Indian Equities In 2025: Three Trends To Keep An Eye On

With the benchmark indices — Sensex 30 and Nifty-50 — falling by over 9 per cent since peaking in September last year, there are worries in some quarters that domestic investors would be incapable of absorbing FPI's selling pressure. Data from NSDL show that FPIs, since October last year until January 10 this year, have sold Indian equities worth Rs 1,22,000 crore. 

Many are now asking if retail investors — direct or through mutual funds — can sustain the buying momentum as witnessed in the recent past. Will neo-retail investors panic and book profits. After all, a lot of new retail investors have entered the stock market only in recent years with no experience of what a real market fall looks like!

At the outset, global equities have turned very cautious in the last few weeks. The fall can mostly be attributed to expectations of a slower than expected pace of interest rate cuts by the US Federal Reserve, jump in US bond yields and appreciating US Dollar against global currencies. Additionally, there is a lot of uncertainty about potential economic policies of US President-elect Donald Trump in his second presidential term that starts from January 20.

In Calendar year 2024, India underperformed key global markets, while it outperformed emerging markets. In spite of a respectable 8 per cent returns on the benchmark equity indices and over 25 per cent returns on the small and mid-cap indices, 2024 has left us with many uncertainties around the stock market. 

For Indian markets, there are additional layers of worry in the form of high valuations, slowing economy and rotation of foreign capital in favour of the US and China.   

So, has retail participation peaked in India? When would FPIs return to India in a meaningful way? How much of an economic slowdown has the market factored? Will investors find comfort in valuations after the recent correction or is the Indian market still overvalued? Answers to these questions are not easy, they nevertheless would decide the direction in which Indian markets would move in 2025. 

Here are three factors that will shape-up Indian equities in 2025:

Retail investors: Will They Panic?

The might of domestic investors has been on the surge in recent times, even as FPI participation stayed muted. Over the last 10 years, DIIs have pumped in cumulatively around US$ 175 billion in Indian equities, while FPI figures stood at US$ 54.4 billion. In 2024, the former invested US$ 62.9 billion, while figures for the latter showed marginal outflows.

Strength of DIIs — mutual funds, insurance companies and pension funds — come from a rise in retail participation. There has been a jump in demat accounts in recent years (from 70 million in 2021 to 185 million in December 2024) with a run rate of 3 million new accounts per month. On the mutual fund front, from 100 million folio accounts in May 2021, the number of folios have reached 220.8 million as of November 2024. Systematic investment plan (SIP) contribution per month has crossed Rs250 billion.  

Retail investor money has provided continued strength to domestic liquidity against any sharp FPI outflow. Even the success of India’s IPO market, which reached new heights in 2024 with Rs 1.62 lakh crore raised, is due to availability of higher domestic liquidity. 

However, on a quarterly basis, the run-rate of new demat accounts is slowing. In the October-December quarter of the ongoing fiscal year, demat account addition was the lowest in the last 3 quarters at 10.3 million.

Does moderating demat account opening hint at peaking of retail investors’ strength?

A scenario where retail investors sitting on the sidelines paints a worrying picture for India's primary and secondary market. Panic selling will also disturb liquidity of the mutual fund industry. Such a scenario was witnessed after the great financial crisis (GFC) (2007-2009) when retail investors went under hibernation for a long period of time.  

Only time will tell if neo investors will move from strength to strength or if they catch a cold in 2025. Important here is to watch if the government relaxes equity investment limits for insurance companies and pension funds to ensure adequate domestic liquidity. 

Foreign investors: Will They Come Back?

FPI participation has lagged DIIs in the last 10 years. In 2024, the MSCI India Index with 14 per cent gains outperformed the MSCI EM Index, which grew by around 5 per cent. Over the last 10 years, the MSCI India Index has outperformed the MSCI EM index by a robust 168 per cent. 

In US Dollar terms, India remains the fourth-best performing market over the last 10 years. India’s share in world market capitalisation, which averaged 2.7 per cent since 2009, stood at 4.6 per cent when the market peaked in September 2024. With such gains, concerns over high valuations are real.

FPIs meanwhile are looking elsewhere. Better opportunities in the US with rising bond yields and shifting of money to the Chinese market after the country announced a few low impact reforms in the recent months has tempted them.  

Interestingly, in the context of FPIs, there is one trend worth noting. Even as FPIs are selling in the secondary market, they have been active in the IPO market. This implies that long term foreign capital is still interested in India but is waiting for the right valuations.

After the recent correction, the Nifty-50 now trades at a 12-month forward price to earnings of around 20 times, which is near its long-term average. Attractive valuations may prompt FPIs to look at India, especially in anticipation of China tariff hikes from the US. 

“We remain cautious on China exposure. We expect the Chinese equity market to remain highly volatile in 2025... Clearly, there are a lot of moving parts. Thus, we advise investors to exercise caution and while valuation may look tempting, we suggest to only invest in Chinese equities if investors are willing to take significant drawdowns”, says Mirae Asset Mutual Fund in a note on global equity outlook for 2025. Indian stock markets are better placed from this perspective. 

Indian Economy: A Cyclical Downturn Amid Global Headwinds

Investor sentiment got dampened after the July–September economic growth numbers that came at 5.4 per cent, the lowest in two years. Weak investments and lower urban consumption dragged economic growth. Thus far, India's economy, despite any volatile global environment, always stood out.       

Now, investors are worried if the economy would be able to adjust to the new global environment. Things have turned swiftly on the external front. Fast depreciating Indian Rupee and jump in crude oil in recent weeks has left many wondering if these developments have the potential to upset many calculations.

For instance, the Indian Rupee against US Dollar has depreciated sharply in recent weeks, with a few analysts now projecting a level of Rs 92 to a US Dollar in the next few months from the current level of around 86 and from around 83 level seen in September 2024.

This is a swift fall with real consequences on the economy and the market. Even crude is raising its ugly head. It has slid by US$ 6 per barrel to the current level of around US$ 76 per barrel in a matter of weeks.

India is now likely to grow by around 6.5 per cent in the next two fiscal years from 7 to 8 per cent growth seen in recent years. Positively, many believe that the weakness in the economy is cyclical and growth is expected to pick up in the second half of the year. Yet there are headwinds. "...monitoring headwinds to growth emerging from external sources like trade policy uncertainty, volatility in global markets, and geopolitical risks would be crucial (for India),” said Care Ratings in a note.   

The onus is on the government to fix any structural issues in the economy so that any weakness does not get broad based. Onus also lies on the Reserve Bank of India (RBI) to tweak its monetary policy to balance economic growth and inflation. Thus far, RBI has lagged the rate cutting cycle undertaken by global central banks.  

Budget & Monetary Policies To Decide Equity Market Future

The equity market always mirrors economic growth in the long term. The last few weeks have proven that India's market and its economy is very much vulnerable to global developments even if it may stand out amongst its peers. 

Given a volatile global backdrop, will 2025 be the tenth consecutive year of positive returns for the Indian market?

Well, a lot will depend on how retail investors react to various market risks. The onus is also on the government and the RBI to ensure a stable long-term prospect of the economy.

The Union Budget and the upcoming monetary policies would be important to track in this regard.