Whalesbook
India's Equity Market Faces Headwinds in 2025, RBI Report Reveals
The Reserve Bank of India's (RBI) Financial Stability Report, released in December 2025, indicates a significant shift in India's equity market performance. After a robust five-year period of outperformance from 2020 to 2024, Indian equities lagged behind both emerging market (EM) and advanced economy (AE) peers in 2025. This marks a notable departure from the strong gains previously achieved.
The Performance Reversal
Between 2020 and 2024, Indian equities had shown remarkable strength, reaching an index level of 173.2, outperforming AEs (157.2) and EMs (96.7). However, the trend reversed dramatically in 2025. Emerging market equities surged to 128.2 and advanced economies climbed to 119.3, significantly outpacing India, which closed the year at 101.1, signalling nearly flat returns. This relative underperformance has raised concerns among market participants.
Factors Behind the Slowdown
The RBI report attributed India's 2025 underperformance to several key factors. Tepid corporate earnings growth played a significant role, occurring alongside relatively slow nominal Gross Domestic Product (GDP) expansion. High equity valuations meant that the market had less room for further gains. Persistent outflows from foreign portfolio investors (FPIs), adverse international trade outcomes, and a depreciation of the Indian rupee also contributed to the slowdown. Furthermore, the report noted that limited engagement with AI-driven trading strategies and a lower market beta compared to other Asian markets may have hindered performance.
Resilience Amidst Volatility
Despite the relative lag, the report underscored the Indian equity market's inherent resilience. It navigated steady foreign investor outflows and persistent global economic uncertainties with remarkable stability. Market volatility remained subdued, with the NSE VIX closing at 10.9 in December 2025, a figure considerably lower than the CBOE VIX's 15.8. Realized volatility on the Nifty 50 also stayed contained at 7.7, contrasting sharply with MSCI EM's 15.1 and MSCI World's 11.3. Historically, sharp corrections in US markets significantly impacted Indian equities, but this transmission effect has notably weakened in recent years, evidenced by a declining beta of the Nifty 50 against the S&P 500.
Domestic Investors Take Center Stage
The stability observed in Indian equity markets has been substantially bolstered by strong and consistent demand from domestic institutional investors (DIIs). The RBI report highlights that DIIs have now surpassed foreign investors in terms of ownership of Indian equities, with their share continuing to rise. Between the fiscal years 2021-22 and 2025-26, DII flows saw an average annual increase of 7.6 percent, while FPI flows experienced an average annual decline of 0.7 percent. In calendar year 2025, DIIs injected ₹7.4 lakh crore in net inflows, dwarfing the ₹1.6 lakh crore in net outflows from FPIs. This shift is further reflected in asset custody figures, with DII holdings reaching ₹83 lakh crore by September 2025, exceeding FPI holdings of ₹75 lakh crore.
Impact
This news suggests a potential moderation in the growth trajectory of Indian equities after a period of significant outperformance. The increased dominance of DIIs indicates a more domestically driven market, potentially less susceptible to global sentiment shifts but possibly leading to different return patterns. Investors may need to re-evaluate growth expectations and focus on domestic demand drivers. The market's resilience despite headwinds is a positive sign, but the reasons for underperformance need careful monitoring. The report could influence investment strategies and asset allocation decisions.
Impact Rating: 8/10
Difficult Terms Explained
- Equities: Shares of ownership in a company, representing a claim on its assets and earnings.
- EMs (Emerging Markets): Countries with developing economies that are in the process of rapid growth and industrialization.
- AEs (Advanced Economies): Highly developed countries with mature economies and high standards of living.
- FPI (Foreign Portfolio Investor): An investment from a security issued in one country made by investors in another country, typically stocks and bonds.
- DII (Domestic Institutional Investor): An institutional investor that is based in India, such as mutual funds, insurance companies, and pension funds.
- NSE VIX: The volatility index of the National Stock Exchange of India, measuring expected market volatility over the next 30 days.
- Beta: A measure of a stock's volatility in relation to the overall market. A beta greater than 1 indicates higher volatility than the market; less than 1 indicates lower volatility.
- EPS (Earnings Per Share): A company's net profit divided by the number of outstanding shares of common stock.
- Nominal GDP: The gross domestic product valued at current prices, not adjusted for inflation.