Quarterly Equity Market Update: December 2025

Quarterly Equity Market Update: December 2025

Quarterly Equity Market Update Executive Summary

As we enter the final month of 2025, Indian equity markets are navigating a complex phase of “growth vs. valuation.” While the domestic economy delivered a stunning 8.2% GDP growth in Q2 FY26, surpassing all estimates, equity benchmarks have faced selling pressure in November and early December. The Nifty 50, after reclaiming record highs in November, has recently corrected, weighed down by sustained FII outflows and volatility in global bond yields.

For the Indian investor, the narrative has shifted from “buying everything” to “sectoral rotation.” The cooling of inflation to record lows (0.25% in October) and the rationalisation of GST rates have reignited consumption themes, while banking remains a pillar of earnings stability.

1. Market Performance & Trends

• Indices: The Nifty 50 is trading around 26,000, down from recent peaks. The index witnessed a sharp correction in early December due to weak global cues and foreign selling.

• Broader Market: Mid and Small-cap indices have shown divergence. While liquidity remains ample domestically, valuation concerns have led to profit-booking in high-flying smaller counters.

• Volatility: Implied volatility has ticked up as the market digests the dual signals of strong domestic growth (bullish) and rising US bond yields/tariff risks (bearish).

2. Q2 FY26 Earnings Review: Margins Drive Profitability

The September quarter (Q2 FY26) earnings season offered a mixed but resilient picture. While top-line (revenue) growth was modest at 5-7% for Nifty companies, profitability improved significantly due to cost efficiencies.

• EBITDA Expansion: Operating profits (EBITDA) for Nifty 50 companies grew by ~13% YoY, aided by lower input costs and reduced financing expenses (interest costs fell to ~4.9% of sales)[web: 21].

• Sector Highlights:

  • BFSI (Banking & Finance): Continued to lead the earnings aggregate. Private banks maintained steady asset quality, though deposit growth remains a challenge, intensifying competition.

  • Auto: Strong performance (profit up ~16% YoY), driven by premiumization and easing raw material costs.

  • IT Services: Remained tepid, signalling that the global discretionary spend recovery is still gradual.

3. Macroeconomic Backdrop

• GDP Surprise (8.2%): The Indian economy grew at 8.2% in Q2 FY26 (July-Sept), significantly beating the consensus estimate of 7.3%. Manufacturing (+9.1%) and Construction (+7.2%) were the star performers, signalling a capex-led recovery.

• Inflation & Rates: CPI inflation collapsed to a record low of 0.25% in October 2025. This “Goldilocks” scenario of high growth and low inflation has fuelled expectations of a potential RBI rate cut in December. However, the central bank may hold rates steady to prevent overheating amid strong GDP growth.

• GST Rationalisation: The government’s move to rationalise GST rates in September 2025 has begun to show results, boosting private consumption expenditure by 7.9% in Q2.

4. Institutional Flows: The Tug of War

A clear divergence persists between foreign and domestic flows, providing a floor for market corrections but capping upside.

• FIIs (Foreign Institutional Investors): Net Sellers. FIIs sold ~₹17,500 cr in November and continued selling in early December (~₹4,800 cr). Triggers include rising U.S. Treasury yields and geopolitical concerns about U.S. trade tariffs.

• DIIs (Domestic Institutional Investors): Net Buyers. SIP flows and insurance money continue to absorb foreign selling, with DIIs buying over ₹4,600 cr in a single session recently.

5. Valuation & Outlook

• Valuations: The Nifty 50 is trading at a P/E of approximately 22.8x (trailing), which is above its long-term historical average. This “scarcity premium” is justified by India’s superior growth rate relative to emerging-market peers, but it leaves little room for disappointment in earnings.

• Risks:

  • Global Trade: Uncertainty around US tariffs on Indian exports (pharma, IT, textiles) is a key overhang.

  • US Fed Policy: Fluctuating expectations of a Fed rate cut are keeping the USD strong, pressuring the INR.

6. Investment Strategy

Overview

Before making any investment decisions, consult your financial advisor for personalised guidance. As a general rule, maintain your long-term asset allocation at a 50% equity split. Current market conditions suggest this allocation remains appropriate, though individual circumstances vary.

Tactical Opportunities

The “GST Cut + Low Inflation” combination creates a favourable environment for the FMCG, Retail, and Consumer Durables sectors. Focus on companies that benefit from increased discretionary rural spending.

IT Sector Outlook

The IT sector may remain range-bound until US recession concerns and AI disruption uncertainties are resolved. Over the past two years, IT has underperformed due to cyclical mean reversion and may continue lagging broader market expectations. Consider a watchful approach rather than aggressive positioning.

Small and Mid-Cap Positioning

Small- and mid-caps are underperforming large-caps, suggesting potential opportunities for patient investors with a 3-5 year investment horizon.

While December volatility is expected, the structural outlook for FY26 remains positive. The market will likely consolidate recent gains before a potential pre-budget rally in Q4 FY26.