Indian equity markets closed on a weak note as investors stayed cautious ahead of the December series derivatives expiry, with selling pressure visible across sectors and the broader market mirroring benchmark losses. The decline extended recent market weakness amid risk-off sentiment and year-end caution in thin holiday trade.

Market Performance Overview

The benchmark indices posted modest declines during the session:

The Nifty settled below the psychologically important 26,000 mark, highlighting subdued market sentiment. Market breadth clearly favoured declines, with 2,831 stocks declining against 1,495 advances on the BSE, while 186 remained unchanged. The session saw 115 stocks hitting 52-week highs, but 195 touched 52-week lows, reflecting underlying weakness.

Sectoral Performance Analysis

Sectoral performance was largely negative across major indices:

Metal stocks emerged as the top gainers despite overall market weakness, receiving a sector-specific boost following the government's imposition of anti-dumping duties on select Chinese steel imports, enhancing pricing power and margin visibility for domestic producers.

Stock-Specific Movements

Top gainers were led by metal and select FMCG stocks:

On the losing side, technology and infrastructure stocks faced pressure:

Market Outlook and Technical Analysis

Volatility indicators showed increased uncertainty, with India VIX rising 6.23% to 9.71, suggesting heightened caution among market participants ahead of the monthly F&O expiry. Technical analysis indicates that after a muted open, the market slipped below the 26,000/85,000 mark, with post-breakdown selling pressure increasing.

Analysts expect the 26,000/85,000 level or the 20-day SMA to act as key resistance zones. The market appears short on catalysts for further upside, with investors largely in holiday mode, signalling a potential consolidation phase in the near term.

Currency Performance

The Indian rupee continued its downward spiral, marking its fifth consecutive session of losses, weakening marginally to 89.95 against the U.S. dollar. The persistent decline was intensified by typical month-end demand from importers and corporates scrambling for the greenback in thin liquidity conditions. The currency is expected to find support around 88.95 with recovery facing a hurdle at 90.30.

Market Outlook

In an environment of global trade anxiety and a weakening rupee, investors are likely to favour large-cap stocks for their relative safety and stronger earnings visibility. Markets are expected to remain in a consolidation phase in the absence of fresh triggers, with attention shifting toward upcoming earnings and clarity on trade developments.

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."