The year 2025 proved to be a true test of resilience for investors on Dalal Street, delivering a volatile journey shaped by robust domestic fundamentals against a backdrop of global uncertainty. This environment prompted a strategic shift towards selective stock-picking over broad market buying, resulting in a sharply divergent performance across market segments.
Segmented Performance: Large-Cap Resilience vs. Small-Cap Stress
Retail investors, who had previously favoured smaller companies, executed a notable pivot away from small-cap stocks. This move was triggered by multiple analyst downgrades to earnings-per-share (EPS) forecasts, as actual profits in the segment remained under pressure. Consequently, the Nifty Smallcap 100 index declined by 5.6% over the year, marking its first annual loss after two consecutive years of gains.
In contrast, the broader market showed pockets of strength. Signs of an earnings recovery emerged in both mid- and large-cap segments during the September quarter. However, these gains were limited due to persistent selling by foreign portfolio investors (FPIs). Despite this headwind, the benchmark Nifty 50 managed to secure a 10.6% gain for the year, extending its winning streak to a remarkable tenth consecutive session.
The Great Divergence: Domestic Institutions Counter Foreign Exodus
A defining narrative of 2025 was the colossal clash between foreign and domestic institutional flows. Data from NSDL revealed that FPIs sold Indian equities worth a staggering ₹1.6 lakh crore during the year. However, domestic institutional investors (DIIs), primarily mutual funds, stood firm as a bulwark, absorbing the entire foreign outflow.
In a powerful display of domestic conviction, DIIs purchased equities at a rate 20 times the amount sold by FPIs. Exchange data highlighted that DII inflows hit a record ₹7.81 lakh crore for 2025, with a substantial ₹79,619 crore invested in December alone. This unwavering support propelled the Nifty 50 to scale a fresh all-time high of 26,325 in late November, a peak achieved after a gap of 14 months.
Global Lag and the Analysts' Outlook for 2026
Despite its double-digit return, the Indian market sharply underperformed several key global peers in 2025. Many Asian markets surged between 16% and 70%. Notably, South Korea's KOSPI led with a 75.63% surge, while markets in China, Hong Kong, and Japan delivered returns two to three times higher than the Sensex. In a striking comparison, Pakistan's KSE 100 index rallied 51.20%, outperforming India and ranking among the world's best, driven by IMF support and domestic rate cuts.
Looking ahead, analysts believe the Indian market is poised for a stronger performance in 2026. Brokerages point to an improving backdrop of earnings recovery, strong GDP growth, easing inflation, and supportive policy measures from the RBI and government. Axis Securities has set a Nifty 50 target of 28,100 for 2026, anticipating a transition from valuation-led consolidation to an earnings-driven cycle. Similarly, Motilal Oswal remains positive, expecting a recovery from 2025's underperformance, supported by better earnings visibility and a supportive macroeconomic environment.
While concerns such as higher US tariffs on Indian imports persist, the overall sentiment has turned cautiously optimistic. Global firms like JPMorgan and Goldman Sachs have also adopted a bullish stance, suggesting that Dalal Street may be on the cusp of a more constructive phase after a tumultuous yet revealing year.
