Much of the hesitation at the top is tied to the shifting market structure. Gains this year have been driven almost entirely by largecaps, analysts say, supported by domestic institutional inflows. Smaller companies never recovered fully from the drawdown. The BSE Smallcap Index remains about 10% below its all-time high and midcaps are still 3.5% off recent peaks.
With breadth weak and global cues mixed, here’s why the index’s latest breakout lacked the depth typically associated with sustained rallies and signals worrying signs for investors
Slow progress in US-India trade deal
Puneet Singhania of Master Trust Group pointed to the slow progress of the India–US trade discussions, adding that rupee weakness and persistent FII outflows continue to reduce foreign participation at higher levels.
In August, US President Donald Trump doubled tariffs on imports from India to as much as 50%, hitting exports of textiles, chemicals and food items such as shrimp. Exports to the US fell nearly 9% year-on-year in October to $6.31 billion from $6.91 billion a year ago, though they were higher than $5.47 billion in September, according to government data.
VK Vijaykumar of Geojit Investments said that the excessive delay in the India–US trade deal and comments by President Trump about taking action on India for “dumping rice” have also hurt sentiment post the record rally.
FII short build up
Analysts note the index derivatives positioning shows FIIs building significant short positions, turning the 26,000-26,250 zone into a major hurdle. Until these shorts unwind, the momentum is likely to remain capped.
Foreign ownership of Indian equities is now at a 13-year low, and a lack of buying at the top has created a ceiling for the Nifty despite strong domestic inflows. According to Ashwini Shami of OmniScience Capital, FIIs sold about Rs 15,000 crore in November and early December alone.
“This has put pressure on the index. Steep rupee depreciation recently in the face of India-US trade deal uncertainties and a growing current account deficit has likely added to FIIs’ selling,” he said.
Rupee uncertainty
The currency has been another catalyst. The rupee’s slide to near 90 against the dollar has intensified concerns around imported inflation and fund outflows. “USD-INR has hit a record low near 90, indicating currency stress and reducing risk appetite for foreign investors,” said Drumil Vithlani of Bonanza.
Technical factors
Technical indicators reflect this uneasy equilibrium. Nifty broke below its short-term trendline support and the 20-day moving average, but simultaneously found support at the 50-day moving average and the 61.8% Fibonacci retracement of its latest upmove. “Nifty may now consolidate within a broader 25,700–26,000 band ahead of the key Fed policy outcome,” said Rajesh Bhosale of Angel One.
Read More: US Fed delivers 3rd rate cut in a row. What does it mean for Indian equities?
A decisive move above 26,200-26,300 could revive sentiment, while a breakdown below 25,700 risks a deeper correction, he added.
Broader market unsupportive
The broader context explains why the rally feels fragile. Profit-taking has been sharper in small and midcaps after two years of strong gains. Stretched valuations, patchy earnings and thin liquidity in the broader market have kept bargain-hunters on the sidelines. According to Vijayakumar, valuations outside largecaps had been “kept high only on the strength of liquidity,” an unsustainable dynamic that is now unwinding.
What’s next from here?
Analysts say fundamentals may soon tilt back in favour of the bulls. Corporate earnings have shown early signs of stabilisation. Citi noted that the top 100 companies delivered 12% profit growth in the September quarter, slightly ahead of expectations and the first quarter in several without an earnings downgrade cycle.
Macro indicators — higher real growth, improving nominal GDP and policy support through rate cuts and GST rationalisation — are expected to strengthen consumption and credit trends into 2026.
Large-caps also offer better value now relative to history. “Valuations in the largecap segment have become fair,” said Vijayakumar. He expects the market to resume tracking fundamentals as inflation rises from unusually low levels and boosts nominal earnings growth.
Global brokerages including, Morgan Stanley and Goldman Sachs, also expect Indian equities to recover lost breadth next year as earnings stabilise and policy measures filter through.
Kotak Securities projects Nifty reaching 29,120 by December 2026 under its base case, assuming steady earnings growth of 17.6% in FY27 and 14.8% in FY28. Its bull case projects 32,032.
Also read: US Fed delivers 3rd rate cut in a row. What does it mean for Indian equities?
Near-term uncertainty, however, is likely to persist. Investors are watching the progress of the India-US trade negotiations and the rupee’s trajectory. Foreign flows remain the swing factor, and the lack of conviction at the top reflects unease about whether the rally can sustain without FII support.
“Investors prefer waiting for clarity from inflation data, the upcoming Budget, and Q3 earnings. Until flows stabilise and earnings visibility improves, the index is likely to stay choppy — a clear sign that the rally lacks strong conviction,” said Ishan Tanna of Ashika Equity Research
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
