2025 was a turbulent year for the Indian stock market as it battled high valuations, geopolitical uncertainties, global policy uncertainty due to the US tariffs, a rapidly weakening rupee, and persistent foreign investor outflows. The benchmark Nifty 50 and Sensex, however, remained resilient in the face of these challenges, with the former ending at 25,938.85 on Tuesday, up 9 per cent in the year — and this is after a correction of around 18 per cent earlier in the year. Both indices broke their all-time highs in November on the back of a rally led mostly by the financial sector and a few big companies.
For 2026, expectations are higher, with hopes pinned on a further uptick in earnings growth, strong macroeconomic fundamentals, and the Indian and US governments finalising a long overdue free trade agreement. Kotak Securities expects the Nifty 50 to rise over 12 per cent to 29,120 points in 2026, while global capital markets firm Jefferies’ target implies a potential upside of 9 per cent to 28,300 points.
“Supported by lower inflation, tax reforms, and easier monetary policy, we believe Indian equities are set to be in a stronger position in 2026. Consensus forecasts point to 10 per cent growth in FY26 and 16 per cent in FY27 (14 per cent for large caps),” HSBC analysts said in a note earlier this month. “Valuations are now more reasonable, with India’s premium over other emerging markets back to normal levels. We also anticipate more foreign flows as funds look to diversify beyond AI-focused sectors in Asia.”
The positive outlook for Indian stocks is despite the rupee’s weak performance against the US dollar in recent months, deterring foreign portfolio inflows — and, in turn, further weakening the rupee. The rupee has fallen around 5 per cent in 2025, with the exchange rate breaking past the 90- and 91-per-dollar marks in December before the Reserve Bank of India (RBI) intervened to stem the rot. On Tuesday, the rupee ended at 89.79 per dollar.
Following the rapid decline in the second half of 2025, analysts now believe the rupee is undervalued compared to peers. A key metric they point to is the rupee’s real effective exchange rate, or REER, which measures the exchange rate not against one particular currency but 40 of them after adjusting for the level of inflation in the respective countries. And India’s 40-currency REER on a trade-weighted basis stood at 97.51 in November. An REER number below 100 indicates a currency is undervalued.
The extent of the rupee’s decline in recent months can be understood by the fact that the REER in November 2024 was 108.03, which suggested the rupee was overvalued by around 8 per cent against the basket of 40 currencies. Since then, not only has the rupee fallen, India’s domestic inflation has also plummeted to all-time lows. Going ahead, the REER is seen stabilising due to positive macroeconomic conditions, among other factors.
One of these factors is seen to be an agreement over a trade deal being reached between India and the US. The two countries have been at it for the better part of a year and while relations had cooled dramatically after the imposition of a penal 25 per cent tariff on India for its import of Russian arms and energy, talks subsequently regained momentum. An FTA is seen leading to a resumption of foreign inflows into India, which would strengthen the rupee, market participants said.
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“FPI exposure remains the lightest in history. The structural domestic bid is intact. India’s long-term story has been reinforced with a slew of reforms, Thus, in our view, Indian equities appear set to reverse their worst performance relative to EM (emerging markets) in 31 calendar years,” Morgan Stanley’s Ridham Desai and Nayant Parekh said in a report in November, adding that they had a 13 per cent upside in the Sensex in 2026 as their base case.
The retail play
While Foreign Portfolio Investors (FPIs) have pulled out Rs 1.6 lakh crore ($18.22 billion) on a net basis in 2025 from Indian stocks, domestic investors have more than made up for it, with inflows by Domestic Institutional Investors (DIIs) amounting to Rs 7.7 lakh crore so far this calendar year.
Retail investors, in particular, have been instrumental, with November seeing Rs 29,445 crore flowing in from Systematic Investment Plans, or SIPs. Not only was this close to an all-time high, but it was 16 per cent higher from a year ago. Meanwhile, Securities and Exchange Board of India (SEBI) data shows there were 21.4 crore demat accounts at the end of November, up 20 per cent from a year ago.
Despite the rapid growth in retail investments, the untapped potential is significant, with only 9.5 per cent of the Indian population currently investing in the capital markets, as per a SEBI survey in September. Experts thus expect the retail momentum to continue in the coming years, with only a significant fall in the market and delay in recovery subsequently potentially thwarting the momentum. “…they (retail segment) have got good returns in the last 5-6 years, so they have that bias (to keep investing)… (only) if there is a vast fall in the market, I believe, the flows could reduce and taper out,” said Pravin Bokade, head of equity research at IDBI Capital.
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On the whole, analysts are hoping for more positive returns in 2026 from India’s stock market. And if the rise in 2025 was enough to make it a year for IPOs, next year will be worth watching out for.
