As 2025 draws to a close, it is time to look in the rear-view mirror rather than make predictions for 2026. The financial markets in India have been a rich teacher this year, offering surprising insights that defy conventional wisdom. From a record-breaking IPO boom amidst tepid index returns to a significant shift towards global investing by domestic players, the year has been full of contradictions and learning opportunities.
Global Diversification and Domestic Resilience
One of the most significant trends of 2025 was the Indian investor's decisive pivot towards international assets. Despite it being the worst year for India's equity returns relative to the emerging markets index in over three decades, the sentiment at social gatherings told a different story. Investors proudly discussed holdings in Korean and Brazilian ETFs, commodity funds, and global defence stocks. This was facilitated by the Liberalized Remittance Scheme (LRS) allowance of $250,000 per person, a range of low-priced products, and easier transactions. Data shows Indians remitted an annualized $2 billion in the first half of 2025-26 via LRS for foreign investments, a sum growing at over 35% annually for five years.
Simultaneously, the Indian market was buoyed by an unyielding stream of domestic capital. Retail flows into mutual funds provided a steady bid for large-cap stocks, insulating them from the brutal valuation derating seen in comparable global companies. For instance, global tech services firms with similar earnings prospects to Indian IT companies traded at cheaper multiples. This domestic liquidity also reduced index volatility, bolstering investor confidence to allocate more household savings to equities.
The IPO Puzzle and Market Contradictions
India is on track for a record IPO year in 2025, with nearly 100 new issues hitting the mainboard exchanges. This surge is paradoxical, occurring against a backdrop of single-digit Nifty returns and a nearly 10% drop in the Nifty Small Cap Index. Market internals were weak, with almost half of the top 500 stocks down at least 20% from their peaks.
Why did investors flock to new issues while ignoring listed stocks? Two factors stand out. First, liquidity in the broader market has dwindled. While India's total market cap grew by over $1 trillion between December 2023 and December 2025, the number of stocks with average daily trading volumes over $10 million fell from 300 to 260. Second, mutual funds are often fully positioned in frontline index stocks. Thus, IPOs became a key avenue to deploy large capital without significant impact cost, sometimes lured by the promise of quick listing gains. This phenomenon was a practical lesson in the gap between theory and reality.
Consolidation, Competition, and Broken Correlations
The trend of industry consolidation, highlighted previously, continued in 2025. While profitable for investors, it carries risks for consumers and regulators, as seen in the domestic aviation duopoly. A Business Standard analysis found consolidation at a 15-year high across eight major industries. The flip side is potential consumer backlash, price capping, and reduced profitability.
Conversely, 2025 also saw determined new entrants disrupt stable sectors. The lesson from Reliance Jio in telecom and Meituan in the Middle East is clear: when a deep-pocketed competitor enters, exiting incumbent stocks is often wiser than betting on their resilience. The fear of a prolonged battle leads to a derating that outweighs solid financials.
The year also witnessed the breakdown of long-held macroeconomic correlations. Gold, for example, doubled in price from late 2022 to September 2025 despite the Federal Reserve's hiking cycle, shattering the traditional link with monetary easing. Gold has morphed into a hedge against multiple fears—geopolitical tension, inflation, and financial system risks—rendering old models obsolete.
Behavioral Insights and Inherent Truths
Market lessons often extend beyond spreadsheets. The Indian rupee's poor performance in 2025, making it the worst Asian currency against the dollar, was largely a case of mean reversion. After being overvalued on a Real Effective Exchange Rate (REER) basis for years, it corrected towards its mean.
Behavioral economics played out in real estate and mutual funds. Despite low rental yields, Indians bought homes for psychological comfort and portfolio risk-balancing. Similarly, 70% of equity mutual fund AUM remains in distributor-led 'regular' plans, even though 'direct' plans are cheaper. Data shows distributor-led investors stay invested longer (52% over three years vs. 36% for direct), highlighting the value of human guidance during market anxiety.
Ultimately, 2025 reinforced that investing is full of inherent contradictions, much like a book of proverbs. Mr Market teaches one lesson one year only to upend it the next. This lack of eternal truths is what makes the journey a lifelong, fascinating pursuit for those who embrace its unpredictability.
