Indian equity markets are concluding 2025 with a complex performance narrative - achieving their 10th consecutive year of positive returns with approximately 10% gains, yet simultaneously recording their biggest underperformance versus Asian peers in nearly three decades. The NSE Nifty 50 Index, closing near the 26,000 level, reflects this dual reality of domestic resilience amid regional weakness.

Record Foreign Outflows Pressure Markets

Foreign institutional investors have significantly reduced their exposure to Indian markets throughout 2025, with outflows reaching unprecedented levels. The selling pressure intensified in recent months as global fund managers reassessed their positions.

Currency Weakness Compounds Challenges

The Indian rupee has experienced significant depreciation during 2025, sliding from ₹85/USD at the beginning of the year to ₹90/USD currently. This currency weakness has eroded returns for overseas investors and contributed to the sustained foreign selling pressure. The lack of progress on a trade deal with the US, which has imposed the highest tariff rates in Asia on India, has further pressured the rupee to test a series of record lows.

Domestic Support Provides Market Foundation

Despite foreign outflows, strong domestic institutional demand has been instrumental in supporting market performance. Local institutions have invested approximately $81 billion into equities during 2025, effectively offsetting foreign selling and underpinning the market's positive returns. This domestic support has enabled India to join Japan and Argentina in the rare global club of markets posting 10 consecutive years of gains.

Market Challenges and Structural Issues

Several factors have contributed to Indian stocks losing favor with overseas investors during 2025. Lofty valuations, slowing earnings growth, and the absence of credible AI-linked companies have dampened international sentiment. The combination of these structural challenges with currency volatility has created headwinds for foreign investment flows.

Policy Support and Economic Cycles

Government and monetary policy measures have provided crucial support throughout 2025. The economic cycle has benefited from tax benefits announced in the Budget, RBI interest rate cuts, and GST rate reductions implemented in September. The 10-year G-Sec yield has declined to 6.58% from 6.80% at the beginning of 2025, reflecting improved market conditions. Additionally, the corporate profit cycle has shown improvement, with earnings upgrades visible for Nifty 50 companies in FY26 and FY27 estimates.

Market Outlook and IPO Activity

Looking ahead, the near-term outlook remains mixed. Historical data shows the Nifty 50 Index loses an average 1.10% in January, suggesting potential early-year volatility. However, the booming IPO market is expected to continue, with forecasts indicating proceeds could exceed $25 billion in the coming year, potentially diverting liquidity toward new listings. Strategists from major institutions expect Indian equities to potentially outperform emerging-market peers, provided corporate earnings continue improving and policy measures supporting domestic demand gain traction.

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.