainty.

Additionally, Indian markets decoupled from global markets during the consolidation year, underperforming within Asian and emerging market baskets. While this positioning might provide relative outperformance during global corrections, absolute impact remains a concern for market participants.