From AI to FPIs, five questions facing Indian stocks in 2026
After a nervy, range-bound year where the Indian stock market clung on to hold its own, 2026 will hold many questions over AI, valuations, foreign investors, mutual funds, and IPO.
In 2025, the Indian stock market overcame fears of an unravelling and held its ground. But it also sent a cautious signal, moving largely within a narrow range. During the year, the bellwether BSE Sensex stayed within a 15% band and ended up about 8%. At current levels, it is barely 1% below its all-time high, hit in September 2024.
As 2026 approaches, market direction will hinge on the interplay between fundamentals—corporate earnings and valuations—and the flow of funds. Here are five demand-supply questions that will be critical in shaping where Indian equities go next.
1. Will the AI clamour continue?
Every bull market has a dominant theme that fuels share prices and anchors sentiment—be it the IT services and dotcom boom of 2000 or the commodities cycle of 2005–07.
In the current market, that role is being played by artificial intelligence (AI), with its expansive and still-evolving use cases across industries.
Meanwhile, the companies creating the AI superstructure are having a golden run on the stock market. Valuations of companies making advanced chips, hardware, data centres, or AI engines are loaded with expectations that AI will find ample and utilitarian business use-cases. Some of the large investment and sourcing deals across these AI companies are interlinked, and fragility in one part of the chain can have a cascading effect. As past bull markets show, when expectations fail to materialize, market corrections can be severe.
2. Will the market remain discerning?
One notable shift in the range-bound 2025 market was a reversion to more realistic valuations in the lower end of the stock universe. Over the previous four financial years, stocks that rose far outnumbered those that fell—suggesting that prices may have run ahead of intrinsic value. During this period, the Sensex gained about 55%.
In 2025-26, however, of the 4,386 stocks listed on the BSE, only 1,423, or about 32%, have shown gains. This is the first time since 2020-21 that this number has dropped below 50%. Typically, in a rising market, froth builds in smaller companies. In recent months, the top end of the market has rebounded—the Sensex is only 1% below its September 2024 high. However, the BSE MidCap and BSE SmallCap indices, which capture the second and third levels of business valuations, are still 6% and 11% below, respectively.
3. Will foreign investors return?
The Sensex is currently trading at a price-to-earnings (PE) ratio of about 23.5. By comparison, the BSE MidCap and BSE SmallCap indices are both trading at a PE multiple of 32.4. Those are rich valuations, and price in high expectations of earnings growth. Besides valuations, the other main factor is the amount of money flowing into the market to buy stocks. At present, while investor demand remains strong, some moderation and contrarian behaviour is being seen.
In 2025, the contrast between the two kinds of institutional investors got amplified further. Foreign portfolio investors (FPIs) were net sellers (value of stocks they bought minus the value of stocks they sold) in Indian equities. In contrast, mutual funds continued to pour money into Indian equities at record levels. In the last five years, mutual funds have made net investments of about ₹13.7 trillion in Indian equities, while FPIs have pulled out ₹0.8 trillion.
4. Will retail investors still believe?
The main reason for mutual funds emerging as progressively larger buyers of Indian equities is the growing interest from retail investors. As of November 2025, there were about 58.4 million unique investors in mutual funds, an increase of 3.8 million in the last eight months alone. Average monthly inflows into systematic investment plans (SIPs) have increased from ₹10,381 crore in 2021-22 to ₹28,207 crore in 2025-26.
While mutual funds are an indirect way of investing in the market, a feature of this bull run has also been retail investors investing directly. The number of demat accounts has increased from about 36 million in March 2019 to about 213 million in November 2025. But the pace of increase has dropped in 2025-26, with a monthly average addition of 1.7 million—the lowest for a financial year since 2020-21. Even the share of inactive demat accounts (accounts that have not seen any transaction in the last 12 months) has increased from 55% to 66%.
5. Will the IPO run continue?
A market that is not on steroids is a bit of a turn-off for retail investors. Continuous retail inflows—both directly and through mutual funds—have played a vital role in absorbing selling pressure. Any slowdown in these flows could alter demand-supply dynamics materially.
One segment of the stock market that will feel the pinch is companies looking to sell their shares to the public for the first time through initial public offerings (IPO). The last few years have been good, especially 2024-25. At the current run rate, 2025-26 is looking set to top that. A number of businesses in new spaces have listed. More are lined up to catch a market that has remained reasonably strong. Whether it will stay that way in 2026, with questions of business prospects, valuations, fund flows, and sentiment looming.
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