From Volatility to Victory: Unpacking India’s Year of Transformation

By Abhishek Reddy

The upward trend of Indian equity markets began to show signs of weakening in 2025. Initially, analysts saw great challenges for investors as experienced foreign investors left the markets, while the rupee declined and concerns over global trade tensions developed. Additionally, the growth in earnings from companies did not grow at the same rate across sectors. But when investors began to consider the changes made by 2025, it started becoming clear that this is the year of "reset" and not a lost year. Investors have learned critical lessons regarding the structure of markets, capital flow, and the continued upward momentum of India's domestic economy. These lessons will likely define the next stage of returns for investors as they enter 2026.

1. The slowdown in earnings growth occurred first, then stabilized.

One of the first concerns in 2025 was net corporate earnings had slowed following the very strong rebound post-pandemic; due to the cooling of profit growth (after a cooling period) in many sectors. The sectors that were viewed as the traditional leaders of profit growth (Banking, IT Services, and Automobile) have all exhibited signs of margin erosion and weakening of demand.

There was also a degree of consistency with respect to the various sectors during the slowdowns in earnings growth, e.g. the Capital Goods, Infrastructure-linked Companies, Energy, and select Manufacturing Companies were still able to maintain a degree of profitability. Overall, the stabilizing of earnings growth in the second half of 2025 indicated that we were transitioning from a broad-based rally to a more selective (quality-based) type of rally.

2. Uncertainty Due to Global Trade Tension

The role that geopolitics as well as trade policy played in influencing market sentiment was substantial. Unresolved trade issues as well as on-going tariff negotiations, in particular with the USA, increased uncertainty in export-oriented sectors including pharmaceuticals, textiles and engineering goods. It was evident to us in India that Diversification in both trade partners as well as Economic Growth drivers is an important strategy.

Although the uncertainty of trade hindered short-term market sentiment, the policy focus on Domestic Manufacturing, Supply Chain Resilience, and Self-Sufficiency has accelerated.

While uncertainty in the markets creates fear, market response has adapted rapidly as a result of a clearer policy direction within a short time frame.

3. FII Selling Dominating the News

In 2025, the news story that dominated the media was the continued large-scale selling of equities by Foreign Institutional Investors (FIIs). There were several factors that contributed to this trend: firstly, the US Dollar continued to strengthen against many currencies; secondly, Global Interest Rates are increasing, resulting in reduced valuations; and third, FIIs sold aggressively in Indian equities because of perceived overvalued Indian Markets — over ₹3 Lakh Crore was withdrawn by FIIs from the Indian Equity Markets during 2025.

Normally when this heavy selling occurs it results in a sharp sell-off in the Indian Markets. However, 2025 surprised everyone.

Despite the extensive withdrawal of funds, the Indian Equity Markets were able to show tremendous strength due to the strong participation of Domestic Institutional Investors (DIIs), Mutual Funds, Insurance and Retail Investors. This is a clear indication of a Structural Shift, where the Indian Equity Markets have become less reliant on foreign capital to maintain stability.

4. Investors’ Confidence Signalled by IPO Boom

While many FIIs left or reduced their positions in the secondary market in 2025 and only a small number entered, the underlying confidence that existed among a small and growing number of local investors was still very strong. 2025 saw one of the biggest increases in the number of companies issuing IPOs. The activities being conducted by FIIs were also present in 2025.

There were three major themes highlighted by the success of IPOs during this period.

Growing risk appetite for new equity investment by domestic investors.

Deeper markets can absorb more new issues being brought to them.

Longer-term growing confidence in the underlying growth story of India.

5. Market Psychology Tested by Currency Depreciation

As the currency of India began to depreciate to the range of ₨ 90 - 91 per U.S. dollar, it created a psychological barrier that was based on what was happening in the broader macroeconomic environment. Currency depreciation has historically indicated an FII outflow, trade pressures, and the long-term strengthening of the U.S. dollar.

Although the depreciation of the Indian rupee increases the cost of imports and has the potential to create anxiety for investors, it also leads to increased export competitiveness and is supportive of various sectors such as IT and pharmaceuticals. This was helped by the Reserve Bank of India's slow and measured approach, which kept the depreciation from becoming chaotic. Market participants changed their view of India as a market when they started viewing the depreciation of the rupee as an adjustment to the macroeconomic environment rather than a sign of a crisis.

The volatility of currency will often show itself to be much worse in the media than it is in actual reality.

6. Domestic Investors Emerge as the Foundation of the Indian Market

The most important takeaway from 2025 will be how domestic investors have become the foundation for Indian Markets in the long term. Monthly SIP inflows continue to be strong, retail participation is on the rise and domestic institutions are consistently absorbing the selling pressure. The emergence of domestic investors indicates a developing financial ecosystem where assets that were previously held as cash or idle have now been put into productive financial assets, allowing for an abundance of domestic investor participation.

For the first time in decades, the Indian equity markets have demonstrated the ability to react to global shocks without collapsing.

7) What Does 2025 Mean For 2026?

We have seen that 2025 was not as focused on returns. Rather, it is more about what is happening in terms of the "foundation" being laid for future sustainable growth:

Valuation corrections occurred without investors having to panic;

Liquidity issues have been replaced by earnings issues,

A broader range of stocks were the leaders of the market;

The behavior of domestic investors has become more disciplined

Historically, markets that have gone through a period of skepticism, consolidation and rotation have historically formed a foundation for a longer period of healthy market cycles. Therefore, as we enter into 2026 with a focus on accelerating earnings growth (following uncertainty in trade), this foundation built in 2025 should provide for sustainable returns in 2026.

Conclusion:

The Indian equity markets demonstrated an important lesson about strength in a down market in 2025: resilience is more powerful than euphoria. What initially looked like a disappointing year for the Indian equity markets turned into one of the defining years of transition for this market. The Indian equity markets have not been broken by the slowing growth of corporate earnings, continued outflows of foreign institutional investment, uncertainty in global trade, or volatility in currency prices; rather, they have adapted.

In contrast to cyclical changes, the most profound shift in the Indian equity markets in 2025 was structural. Domestic investors have acted as the foundation of the Indian equity markets, displaying maturity and discipline in absorbing global economic shocks. Rather than fleeing to cash, capital rotated to other investment opportunities; valuations did not collapse in a panic-driven environment; and the leadership of the Indian equity markets became increasingly widespread, rather than concentrated in a few index-heavy stocks. These changes indicate that the Indian equity markets are no longer merely responding to global capital flows, but increasingly reflect a growing conviction and belief in the long-term growth potential of domestic economic activity.

The financial markets build upon what occurred in 2025; it was a time of uncertainty and consolidation in which all the pieces are now coming together for a stronger, more sustainable Indian Equity Market. The continuing saga of Indian Equity Market has learned valuable lessons from what happened during this period to create a stronger foundation for growth and development.