India's stock market experienced a year of contrasts, with record foreign selling tempering what could have been a stronger rally despite benchmark indices achieving notable gains. The divergence between global and domestic investor behavior became increasingly pronounced as the year progressed.

Record Foreign Outflows Hit Indian Markets

Foreign portfolio investors sold approximately ₹1.60 trillion worth of Indian shares, representing the highest annual outflow on record. This massive selloff occurred despite the Nifty 50 and Sensex achieving gains of around 10% each, highlighting the resilience of domestic participation in cushioning market volatility.

Key Drivers Behind Foreign Selling

Several factors may have contributed to the unprecedented foreign selling pressure. Stretched valuations, subdued earnings visibility, geopolitical worries, and concerns over potential steep U.S. tariffs on Indian exports were cited as primary catalysts. Information technology stocks particularly suffered, reportedly accounting for nearly half of the total outflows due to subdued client spending and macroeconomic uncertainty in the U.S., a key market for Indian IT companies.

Siddhartha Khemka, head of research for wealth management at Motilal Oswal Financial Services, stated, "Elevated valuations, weaker earnings visibility in the first half of the calendar year and tariff uncertainties were the key drivers of foreign selling."

Ownership Structure Shifts

The selling pressure led to a significant shift in market ownership patterns. By the September quarter, foreign ownership of Indian equities dropped to a 15-year low of 16.9% from 17.4% at the end of the previous year. Conversely, domestic mutual funds' holdings climbed to a record high of 10.9% from 10.0% at the previous year-end, according to NSE data.

Outlook for Recovery

Despite the challenging year, analysts remain optimistic about potential recovery. Khemka suggests that India could regain favor among global investors as valuations ease, earnings stabilize, and the economic growth outlook remains intact. Garima Kapoor, an economist at Elara Capital, expects a potential revival in inflows during the March quarter amid accelerating public capital expenditure, easing inflation, potential progress on trade deals, and U.S. rate cuts.

Analysts also expect India to potentially benefit as money moves out of AI stocks globally. InCred Wealth noted, "The year forced markets to pause and recalibrate. Tariff shocks and global uncertainty tested sentiment, but strong domestic participation ensured markets never truly lost their footing."

Indian equity markets opened Monday's trading session with marginal losses, reflecting cautious sentiment amid thin year-end volumes and mixed global cues. The subdued opening came as investors balanced positive signals from some Asian markets against persistent concerns about foreign institutional investor outflows and typically reduced trading activity during the year-end period.

Market Opening Performance

The benchmark indices showed restrained movement at the opening bell, with both major indices trading in negative territory despite selective sectoral strength.

Sectoral Performance and Stock Movements

Metal stocks emerged as the primary gainers on the Nifty 50, providing some support to the broader market sentiment. The sector's outperformance reflected positive commodity price movements and improved demand outlook.

Conversely, infrastructure and financial stocks faced selling pressure, with port and banking stocks leading the declines.

Market Analysis and Technical Outlook

Market analysts highlighted the impact of continued foreign fund outflows and thin trading volumes on market sentiment. "Nifty remained under pressure through Friday, ending 100 points lower at 26,042 amid thin holiday volumes, while Sensex fell 367 points to 85,041 and Bank Nifty slipped 172 points to 59,011," said Prashanth Tapse, Senior VP (Research) at Mehta Equities Ltd. "Supportive global cues were overshadowed by FII selling of ₹318.00 crore and lingering US-India trade frictions."

Technical analysts identified key support and resistance levels for the trading session. "The Nifty 50 remains technically constructive despite recent consolidation," said Aakash Shah, Technical Research Analyst at Choice Equity Broking. "Immediate support is placed at 25,850-25,900, and a breach below this zone could drag the index towards 25,800. On the upside, 26,150-26,200 remains a crucial resistance band."

Global Market Cues and Currency Movement

Global markets presented mixed signals, with Japan's Nikkei 225 trading lower by around 0.30%, while South Korea's KOSPI outperformed with gains of nearly 1.50%. US stock markets had risen during the shortened holiday week, with the S&P 500 and Dow Jones Industrial Average both reaching record highs, supported by robust Q3 GDP expansion at 4.30% annualised rate.

The Indian rupee weakened to close at 89.85 against the US dollar on Friday, attributed to persistent foreign outflows and increased dollar demand from metal importers. "USD/INR is trading marginally higher near the 89.80 zone, recovering modestly amid renewed dollar demand and year-end positioning," said Ponmudi R, CEO of Enrich Money.

Market Outlook and Key Factors

Looking ahead, market participants are tracking multiple factors including India-US trade developments, FII flows, rupee movement, crude prices and upcoming Q3 earnings. "India's macros are in Goldilocks setting with robust economic growth and stable financial construct," said Dr VK Vijayakumar, Chief Investment Strategist at Geojit Investments Limited. "The more important factor from the market perspective—earnings growth—is set to recover from Q3 FY26 onwards."

With the IIP data release and F&O monthly expiry approaching, investors are adopting a selective approach, reinforcing expectations of continued range-bound trading in the near term amid thin year-end volumes.