Indian Stock Market: The 2025 Lookback and the 2026 Watchlist

“Volatility in headlines, stability in index.” If we had to sum up 2025 for investors, that might be it. The year felt at times like a rollercoaster – global worries, sharp sector rotations, and a barrage of news – yet India’s stock market quietly notched solid gains. 

The Sensex rose close to 8% and the Nifty 50 gained ~9% year-to-date (YTD), but there’s more beneath the surface. Nearly three out of every four stocks in the broader market underperformed the benchmark indices. For retail investors, 2025 became a masterclass in risk management.

2025 YTD Market Performance

^{Source: NSE, BSE data}

What made this year particularly interesting wasn’t just the divergence between large and small caps. Foreign Portfolio Investors (FIIs) withdrew over ₹1.61 lakh crore, a dramatic reversal from the previous year’s enthusiastic inflows. Meanwhile, gold surged about 65%, making it the year’s undisputed winner. Also, 2025 was the year silver joined gold as an inflation hedge. With a ~125% YTD surge against gold’s growth, silver’s domestic prices in India crossed record ₹2.4 lakh per kg by the end of 2025.

If you’re heading into 2026 and want a quick, curated starting point, you can also explore smallcase’s New Year Essentials collection.

Now, as we close the books on 2025 and look toward 2026, the question we need to ask is what kind of market we’re heading into and how investors should position themselves.

5 Narratives that Defined Indian Stock Markets in 2025

Let’s start with the numbers. Despite all the noise, 2025 turned out to be a rewarding year for equity investors overall. 

1. ‘Expensive India’ and Valuation Reset

For most of 2025, Indian stocks were priced higher than other emerging markets (like China, Indonesia, and Korea) when you compare them using the P/E (Price-to-Earnings) ratio, which shows how much investors are willing to pay for each dollar of a company’s earnings.

However, as the year progressed, the market cooled. The Nifty’s “expected P/E for the next year” came down from roughly 23–25 times to about 19–22 times.

This happened because:

• profits didn’t grow as strongly as expected (earnings disappointed), and/or
• stock prices corrected (fell or moved sideways)

A lower P/E ratio means the market has become less expensive, and prices are starting to match reality more closely. That creates a healthier starting point for the next year, more reasonable and stable.

Additionally, the performance of large and mid-cap segments in the Indian stock market has been mixed. On a YTD basis, large caps delivered steady 8% returns while small caps fell 7.5%, according to our investment experts.

2. FPI Exodus vs DI/Retail Dominance

Foreign portfolio investors pulled out roughly $18 billion (₹1.6 lakh crore) from Indian equities in 2025, turning persistent net sellers amid high valuations, a firm USD and tariff/US Fed uncertainty. Despite that, the total BSE market cap still jumped by over ₹30 lakh crore as indices gained around 8–10% for the year, underpinned by steady SIPs and domestic institutional/retail flows becoming the anchor buyer.

3. Macro Resilience Amid Global Shocks

Even as developed markets slowed with sticky inflation and tight monetary policy, India held on to robust GDP growth above roughly 7.5% with contained inflation, supporting the “macro‑resilience” narrative. This stability, combined with political continuity and ongoing capex and reform focus, kept long‑term investors constructive on India’s structural growth story.

4. Tariffs, Trump 2.0 and ‘China+1’

The re‑election of Donald Trump and renewed US tariff salvos reinforced a world of higher trade frictions, which actually strengthened the case for India as a relatively inward‑focused, domestic‑demand‑led market versus export‑heavy EM peers.

At the same time, India continued to be positioned as a key “China+1” and supply‑chain diversification beneficiary, with policy thrust on manufacturing, infrastructure and defence/clean‑energy localisation shaping sector leadership lists.

5. The IPO Mania

India remained one of the world’s busiest IPO markets. Mainboard IPOs raised an unprecedented ₹1.75 lakh crore, the highest ever for India’s equity markets. The SME platform also saw heavy activity, with 267 companies together raising ₹11,429 crore. 

If you like tracking broad market moves, you can explore model portfolios that focus on the broad market, offering diversified exposure beyond the Nifty’s top 50. Explore portfolios built around sectors projected to grow in 2026 here.

Sector Winners and Laggards

2025 was a tale of two extremes: economically sensitive cyclical sectors soared, while traditionally “safe” defensive sectors lagged. Here’s a look at a few prominent sectors on their performance:

At the top of the leaderboard were sectors turbocharged by policy support and economic recovery. Public sector banks were the standout stars, with the Nifty PSU Bank index skyrocketing nearly +29%. Government infrastructure spending and bank reforms boosted this sector. 

Metals weren’t far behind. The Nifty Metal index jumped nearly +22%, thanks to a global commodity upcycle and strong demand. 

The Auto sector also had a stellar year (Nifty Auto up +21.1% as vehicle sales rebounded and companies benefited from production-linked incentives and easing supply chain issues due to Goods and Services Tax (GST) rate rationalisation.

Even the broader Bank Nifty (which includes private banks) surged about 16% to record highs, reflecting robust credit growth and improving balance sheets.

Defence indices and key PSUs like HAL, BEL, BDL, GRSE and Solar Industries delivered robust returns in 2025, helped by large order inflows and continued “Aatmanirbhar” thrust.

Tailwinds came from higher defence spending, frequent DAC approvals (over ₹79,000–1,05,000 crore of proposals cleared) and rapid indigenisation, with ammunition indigenisation reaching about 91%, reinforcing the multi‑year growth story for domestic defence manufacturers.

Overall, sectors tied to growth, manufacturing, and infrastructure thrived. 

And the laggards? 

