Market Outlook, December 2025

As we enter the final month of 2025, the Indian equity market presents a dichotomy of headline resilience and underlying caution. While the benchmark Nifty 50 has scaled fresh peaks, the broader market is grappling with valuation adjustments, earnings fatigue, and macroeconomic headwinds. December seems to be a month of consolidation where stock selection will be paramount, driven by global signals and domestic reality checks. 

Macroeconomic backdrop: growth with a limp 

The macro backdrop is hinting at fatigue even as policy support is beginning to turn more accommodative. India’s Index of Industrial Production grew just 0.4% year-on-year in October 2025, the weakest reading in 14 months and a sharp step down from September’s stronger print. The drag came from a fall in electricity output and pressure in mining, while manufacturing growth of around 1.8% still could not lift the overall index in a meaningful way.  

In response to this softer industrial momentum and a sharp moderation in inflation, the Monetary Policy Committee has cut the repo rate by 25 basis points to 5.25%, with the Standing Deposit Facility reduced to 5% and the Marginal Standing Facility and Bank Rate brought down to 5.5%. The stance remains neutral because the RBI is trying to balance price stability and growth support at a time when headline CPI has slipped to about 0.25% on the back of lower food prices and GST cuts, while Q2 FY2026 GDP growth has accelerated to around 8.2%, giving some room for calibrated easing rather than a rushed or aggressive rate-cut cycle. 

Market internals: narrow leaders, wide laggards 

On the surface, the market looks healthy with the Nifty 50 scaling new highs around the 26,300 zone, driven by strong showings from large banks, select IT names and a cluster of heavyweight compounders. Domestic Institutional Investors have added a strong liquidity cushion by deploying over ₹77,000 crore in November, which has comfortably absorbed persistent Foreign Institutional Investor selling of nearly ₹17,500 crore and helped keep benchmark indices resilient.  

Despite this, a significant portion of the broader market is in correction, as many stocks in the Nifty 100 and Nifty 500 baskets trade meaningfully below their 52-week highs even while the index prints records. Breadth data also shows that while the Nifty 50 is at or near a peak, the Nifty Small cap 250 remains roughly 10% below its own all-time high, which highlights how much more pain the average stock is seeing compared to the index headline. 

Small caps vs large caps: the reset phase 

The Nifty Small cap 100 index fell nearly 3% in November, sharply diverging from the rally in large caps and underlining a clear shift in market leadership. This relative underperformance is likely to persist in December because three forces are at work: first, earnings disappointment, with Nifty Small cap 100 companies posting profit growth of barely around 1.5% in Q2 FY26 versus a steadier 7–8% for mid and large caps; second, valuation compression, as the small cap/large cap forward P/E had stretched to about 1.25 times against a long-term average near 0.9, forcing mean reversion and pushing investors from “hope trades” into quality growth and third, a liquidity shift, since ongoing FII selling and lower risk appetite are driving flows towards liquid large cap counters instead of relatively illiquid smaller names. 

Commodities: The Bull Run in Gold & Silver 

Precious metals have witnessed a spectacular rally, with gold prices touching unprecedented levels of ₹1,30,874 per 10 grams in October and remaining buoyant. The surge is driven by aggressive central bank buying (particularly by China and India) and heightened geopolitical tensions in Eastern Europe and the Middle East. Gold is effectively pricing in a “fear premium” and hedging against global currency debasement. 

We see further upside for both gold and silver in December. Silver, trading near ₹1.73 lakh/kg, is benefiting from dual demand as a monetary asset and industrial metal for green energy applications. The consensus target for gold is edging towards ₹1.4 lakh by year-end. 

Currency: USD/INR on an Uptrend 

The Indian Rupee is facing renewed pressure, with the USD/INR pair forecast to test the 91.00 mark by December-end. The depreciation is fueled by the relentless strength of the US Dollar Index (DXY) and sustained FII outflows from Indian equities. Furthermore, the threat of new US tariffs (specifically the looming 50% import duty narrative) is weighing emerging market currencies. 

Expect a sideways-to-positive move for the USD/INR pair. The RBI is likely to intervene to curb volatility, but the path of least resistance remains upwards due to the global “dollar’s smile” phenomenon. 

Outlook: 

To sum up, December is shaping up as a consolidation month where leadership stays with quality, large and select midcap companies while small caps work through a cleansing of excess valuations. For investors, this is a time to behave less like a short-term trader and more like a thoughtful business partner: prune exposure to high-valuation names without earnings support, reduce clutter in the tail of the portfolio and reallocate towards strong balance sheets, steady cash flows and proven capital allocation. Practically, that means shifting SIPs and new money towards large cap and resilient midcap leaders, maintaining a sensible allocation to gold as insurance, and resisting the urge to chase every sharp bounce in beaten-down small caps. By doing so, you give your portfolio the solid roots it needs to grow through 2026, instead of depending on temporary tailwinds.