2025 in Retrospect, 2026 in Perspective: Navigating Opportunities in a Changing Market

The Year the Myth Died

If you've been tracking the markets as closely as most advisors do, 2025 stands out as something far more significant than just another profitable year on Dalal Street. It was the year that fundamentally rewrote the rules of India's equity market—the year when the baton passed from foreign to domestic hands.

For decades, the conventional wisdom was unambiguous: When Foreign Institutional Investors (FIIs) sneeze, the Indian market catches a cold. Global sentiment, dollar strength, and offshore capital flowed as the pulse-takers. Advisory frameworks, risk management systems, and portfolio hedging strategies were all calibrated around this dependency.

2025 officially put that narrative to rest.

The Power Shift: Understanding the Flow Dynamics

What's remarkable isn't the magnitude of FII selling in isolation, but rather its complete irrelevance to market stability. In previous cycles (notably 2022), similarly sized FII outflows would trigger panic selling and sharp corrections. In January 2025, when FIIs pulled out ₹87,000 crore—the most significant single-month exodus in recent history—DIIs absorbed nearly the entire withdrawal within weeks. The resulting market correction? The Nifty fell just 3–4%, compared to the 15–20% drawdowns we would have expected a decade ago.

India's mutual fund industry, powered by systematic SIP inflows, crossed ₹21,000 crore per month by mid-2025. To contextualise this scale: in 2016, total AUM in Indian mutual funds was around ₹20 lakh crore. Today, it exceeds ₹65 lakh crore. Insurance companies, pension funds, and provident funds have similarly expanded their asset bases with compound annual growth rates exceeding 15%.

The Macro Backdrop: The "Goldilocks Period" (And When It Ends)

To position wisely in 2026, we need to acknowledge the rare—perhaps unique—macroeconomic environment India currently occupies, and understand when it will shift.

Real GDP Growth: Accelerating, Not Decelerating

India's GDP growth in FY26 is expected at 7.5%, with Bank of America recently upgrading its forecast to 7.6% after the September quarter data surprised to the upside. The RBI has raised its estimate to 7.3%. Most economists expect growth to range from 6.8% to 7.6%.

This isn't a statistical anomaly. Q2 FY26 printed 8.2%—the fastest pace in six quarters—driven by robust consumption and government capex. Calendar year 2025 averaged 7.8% growth across fiscal quarters.

Why this matters: In most growth cycles, accelerating growth leads to accelerating inflation, triggering central bank tightening and an eventual slowdown. India is defying this pattern.

Inflation: A Historic Low (But Rising from Here)

Here's where the macro situation gets unusual:

CPI inflation hit 0.3% in October 2025—a 15-year low, approaching the lowest point in the CPI series.

It subsequently inched up to 0.71% in November, signalling that the disinflation cycle has likely bottomed.

The RBI's revised inflation forecast for FY26 is now 2.0%, down from its earlier projection of 2.6%.

This combination—7.5% real growth with 2.0% inflation—is the "Goldilocks" scenario. RBI Governor Sanjay Malhotra explicitly termed it this during the December 2025 monetary policy decision.

The catch: Inflation won't stay at 2% forever. As base effects normalise and commodity prices stabilise at higher levels, CPI will drift upward toward the RBI's 4% medium-term target. Most economists expect CPI to average 3.5%–4.0% in FY27.

Monetary Policy: Easing Cycle Near Its End

The RBI cut rates by 125 basis points in 2025, bringing the repo rate from 6.50% to 5.25%. This was one of the largest easing cycles in recent RBI history.

Critically, the RBI's December 2025 policy statement signalled a pause. Most economists don't expect a rate cut in February 2026; the consensus is that the RBI will hold at 5.25%.

Why?

The RBI Governor explicitly stated that policy decisions are now dictated by real GDP growth, after adjusting for inflation, rather than nominal metrics. With real growth at 7.5% and inflation at 2.0%, real rates (5.25% - 2.0% = 3.25%) are already accommodative. Further cuts make less sense.

