The Indian equity market in 2025 delivered modest returns, with benchmark indices largely moving within a narrow range for most of the year. While both the Sensex and the Nifty 50 ended the year higher, momentum remained subdued, and markets struggled to establish a sustained upward trend. During the final quarter, the Nifty 50 traded largely between 25,800 and 26,300, highlighting the absence of strong directional conviction. Overall, 2025 was characterised by consolidation rather than expansion.
In relative terms, Indian equities underperformed several global and Asian peers, including major U.S. indices, South Korea’s KOSPI, and Hong Kong’s Hang Seng. This underperformance was primarily driven by intermittent foreign institutional outflows and a moderation in corporate earnings growth. Additionally, India’s limited exposure to certain high-growth global themes, particularly advanced AI-led technology cycles, weighed on relative performance.
Macroeconomic factors played a meaningful role in shaping market sentiment. Inflation trends, RBI policy signals, and the pace of rural demand recovery influenced investor confidence throughout the year. Infrastructure activity showed gradual improvement, with cement and steel production supporting industrial growth. On the flow side, foreign portfolio investors remained cautious and turned net sellers at various points, while domestic institutional investors helped stabilise markets through selective and consistent participation. Market volatility remained relatively low, though liquidity thinned toward the year end.
Sector performance in 2025 was clearly divergent. PSU banks emerged as the strongest performers, supported by healthy credit growth, improved asset quality, and stronger capital adequacy. Structural reforms and regulatory clarity further enhanced long-term valuation comfort for the sector. Defence stocks also delivered robust gains, driven by rising government expenditure, strong order inflows, and increased focus on domestic manufacturing. Metal stocks benefited from favourable commodity cycles, particularly in base metals such as copper, while the auto sector posted mid-teen returns on the back of demand recovery and policy support.
On the other hand, the IT sector lagged broader markets due to subdued global technology spending, margin pressures, and slower deal conversion. Real estate and select consumer segments experienced muted or negative returns, impacted by valuation pressures and uneven discretionary demand. FMCG stocks provided stability but underperformed cyclical sectors as growth remained moderate.
Despite near-term challenges, several structural opportunities continued to strengthen beneath the surface. The domestic credit cycle, defence manufacturing, infrastructure-led capital expenditure, healthcare expansion, and clean-energy adoption remained key long-term growth pillars for Indian equities.
Sector-Based Investment Outlook – FY 2026–27
The Defence and Aerospace sector stands out as a high-conviction, long-term investment theme for FY 2026–27 and beyond. Consistently rising defence allocations, the government’s focus on indigenization, and growing export opportunities have significantly improved visibility for the sector. Strong order books across both PSU and private players provide multi-year revenue certainty, though execution timelines and dependence on government procurement cycles remain key risks.
Renewable Energy and the broader energy transition theme represent a multi-decade opportunity. India’s commitment to achieving 500 GW of renewable capacity by 2030 continues to drive investments across solar, wind, energy storage, and grid infrastructure. While the sector is capital-intensive and sensitive to policy and tariff changes, companies with strong balance sheets and stable cash flows are well-positioned to benefit from this transition.
E-Waste Recycling and the circular economy are emerging investment themes with significant long-term optionality. India’s rapidly rising electronic consumption and stricter Extended Producer Responsibility norms are pushing the formalisation of recycling activities. As recovery of critical metals becomes economically viable, organised players with technological capabilities and scale are likely to gain share, though regulatory execution and industry fragmentation remain challenges.
Rare Earths and Critical Minerals have gained strategic importance amid global efforts to diversify supply chains away from China. Rising demand from electric vehicles, renewable energy systems, defence electronics, and semiconductors makes this a nationally strategic sector. While project timelines are long and subject to environmental approvals, government-backed initiatives and joint ventures could unlock meaningful long-term value.
Healthcare and Pharmaceuticals continue to offer a balance of defensive stability and growth. Increasing domestic healthcare penetration, recovery in export markets, and rising contribution from specialty pharma and CDMO businesses support medium-term earnings visibility. Regulatory compliance and pricing pressures, particularly in the U.S., remain important monitorables.
The Medical Equipment and Devices segment is structurally underpenetrated in India and presents a compelling import-substitution opportunity. Government incentives under the PLI scheme, growing hospital infrastructure, and rising diagnostics demand are accelerating domestic manufacturing. Companies with strong design, R&D, and manufacturing capabilities are best placed to capitalise on this long-term trend, despite competitive intensity and high development costs.
Conclusion
Calendar year 2025 was a phase of consolidation for Indian equities, marked by modest returns and sectoral divergence. Looking ahead to FY 2026–27, the investment environment increasingly favours sectors aligned with national priorities, policy visibility, and long-term structural demand. Defence, renewable energy, critical minerals, healthcare, and emerging circular economy themes offer meaningful opportunities for patient, long-term investors. In the coming cycle, wealth creation is likely to be driven less by market timing and more by disciplined capital allocation and conviction-led investing.
