As Santa bails on Dalal Street, domestic investors come to the rescue

The Sensex is on track to end December marginally in the red, extending last year’s weak finish and marking the sixth time in close to a decade that the benchmark index has closed the holiday month with losses.

A Mint analysis shows the index headed for a modest decline of about 0.2% in December, following a 2% fall in December 2024. The only worse December in recent years was 2022, when the Sensex dropped almost 4%. This subdued performance contrasts sharply with December 2020 and 2023, when markets surged 8.2% and 7.8%, respectively.

That weakness stands out because December has historically been one of the strongest months for Indian equities.

Over the past 46 years, the market has delivered positive returns in roughly three out of every four Decembers. Often, those gains were outsized: December ranked among the top three performing months 12 times and placed fourth or fifth another 12 times. Yet it has also delivered sharp losses, emerging as the worst-performing month in both 1990 and 2014. This year, after the sharpest fall of 5.5% in February, followed by declines in January, July and August, December is on track to be the fifth-worst month of 2025.

Domestic cushion

Despite the weak finish, the damage has been far more contained than it could have been. The key reason: sustained buying by domestic institutional investors, which has helped markets avoid a much steeper correction even as valuations remain stretched and global uncertainty persists.

“If it weren’t for domestic institutional investors, markets would not have closed at current levels in 2025 and could have seen a much deeper correction," said Anand K Rathi, co-founder of Mira Money.

Foreign investors pulled out nearly ₹1.55 trillion during the year, but Indian domestic investors stepped in with investments of about ₹7.55 trillion in 2025, helping cushion the fall.

“Lack of strong returns in alternative asset classes such as debt and real estate this year, pushed more domestic institutional investors (DIIs) money towards equities. Without DII buying, markets could easily be at least 10% lower than current levels," Rathi added.

The divergence between domestic and foreign flows became even starker this month. DIIs provided strong support to the market with net buying of ₹59,903 crore, while foreign portfolio investors (FPIs) remained cautious and sold ₹11,830 crore. This was a sharp contrast to December 2024, when both were net buyers—DIIs invested ₹34,195 crore and FPIs ₹15,446 crore.

December 2023 also saw healthy participation from both sides, with DIIs investing ₹12,942 crore and FPIs ₹66,135 crore. The shift in 2025 underscores how domestic money has increasingly become the market’s primary stabilizer when foreign flows turn volatile.

That pattern is expected to persist. Experts say foreign investors may continue booking profits given India’s premium valuations, while domestic institutions are likely to step in whenever overseas selling intensifies.

The missing year-end rally, however, has less to do with seasonal patterns and far more to do with macro uncertainty.

“Sticky global inflation, delayed rate-cut expectations, geopolitical risks, and volatile currency moves have kept FPIs defensively positioned. In such an environment, investors prefer to protect year-to-date gains rather than chase seasonal trends," said Nikunj Saraf, chief executive officer of Choice Wealth.

“So the missing Santa rally looks less like a broken tradition and more like markets respecting macro reality. Seasonality still exists — but today, it takes a backseat when global risk appetite is fragile," Saraf added.

Beyond seasonality

Analysts also caution against reading too much into month-specific patterns altogether.

“There is no fixed rule in markets that one month is always good and another is always bad," said Rathi of Mira Money. “Earlier, investors believed in ideas like ‘sell in May and go away’, but such seasonal patterns have largely faded. Today, market movements are driven far more by economic factors and news flow, both domestic and global."

Some market participants have questioned whether liquidity has been diverted from secondary markets into the booming primary market. But fund managers argue that this has played only a limited role.

“While 2025 has been the strongest year for IPOs in India, we would attribute the weakness more to global factors than primary markets taking away liquidity," said Sandip Bansal, deputy chief investment officer at ASK Investment Managers.

He pointed to a combination of pressures, including a weaker rupee that has hit record lows against the US dollar, continued overseas outflows, profit booking after recent market highs, global investors’ preference for markets with stronger AI exposure, and uncertainties arising from delays in signing the India-US trade deal.

Saraf echoed this view: “Rising IPO and primary-market participation has played a role, but it is more of a temporary liquidity diversion than a structural drain," Large IPOs do absorb short-term capital, particularly from institutional investors and high-net-worth individuals, but that money typically returns to secondary markets once listings stabilize. “On its own, this factor is not strong enough to suppress an entire month’s rally," he added.

For long-term investors, experts say, the recent softness matters less than the underlying shift it reveals: a market increasingly anchored by domestic capital and guided by macro fundamentals rather than calendar-driven expectations. Short-term corrections, they argue, should be viewed less as a warning sign—and more as an opportunity.