India's benchmark Nifty index has scaled fresh record highs twice in just over 40 days, crossing the 26,300 mark in early January after first hitting an all-time high in late November. The rally has been driven by strong performances across banking, auto, and energy sectors, raising questions about the sustainability of this upward momentum compared to previous market phases.

Fundamental Drivers Behind the Rally

Analysts highlight that the current rally differs significantly from previous momentum-driven phases. According to Sourav Choudhary, Managing Director at Raghunath Capital, this upward movement is anchored in earnings growth and macro stability rather than just liquidity flows. Banks, industrials, manufacturing, and capital goods companies are positioned to report steady profit growth, supported by government capital expenditure and gradual economic formalization.

Sectoral Strength and Market Breadth

The rally has demonstrated remarkable breadth across market segments. Khushi Mistry, Research Analyst at Bonanza, noted that around 15 out of 16 sectors advanced during the recent upward movement. Financials continue benefiting from improving asset quality and credit growth, while automotive and manufacturing sectors have maintained stable demand. Infrastructure-linked companies are reporting strong order books as public spending remains robust.

Domestic money flows have provided crucial support, with monthly SIP investments remaining elevated. This steady domestic participation has reduced market dependence on overseas liquidity, making corrections shallower and more manageable.

Technical Analysis and Market Structure

From a technical perspective, the index shows strong underlying momentum. Pravesh Gour, Senior Technical Analyst at Swastika Investmart, highlighted that Nifty continues trading comfortably above all key moving averages. The 9, 20, and 50-day averages are rising and stacked positively, while the 100 and 200-day averages remain well below current levels.

Vishnu Kant Upadhyay, AVP - Research and Advisory at Master Capital Services, noted that the rally has been supported by optimism ahead of Q3 earnings season, selective value buying in large caps, and expectations of potential trade agreements.

Market Outlook and Risk Factors

While the technical structure remains bullish, analysts acknowledge potential challenges. Abhishek Jain, Head of Research at Arihant Capital Markets, suggested investors should consider select small and midcap opportunities rather than focusing solely on benchmark performance. He noted that India continues underperforming some global markets, indicating potential headwinds.

Key risk factors include potential earnings disappointments, sustained foreign outflows, or renewed input-cost pressures that could trigger volatility. However, most analysts agree that the nature of any corrections may differ from previous cycles, with consolidation phases more likely than trend reversals as long as earnings delivery and domestic demand remain resilient.

Indian equity markets are positioned for a mildly positive yet range-bound opening, with Gift Nifty at 26,390 signaling a positive start of approximately 50 points. Market participants are preparing for a session dominated by weekly options expiry flows and growing anticipation around the Q3 earnings season.

Market Sentiment and Key Drivers

According to Ponmudi R, CEO of Enrich Money, domestic equity markets are set for cautious optimism with underlying support from stable macro fundamentals. "Market attention is expected to centre on weekly options expiry-related flows and evolving expectations around the upcoming Q3 earnings season," he noted. The broader sentiment remains guarded amid recent volatility driven by geopolitical developments and tariff-related concerns.

Foreign Investment Concerns and Policy Watch

Analysts have highlighted selling by foreign portfolio investors as a significant concern for market stability. The focus has intensified on US President Donald Trump's policy moves, particularly regarding tariffs, which market participants are monitoring closely for potential impact on global trade dynamics.

Government Spending and Sectoral Performance

Government capital expenditure demonstrates healthy momentum in 8MFY26, with defense spending leading the charge. Railways sector is expected to witness increased activity over the coming quarters, supporting the overall capex narrative.

Technical Analysis and Market Outlook

Siddhartha Khemka, Head of Research at Motilal Oswal Financial Services, expects markets to maintain firmness with positive bias. This optimism stems from better-than-expected Q3 business updates and expectations of capex pickup ahead of the Union Budget, though volatility may persist due to global geopolitical developments.

Technical indicators reveal elevated market stress, with India VIX rising 6.06% to 10.02 during the session. Aakash Shah, Technical Research Analyst at Choice Broking, emphasizes that a sustained close above the 26,300 zone would be crucial for reviving bullish momentum in the Nifty.

Global Market Context

Asian stocks displayed mixed performance in early trading, despite a strong overnight close in US markets. This divergence reflects the cautious approach adopted by regional investors amid ongoing global uncertainties and policy developments.