India’s equity markets rise in 2025, but risk aversion hits mid and small-cap stocks: NSE 2025 report

India’s equity markets wrapped up the calendar year 2025 with moderate headline gains, but the performance beneath the surface revealed sharp divergence across market segments. While benchmark indices ended the year higher, smaller stocks struggled, investor behaviour shifted, and market flows highlighted a growing preference for stability over risk. The contrasting trends underscored how 2025 was less about broad-based rallies and more about selective participation.

The benchmark Nifty 50 rose 10.5% during the year to close at 26,130, supported largely by heavyweight stocks in banking, financial services, metals and select industrials, NSE Annual Report stated. However, the broader market painted a far less uniform picture. The Nifty Midcap 150 gained just 5.4%, while the Nifty Smallcap 250 declined 6%, making small-cap stocks the weakest-performing segment of the equity market in 2025. This marked a reversal from previous years, when mid- and small-cap stocks had significantly outperformed large caps.

Market participants attribute this divergence to a combination of stretched valuations, profit-taking after strong multi-year rallies, and heightened volatility triggered by global macro uncertainty.

Rising geopolitical tensions, fluctuating commodity prices and sharp swings in global bond yields prompted investors to reassess risk. As a result, capital rotated away from smaller, more volatile stocks toward large-cap companies with stronger balance sheets and predictable earnings.

Despite the uneven market performance, fund mobilisation across capital markets remained resilient. Total funds raised through equity and debt issuances rose 10% year-on-year to nearly ₹19.6 lakh crore. While total equity fundraising dipped marginally, debt issuances saw a strong jump, reflecting improved appetite for bonds amid easing domestic yields and deeper corporate debt markets. Mainboard IPOs remained active, even as the overall number of new listings declined, indicating that larger and well-known issuers continued to command investor confidence.

A key structural shift during the year was the growing dominance of domestic investors. Domestic institutional investors (DIIs) emerged as the backbone of the equity market, investing a record Rs 7.8 lakh crore into equities in 2025. Their sustained buying helped cushion the impact of foreign outflows and stabilise market sentiment during periods of stress. In contrast, foreign portfolio investors (FPIs) were net sellers of over Rs 1.6 lakh crore during the year, weighed down by a stronger dollar, currency volatility and uncertainty around global interest rates.

Retail participation continued to expand, reflecting the long-term deepening of India’s equity culture. The number of unique registered investors crossed 12.5 crore by the end of December, with about 1.6 crore new investors added in 2025. However, data showed that fewer individuals actively traded in equities and derivatives compared with the previous year. This suggests a gradual shift among retail investors toward long-term investing, systematic investments and passive products, rather than frequent trading.

India’s market infrastructure also strengthened its global standing. The National Stock Exchange retained its position as the world’s largest equity derivatives exchange by trading volume. At the same time, the NSE International Exchange crossed the $1 trillion mark in notional turnover during the year, highlighting growing international participation in India-linked financial products.

Overall, equity markets in 2025 demonstrated that headline index gains can mask significant internal churn. The sharp divergence between large caps and smaller stocks, coupled with strong domestic inflows and cautious foreign participation, signals that quality, balance-sheet strength and earnings visibility have become central themes. As investors head into 2026, selectivity rather than broad market exposure is likely to define equity investment strategies.