Indian Markets Rebound Strongly on Large-Cap Valuations, FPI Optimism

India's stock markets closed higher on Friday, driven by attractive large-cap valuations and easing foreign investor outflows. The Nifty 50 and Sensex extended their winning streaks, marking the strongest weekly gains since July 2022. Key drivers included strong corporate leadership transitions, strategic investments, and sector-wide gains, with particular strength in mid- and small-cap stocks.

Indian Stock Markets Rally as Foreign Investors Return and Large-Caps Shine

After a cautious opening, Indian equity markets rallied on Friday, with benchmark indices climbing on renewed investor confidence, attractive large-cap valuations, and early signs of foreign capital returning to domestic equities. The gains mark a noteworthy shift in sentiment after a prolonged phase of selling pressure by foreign portfolio investors (FPIs).

The NSE Nifty 50 rose 0.51 percent to 23,312.45, while the BSE Sensex advanced 0.48 percent to 76,717.53 by mid-morning. Though both indices opened lower—each slipping around 0.2 percent—a sharp recovery through the session pushed them into solid positive territory.

Strong Weekly Performance Amid Market Recovery

With Friday’s upswing, the Nifty has now logged gains for five consecutive trading sessions, its longest winning streak in nearly two months. The index is on track for a 4 percent weekly jump—its best performance since July 2022. This rally, analysts say, is being powered by a combination of technical pullbacks and investor focus on fundamentally strong large-cap stocks, many of which are currently trading at attractive valuations.

"Currently, we are witnessing a relief or pull-back rally that could last up to 23,300-23,500 levels," noted Shrikant Chouhan, Head of Equity Research at Kotak Securities. He added that stable economic fundamentals and strong earnings growth projections should sustain the market's momentum, though geopolitical or tariff-related shocks could dampen sentiment.

Foreign Portfolio Investors Begin to Trickle Back

One of the key shifts underpinning this market reversal is the tentative return of foreign capital. FPIs, who had been net sellers of Indian equities since late 2023, have turned net buyers in two of the last four sessions. While it’s too early to declare a complete reversal in trend, the reduction in outflows has buoyed investor sentiment.

This softening of selling pressure coincides with a broader global recalibration, as markets react to evolving interest rate expectations and slowing inflation in key economies. For India, the inflow could signal renewed global confidence in its macroeconomic trajectory and corporate earnings potential.

Broad-Based Gains Across Sectors

All 13 major sectoral indices closed in the green, indicating that the rally is not limited to a few heavyweight stocks but has broader market support.

Notably, the IT sector—initially down over 2 percent due to Accenture’s warning about weaker U.S. discretionary spending—recovered smartly to end 0.4 percent higher. This rebound suggests that investors are willing to look past short-term headwinds, focusing instead on long-term digital demand and cost optimization trends.

The rally was even more pronounced in mid-and small-cap segments, often considered bellwethers for domestic investor confidence. The Nifty Smallcap 100 rose 1.8 percent, while the Nifty Midcap 100 climbed 1.3 percent, extending their outperformance streak relative to large-caps.

Stock Highlights: Smooth Transitions and Strategic Investments

Among individual stocks, Bajaj Finance stood out with a 3.1 percent surge. The non-banking financial company extended its record-setting rally after elevating long-time Managing Director Rajeev Jain to the role of Vice Chairman. Market watchers praised the move as a “smooth and well-planned” leadership transition, further cementing investor confidence in the company’s governance and vision.

Manappuram Finance also jumped 3 percent after announcing a significant investment from Bain Capital. The U.S.-based private equity giant is set to acquire an 18 percent stake in the gold loan provider for ₹43.85 billion (approximately $508 million), signaling robust institutional interest in India's alternative lending space.

Outlook: Optimism Tempered by Global Uncertainties

While the current rally offers much-needed respite, analysts caution that headwinds still loom. Global tariff tensions, geopolitical conflicts, and fluctuating commodity prices could inject volatility into markets. However, India’s consistent GDP growth, resilient corporate earnings, and improving investor flows position it well to absorb external shocks.

The coming weeks will be crucial in determining whether this rally has staying power or if it’s merely a short-term rebound. Much will depend on how FPIs continue to behave, corporate earnings for Q1 of FY26, and any potential policy shifts after the upcoming budget session.