The space for ease has narrowed. The window when the RBI can cut rates without worrying about inflation is closing.

2026 Outlook: Expectations, Opportunities, and Risks

In 2026, gravity will reassert itself. Here's why:

1. Higher base effects: The companies that doubled from 2024 lows are now priced for perfection. Any earnings miss will be brutal. Management misguidance, margin compression, or slower growth will trigger sharp corrections.

2. FII selectivity: Returning foreign investors will deliberately avoid speculative names, tilting capital toward quality. This tilts the playing field further against weak businesses.

3. Earnings divergence widens: Quality companies with pricing power, efficient balance sheets, and stable margins will report earnings growth. Weak-balance-sheet companies will struggle as input costs remain elevated and competition intensifies.

Equities: Quality will dominate

In 2026, market leadership will rotate fast. A rigid Large-Cap fund might miss a mid-cap rally, and a Small-Cap fund might crash if volatility hits. A good Flexi-Cap manager has the mandate to move across large-, mid-, and small-cap stocks based on valuation.

Look for managers with a "Quality" bias (high ROIC focus). Avoid funds that churn their portfolio too much.

Debt: Play it safe

For the past three years, the mantra was "Cash is King." That era is definitely ending.

Interest rates have peaked. The RBI cut by 125 bps in 2025 and has signalled more ease is possible (though unlikely in February—likely only in H2 2026 if growth slows sharply). For conservative clients and shorter horizons (0–2 years), these offer stability with yields of 5.0–5.5% and minimal mark-to-market losses if rates move.

REITs: Income with Growth, Minus Property Headaches

Why REITs matter for 2026:

1. A dividend yield of 5–6% is achievable with tax-efficient structures (dividend income in many REITs remains tax-free to investors under the REIT regulatory regime).

2. Rental growth: As the Indian economy grows and corporate capex expands (especially IT services and tech companies), real estate demand continues to grow. Rents are likely to produce 6–8% annually.

3. Rate sensitivity: As the RBI cuts rates, REITs' cost of capital falls. This improves distributable cash flows and often leads to distribution hikes. Lower mortgage rates for property buyers also boost demand for commercial real estate.

4. Inflation hedge: Real estate rents typically follow inflation. As inflation edges up to 3.5%–4.0% in FY27, rental growth will accelerate, providing inflation protection.

Gold: A Hedge, Not a Return Generator

The 2026 case for gold:

1. Central bank accumulation: China, Russia, and India's RBI are all actively accumulating gold reserves to diversify away from USD exposure. The RBI's foreign exchange reserves now exceed USD 690 billion, with a rising gold component. This provides a permanent, structural floor for gold prices.

2. Geopolitical risks: We live in an era of rising geopolitical tensions (Middle East instability, Ukraine war, US-China tensions)—gold benefits during periods of uncertainty when investors flee to safe havens.

3. Currency volatility: The Indian rupee has been under pressure, hitting a low of 91 against the dollar in recent months. Gold provides a hedge against rupee depreciation.

4. Inflation hedge: While inflation is low today, geopolitical disruptions to supply chains could create pockets of inflation. Gold is a proven long-duration inflation hedge.

Conclusion: Opportunity in Structural Transition

2025 wasn't just a profitable year for Indian equities; it was a transformative year. The shift from FII dependency to DII dominance is structural, not cyclical. It makes Indian markets more stable, less vulnerable to external shocks, and more responsive to domestic fundamentals.

For long-term investors, this is unambiguously positive.

But transition periods are also periods of dislocation. Old winners (mega-cap darlings that benefited from FII flows) may not be tomorrow's winners. Speculative names that rallied on momentum will face gravity. Quality will reassert its value.

The baton has been passed. India's equity markets are now in the hands of domestic investors. The years ahead will be shaped not by foreign flows but by domestic earnings growth, capex execution, and earnings quality.