The Indian market is entering 2026 after a significant period of consolidation in 2025. If 2024 focused on new narratives and 2025 was about normalisation, then 2026 will be all about convergence. Indian equities in 2025 delivered moderate gains amid volatility, with large caps leading while small caps declined.

Nifty 50 rose 11.88% fuelled by a second-half recovery despite early headwinds like FII selling, Trump tariffs, and rupee weakness. Top sectors included Nifty PSU Bank (31%), Metal (30%), and Auto (25%), while Media (-20%), Realty (-16%), and IT (-10%) lagged sharply. Broader markets showed divergence during the same period: Nifty Midcap 150 (+6%), but Nifty Smallcap 250 (-5%). (Source: NSE Indices Data)

Environment

Expect robust macro stability with GDP growth above 7%, moderating inflation, and further RBI easing amid benign global rates. Government initiatives like GST simplification, tax cuts, and capex will boost consumption and infrastructure, countering US trade risks. Geopolitical tensions may add volatility, but a revival in domestic demand across rural/urban areas and in sectors such as consumer discretionary, real estate, insurance, and hospitals supports resilience.

Earnings and Valuations

Consensus estimates from public data sources suggest relatively higher earnings expectations for mid- and small-cap segments compared to large caps, alongside a wide dispersion in valuation metrics on a forward-looking basis. Index performance has been driven by a narrow set of high-weight constituents, resulting in headline gains that mask broader weakness beneath the surface. Although benchmark indices are near their recent highs, market breadth remains uneven. Across large, mid, and small-cap universes, median stock performance continues to lag index-level movements, underscoring the divergence between headline indices and the broader market.

Flows and Liquidity

As in 2024, FII continues to sell in the secondary market while cautiously engaging in the primary market. A significant rotation of capital characterised their actions: they withdrew a record INR 2.40 lakh crore from the secondary market. Still, they reinvested around INR 73,900 crore in primary market offerings, such as IPOs and new issues. The extent of FII activity in 2025 has been unprecedented, with aggressive selling reducing foreign ownership in Indian equities to its lowest level in nearly 14 years. A key structural change in 2025 was that DIIs officially surpassed FIIs in shareholding for the first time.

2026 Outlook

Market conditions in India reflect a convergence of moderating inflation, greater stability in interest rates, and improving private-sector investment activity. These factors have contributed to a more balanced market backdrop, with recent valuation adjustments influencing how investors assess longer-term fundamentals.