Key Economic Events of 2025 and How They Impacted Investments

December 27, 2025

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Global economic events have a major impact on stock market dynamics and investing outcomes in today's interconnected world. International financial markets are influenced by events that happen anywhere on earth due to government actions, economic changes and geopolitical conflicts, impacting investor confidence and stock prices in a significant way.

For investors, particularly those with a cautious risk profile, understanding these linkages is essential. By recognising how global events translate into market movements, investors can better manage uncertainty, protect portfolios, and identify opportunities during periods of volatility.

Reflecting on 2025, India’s economy showed resilience amid global uncertainties, supported by robust growth, policy measures, and domestic investor activity. Let us explore how these factors shaped investments last year and what to watch for in 2026.

GDP Growth Surge

India’s economy delivered a strong performance, recording 8.2% growth in Q2 FY2025–26, up from 5.6% a year earlier, with Q3 matching this pace despite US tariff pressures. Manufacturing expanded by 9.1%, while services such as finance grew by 10.2%.

This solid economic backdrop translated into positive market sentiment. India’s Q2 FY2025–26 GDP grew 8.2% year-on-year. Equity markets rallied, particularly in consumer goods and infrastructure stocks, as consumer spending rose to 7.9%, accounting for nearly 60% of GDP. Private capital expenditure gained momentum, drawing domestic funds into mid-cap stocks and reinforcing India’s appeal as a long-term investment destination. Lower inflation and GST adjustments further supported corporate margins, lifting Nifty returns by mid-year.

RBI's Rate Cuts

Building on the growth momentum, monetary policy also turned supportive. The Reserve Bank of India cut the repo rate by 25 basis points to 5.25% on December 5, unlocking up to USD 16 billion in banking-system liquidity to support steady growth alongside contained inflation. This move followed softer core inflation data, with the Monetary Policy Committee signaling the possibility of further cuts if external risks, such as Indo–US trade negotiations, ease.

Markets responded positively. Lower borrowing costs boosted housing and automobile demand, lifting NBFC and real estate stocks, which gained after the announcement. Bond yields declined, improving the appeal of debt funds during equity volatility, while SIP inflows remained steady as EMIs became more affordable for retail investors. Overall, this policy shift helped cushion portfolios against foreign investor outflows.

Trade Agreements Momentum

On the external front, trade diplomacy gathered pace. India finalised key agreements, including the UK free trade agreement on May 6, expected to deliver USD 34 billion in annual trade gains through near-zero tariffs, alongside the rollout of the EFTA–TEPA agreement from October 1. The India–New Zealand pact, concluded in December, was among the fastest negotiated and focused on agricultural and pharmaceutical exports. Talks with the European Union continued, targeting a year-end conclusion despite ongoing challenges.

These agreements helped diversify India’s export base, shielding sectors such as pharmaceuticals and IT from US tariffs of up to 50% imposed in August over Russian oil purchases. Despite these pressures, November exports rose 19.4% year-on-year to USD 38 billion. Investors responded by favouring export-oriented sectors such as textiles and electronics, with mid-cap indices outperforming as global supply chains increasingly shifted towards India.

FPI and Domestic Flows

While global uncertainties weighed on foreign sentiment, domestic investors played a stabilising role. Foreign portfolio investors sold a record INR 1.58 lakh crore (USD 18.4 billion) worth of equities by December, erasing five years of net inflows amid higher US interest rates and renewed tariff concerns. Market volatility intensified, with early December alone witnessing USD 1.96 billion in outflows.

In contrast, retail investors and domestic institutional investors stepped in decisively. Retail inflows reached INR 4 lakh crore year to date, with SIP contributions up 80% year-on-year, while DIIs invested a net INR 6 trillion to offset FPI selling. This domestic support stabilised markets, favouring large-cap stocks and debt instruments. However, retail investors’ mid- and small-cap tilt amplified gains during rallies and deepened losses during corrections.

PLI Schemes Boost

Government-led manufacturing incentives provided another layer of support. Production-linked incentive schemes attracted USD 20.3–21 billion in investments by mid-year across 14 sectors, approving 806 projects and generating INR 16.5 lakh crore in sales along with 12 lakh jobs. Electronics, pharmaceuticals, and textiles emerged as key beneficiaries, supported by INR 1.76 lakh crore in committed investments under the Atmanirbhar Bharat initiative.

This policy push drove clear sectoral rotation in equity markets. PLI beneficiaries, particularly mobile handset manufacturers, recorded stock gains, drawing strong interest from mutual funds. Reduced import dependence helped stabilise the rupee amid oil price fluctuations, while capital expenditure cycles strengthened in automobiles and renewable energy, rewarding long-term equity investors.

Geopolitical Headwinds

Despite these positives, geopolitical risks remained a persistent challenge. Border tensions along the LAC and with Pakistan, including an April Pahalgam flare-up, created defence-related uncertainty, trimming Q2 GDP growth forecasts to 5.9% and resulting in estimated losses of INR 48,000 crore due to logistical disruptions in northern India.

Ongoing conflicts in Russia–Ukraine and the Middle East heightened oil price volatility; however, lower Brent crude prices helped cushion domestic inflation despite reduced Russian imports following US sanctions.

At the same time, the US–China rivalry opened up China+1 opportunities. Supply-chain shifts supported Indian electronics manufacturing, even as the USD 99 billion trade gap with China persisted. Although US tariffs affected exports, diversification through FTAs contributed to export growth.

These developments intensified FPI volatility, while cyber risks posed potential losses of INR 20,000 crore to the financial sector. Encouragingly, India’s sovereign rating was upgraded to BBB+ for the third time, partially offsetting fiscal pressures from higher defence spending.

These geopolitical developments unsettled short-term traders but ultimately favoured diversified portfolios, with defence and renewable energy stocks outperforming and oil hedging strategies delivering protection.

Looking back and forward

Overall, 2025 demonstrated that India’s economy remained steady amid global uncertainty. Strong GDP growth, supportive monetary policy, and targeted government incentives underpinned investment activity, while domestic investors helped absorb sustained foreign outflows. Although geopolitical risks persisted, they also accelerated localisation and manufacturing opportunities. As 2026 approaches, a balanced investment approach, with continued focus on infrastructure and renewable energy, may support stable and long-term returns.

-Nini Prasad

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Key Economic Events of 2025 and How They Impacted Investments

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