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Below the Quote on Monthly Equity Market Outlook by Vinay Paharia of PGIM India Mutual Fund

Indian equities stable on back of DII support

The Indian equity market ended the month with modest losses. The Nifty Index slipped  0.3%, and the mid-cap and small-cap indices declined -0.9% and -0.6%, respectively. On the sectoral front, metals (+8%), oil & gas (+1.8%) and auto (+1.3%) were the top gainers, whereas capital goods (-3%), consumer durables (-3%) and realty (-3%) were the laggards. The other key developments were: (1) The Reserve Bank of India (RBI) Monetary Policy Committee (MPC) reduced the policy repo rate by 25 bps to 5.25% while maintaining the stance at neutral, (2) Fitch Ratings revised India’s GDP growth forecast for FY2026 to 7.4% from 6.9% projected earlier, (3) The US Federal Open Market Committee (FOMC) reduced the federal funds rate by 25 bps to the 3.5-3.75% range, the third 25 basis point cut this year, (4) The Bank of Japan (BoJ) raised its benchmark interest rate by 25 basis points to 0.75%, marking its highest level since 1995, (5) The Cabinet approved the Atomic Energy Bill, 2025 and (6) The Securities and Exchange Board of India (SEBI) revised the Mutual Funds (MF) expense ratio framework.

 Meanwhile, Foreign Portfolio Investors (FPIs) sold $2.6 bn of Indian equities in the secondary market, whereas Domestic Institutional Investors (DIIs) bought $8.1 bn. For the full year, Foreign Institutional Investors (FIIs) sold close to $18bn of equities which is the highest ever calendar year outflow, which was more than amply outweighed by DIIs which bought close to $90bn worth of equities in the cash market.

On the economy front, November Consumer Price Index (CPI) inflation inched up to 0.71% from 0.25% in October. Wholesale Price  Index (WPI) inflation for November was (-) 0.3% YoY against (-) 1.2% in October. The Index of Industrial Production (IIP) grew by 6.7% in November 2025, marking a 25-month high. Manufacturing output reported growth of 8% YoY while Mining output grew by 5.4% YoY. Merchandise trade deficit narrowed to a five-month low in Nov’25 as exports rose, and imports declined.

Unexpectedly, both oil and non-oil exports rebounded significantly from their previous contractions amid trade uncertainties. As per the latest fortnightly data (15th Dec’25), system credit growth improved to 12.0% YoY (vs. 11.5% YoY on 28th Nov’25), while deposit growth moderated to 9.4% YoY (vs. 10.2% YoY on 28th Nov’25). The system credit-deposit ratio continues to be elevated at ~82% as of Dec’25 (vs. 80% in Nov’25).

Calendar year 2025 saw the large caps (Nifty) delivering better returns at 11.5% than midcaps 5.7% and small caps (-6.1%), reversing the phenomenon of CY24 wherein mid and small caps outperformed large caps. At a broader level, the markets saw a modest return of 7.4% (NSE 500), thereby seeing a slowdown in returns from the previous year on concerns of elevated valuations as well as correction in some of the excesses that were built in the market.

The first half of CY25 was a period of stable gains with high quality and high growth companies delivering stable returns, while bulk of the relative under performance was delivered by low quality and low growth companies. However, in the second half of the year, we witnessed a significant underperformance by high quality and high growth companies, which significantly increased their relative underperformance for the year.

We are firm believers in superior long-term return potential of growth companies (companies with higher-than-average growth and higher than average business quality). Such companies have delivered strong long-term performance over a 5-year and 10-year period, despite a difficult 3-year period. Patient growth investors are likely to reap rich rewards in the medium term also as India grows at a relative fast pace, which is likely to be best captured by such high growth and high-quality companies.

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