Interestingly, defensive sectors failed to defend in 2025. Consumer staples (FMCG) and Healthcare/Pharma ended the year roughly flat to slightly negative (around –2% to –3%). These sectors struggled with high input costs and valuation fatigue; in a risk-on environment, investors rotated out of low-growth defensives into higher-growth opportunities. 

The worst-performing major sector was IT. The Nifty IT index fell about 11–12%, a sharp reversal after years of decent performance. Why? Global headwinds. Tariff-induced factors, subdued client spending in the US and Europe, hurt Indian IT firms. Tech stocks also bore the brunt of foreign selling.

If you want to see how investors are positioning by sector, check out smallcase’s 2025 Most Subscribed collection so you can track or invest in a diversified way instead of betting on single stocks

Flows & Liquidity

One of the biggest stories of 2025 was who was buying and who was selling. In simple terms, foreign investors ran for the exits, while domestic investors poured money in. This push-pull of FII vs DII had a huge impact on market leadership and stability.

Foreign Institutional Investors (FIIs) pulled out in record amounts. By year-end, FIIs had sold about ₹1.6 trillion worth of Indian equities (roughly $18 billion), the largest annual outflow on record. Concerns about stretched valuations and weaker earnings in early 2025 made global investors cautious, and factors like steep US tariff threats on Indian exports only added to their list of reasons to trim India.

^{Source: Reuters}

This also put pressure on the Indian Rupee, which touched 90/US Dollar; the persistent outflows contributed to a noticeable INR depreciation during the year.

Domestic investors (both institutions and retail) stepped up in a big way to counter this. Domestic Institutional Investors (DIIs, like mutual funds, insurance companies, banks, etc.) recorded inflows of over ₹7 trillion in 2025, an all-time high that eclipsed the FII exodus. Simply put, for every share foreign funds sold, Indian institutions happily bought more. 

Retail investors, too, kept the faith. Our investment managers noted that monthly SIP (Systematic Investment Plan) inflows of ~₹30,000 crore per month provide a strong and resilient counterbalance to volatile outflows. Explore our Most SIP’d collection to see which model portfolios investors are backing consistently.

From a liquidity perspective, discretionary spending made a comeback as well. 

The Reserve Bank of India (RBI) cut interest rates for the first time since COVID-19, easing the cost of funds and pumping more liquidity into the system. By December, the repo rate was down to 5.25% (from 6.50% at the start of the year) after a series of cuts

This monetary tailwind provided an added boost, especially in the latter half. Lower interest rates meant better sentiment for rate-sensitive stocks such as banks, auto and REITs.

If you’re curious about portfolios catching investor’s attention recently, you can check out 2025’s Most Viewed collection on smallcase.

What Investment Experts at smallcase are Watching in 2026

2026, in our experts’ words, looks like a year for caution and selectivity, without losing sight of the long-term India story. Here’s more:

A) Stock Selection

Our investment experts are leaning into selectivity over chasing index levels, especially with expensive pockets across the market.

“We remain bullish on Indian equities in 2026, with a clear focus on stock selection rather than index levels,” says Dhiren Shah, Co-Founder, KamayaKya. His watchlist includes sectors like chemicals, infra, and manufacturing.

B) Valuation Discipline 

The market may be pricey overall, but experts say opportunities still exist for investors who don’t chase quick wins.

“The market, as a whole, is expensive, but that doesn’t mean there are no opportunities,” says Nikhil Gangil, Founder & CIO, Intrinsic Value, adding that “Patient, long-term investors tend to do better than those chasing quick gains.”

C) Private Capex Revival 

A big 2026 signal for our investment experts is whether private capex finally joins the party, powered by stronger corporate balance sheets and rising utilisation.

“The next phase will come from a revival in private capex as corporate balance sheets strengthen and capacity utilisation rises,” Shah believes.

D) Liquidity Conditions

Experts see macro as supportive (moderating inflation + rate-cut cycle), but they are alert to liquidity shocks, especially from global cues.

“It can tighten global liquidity, lift volatility and lead to temporary FII outflows…”, says Vivek Sharma, Investment Head, Estee Advisors.

E) Flow-driven Swings

Even with steady domestic participation, our experts flag that global positioning can make markets more sensitive to flows in the short term.

“This has made Indian markets more vulnerable to short-term, flow-driven swings…”, says Vivek Sharma.

F) US Tariff Noise

Managers are explicitly separating headline risk from India’s long-term growth story.

“Tariff-related noise… is more of a sentiment and liquidity risk than a structural one,” adds Sharma.

Additionally, the AI-led surge in a few US mega-caps is pulling global capital, leaving emerging markets “under-owned”, which can make India more flow-sensitive in the short term.

TL;DR: Experts aren’t walking into 2026 expecting an easy, broad-based rally. The base case is: stay long-term confident, stay short-term selective, and judge progress through earnings durability, valuation discipline, private capex green shoots, and the flows backdrop.

Keen on exploring more? You can also check out most viewed model portfolios by top managers in 2025.

To Wrap Up

As 2026 begins, the key edge will lie not in forecasting every macro twist, but in sticking to clear goals, valuation discipline in India’s long-term growth story.

Finally, a grounding thought to carry with you: process > prophecy. No one knows what 2026 holds. But if you have a sound process, you don’t need to know the future. Focus on what you can control (your diversification, your savings rate, your behaviour) and wait for the outcomes to take shape over time.

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Disclaimer: This analysis is for educational purposes and does not constitute investment advice. Market conditions can change, and past performance is not indicative of future results. Investors should conduct their own research and/or consult a certified financial advisor before making investment decisions.