The year gone by – A snapshot

Global economy and markets: Global growth remained resilient in 2025 despite significant increase in trade and geopolitical tensions. Growth was supported by monetary policy easing by central banks, as well as expansionary fiscal policies by prominent economies. MSCI World Index rallied by 20% in 2025, while MSCI Emerging Market Index outperformed with a 31% return. Commodity prices exhibited divergent trends. While prices of precious metals such as gold rose to a record high on account of safe-haven demand, energy commodities such as crude, witnessed sharp correction on account of ample supplies. The Rupee continued to depreciate through the year, primarily on account of outflows from the equity market.

Economy: Indian economy outperforms amidst government reforms

Despite headwinds from imposition of high tariffs on Indian imports by the US, the economy exhibited strength through the year. The economic momentum was helped by frontloading of government capital expenditure, growth in private consumption on account of reduction in direct and indirect tax rates, revival in rural economy due to robust monsoons, and policy easing by the RBI. The services sector continues to perform strongly as India has emerged as a key destination for setting up Global Capability Centres (GCGs) by major global corporations.

The government continues to take measures to enhance India’s long-term growth potential, and has implemented a series of reforms, including rationalisation of GST rates, labour market reforms, process reforms aimed at enhancing ease of doing business, and revising the rural employment scheme with a focus on durable asset creation. With a view to promote exports, India has concluded multiple trade negotiations in 2025, including with UK, New Zealand and Oman.

Equity markets: Narrow rally amidst volatility

The Nifty 50 index ended 2025 with 11% gain. It was the tenth consecutive year of gains for the Nifty index. The year 2025 was a year of two halves with most of the up move coming in the last 5 months of the year amidst significant volatility. Mid-cap and Small-cap indices underperformed with Midcaps up 1% and Small-caps down 6% during the year. Among sectors, Banking and Financial Services (BFSI), Metals and Automobiles outperformed while Information Technology, Real Estate and Power sectors underperformed. Flows from Domestic Institutional Investors (DIIs) remained strong with net buying of equities worth US$ 90bn while Foreign Institutional Investors (FIIs) sold equities worth US$ 18bn.

Outlook: The global economy is experiencing an uneven recovery with divergent growth rates, inflationary trends and policy responses. This has induced significant volatility across various asset classes. From a domestic market perspective, India’s macro-economic fundamentals continue to show improving trends driven by supportive policy measures, reforms, and robust financial conditions of the banking system. Data points pertaining to consumption and investment remain stable despite external headwinds. Demand conditions, across most sectors, have been strengthening on the back of reduction in income taxes and GST as well as monetary easing. This bodes well for corporate profitability. Post the consolidation phase, outlook for equity markets appear sanguine from a medium to long term perspective.

Fixed Income market: Declining inflation prompts RBI easing

Through most of 2025, retail inflation trended below RBI’s target midpoint of 4%, with October 2025 seeing a record low at 0.3%. Decline in inflation was primarily led by decline in food prices on account of good monsoon rainfall, benign energy prices, as well as GST reforms. In response to low inflation, RBI emphasized its focus towards supporting growth and implemented easing measures such as reduction in policy rates as well as cash reserve ratio (CRR).

The central government continues to deliver on its fiscal consolidation roadmap and has projected FY26 fiscal deficit to decline to 4.4% of GDP from 4.8% in FY25. Significant improvement in India’s macroeconomic variables was acknowledged by global rating agency S&P, which upgraded India’s sovereign rating to BBB after a gap of eighteen years. Despite significant volatility in global markets, FII inflow into Indian debt market was at US$ 7bn in 2025.

Outlook: The transmission of monetary policy easing measures by RBI has been muted. Weakness in transmission was a result of demand-supply mismatch (higher supply of State Government Securities), while demand from DIIs remained relatively muted. Given supportive measures by RBI, we expect bond yields to trade rangebound in the near term.