Indian stock markets concluded 2025 with a paradox: the Nifty 50 extended its bull run to a tenth consecutive year, yet significantly underperformed its Asian peers. While the benchmark index delivered positive returns in rupee terms, a combination of factors, including currency depreciation and substantial foreign investor outflows, led to its relative weakness compared to other major equity markets.
The Nifty 50 and the Sensex both saw gains, with the Nifty rising approximately 10% and the Sensex around 8.55%. This continues a decade-long streak of positive annual returns. On the last trading day of the year, the Sensex closed at 85,220.60, a gain of 0.64%, and the Nifty 50 ended at 26,129.60, up 0.74%. However, these gains mask a more complex picture. In dollar terms, the returns were considerably lower, placing India as one of the worst-performing major equity markets globally.
Several factors contributed to this underperformance. A key issue was the depreciation of the Indian rupee, which fell 5% during 2025 due to sustained foreign outflows and a strong dollar, eroding returns for international investors. Foreign portfolio investors (FPIs) withdrew a record $18 billion from Indian markets, the highest ever in a calendar year. This selling pressure was compounded by concerns over relatively expensive valuations, slowing earnings growth, and the absence of prominent AI-driven stocks compared to markets like South Korea and China. Trade tensions with the U.S. also added to the negative sentiment.
In contrast, other global markets surged ahead. South Korea's KOSPI soared nearly 81%, Brazil's Bovespa jumped about 48%, and Germany's DAX rose 38%. Even developed markets like the S\&P 500 and Nasdaq saw significant gains. This divergence highlights the specific challenges faced by the Indian market in 2025.
Despite the headwinds, domestic institutional investors (DIIs) provided crucial support, injecting ₹7.4 lakh crore in net inflows, significantly offsetting the ₹1.6 lakh crore in net outflows from FPIs. Strong demand from local institutions underpinned market returns. The RBI noted that DIIs have surpassed foreign investors in ownership of Indian equities, highlighting their growing influence.
Looking ahead to 2026, analysts express cautious optimism. Some strategists anticipate a potential outperformance by Indian equities, contingent on improved corporate earnings and supportive policy measures. Brokerage estimates suggest the Nifty could climb to 28,992 by the end of 2026. Sectors like autos, software services, pharmaceuticals, and export-oriented industries are expected to offer opportunities. However, challenges remain, including the potential for continued IPO activity to divert liquidity and the historical tendency for Indian stocks to underperform in January. The performance of the Indian stock market in 2026 will depend on addressing the factors that led to its relative underperformance in 2025, including currency stability, earnings growth, and a resurgence in foreign investor confidence.
