Indian equities are projected to reach new heights by mid-2026, primarily fueled by strong domestic investment flows that are expected to outweigh foreign outflows. Despite a mixed performance in 2025, where benchmark indices delivered moderate returns and small-cap stocks faced volatility, the overall outlook for the Indian market remains optimistic.

Domestic Investment Surge

A significant factor driving this positive forecast is the increasing participation of domestic investors in the equity market. Retail investors, in particular, are channeling substantial funds into the market through avenues like mutual funds and direct stock investments. Systematic Investment Plans (SIPs) have emerged as a popular mode, attracting millions of new investors to the equity market. This surge in domestic flows has led to domestic ownership of Indian companies surpassing foreign ownership, marking a significant shift in market dynamics.

Several factors contribute to this rise in domestic investment. A growing working population eager to create wealth, increasing access to banking and brokerage services, rapid digital adoption, and the country's solid economic fundamentals all play crucial roles. Government initiatives like "Make in India" and Production-Linked Incentive (PLI) schemes are also boosting domestic industrial capacity and attracting investments.

Foreign Investment Trends

While domestic flows are expected to dominate, foreign investment trends remain a key factor to watch. In 2025, Indian markets saw record outflows from foreign investors due to concerns about slowing growth, high valuations, and a weakening rupee. However, experts anticipate a potential rebound in foreign investment in the latter half of 2026, contingent on resolving global economic uncertainties and geopolitical situations. A potential trade deal between the U.S. and India could also significantly boost investor confidence and attract foreign capital.

Economic Outlook and Key Drivers

The positive outlook for Indian equities is also underpinned by a strong economic growth forecast. The Reserve Bank of India (RBI) has raised India's GDP growth forecast for FY26. Other organizations, like the OECD, have also increased their growth projections for India. This economic expansion, coupled with improving corporate earnings and supportive government policies, is expected to drive market performance.

Several key factors are expected to contribute to this growth:

• Consumption: Rising consumption, boosted by income tax relief and increasing disposable incomes, will be a key driver of GDP growth.
• Earnings Growth: Corporate earnings are expected to rebound, with consensus estimates suggesting double-digit growth in FY26-27.
• Fiscal Policy: Government spending and fiscal policies are expected to support economic activity.
• Monetary Policy: Easing monetary policy by the RBI, including potential interest rate cuts, is also expected to boost market sentiment.

Potential Risks and Challenges

Despite the optimistic outlook, several risks and challenges could impact the Indian equity market:

• Global Volatility: Prolonged global volatility, stemming from factors like inflation, geopolitical tensions, and the US-China rivalry, could delay the return of foreign investment and trigger earnings downgrades.
• Trade Uncertainties: Unresolved trade tensions and tariff-related issues with the U.S. could dampen investor sentiment.
• Rupee Volatility: Sharp currency movements could impact global growth and the growth of Indian markets.
• Valuation Concerns: High valuations, particularly in the mid- and small-cap segments, could lead to corrections.

Sectoral Outlook

Going into 2026, experts suggest focusing on sectors with strong fundamentals and growth potential. Sectors like financials, consumption, and domestic cyclicals are expected to lead the market. The information technology sector is also identified as a potential tactical outperformer, with a possible reversal in market leadership lifting IT stocks.

Overall, the Indian equity market is poised for a positive run leading into mid-2026, driven by robust domestic inflows and a strong economic outlook. While challenges remain, the underlying structural growth story of India remains intact, making it an attractive destination for long-term investors.