Budget to Budget: PSU banks shine, smallcaps struggle, while global markets race ahead

Between the last Budget and now, benchmark indices delivered modest returns, masking wide dispersion beneath the surface. Midcaps outperformed, but smallcaps slipped marginally, down 0.5 percent, reflecting tighter liquidity and selective risk-taking.

• Midcaps and PSU banks outperformed, while FMCG, IT, and real estate lagged.
• Global indices outperformed India; Brazil and South Korea saw strong gains.
• FIIs sold in secondary markets; DIIs provided stability with steady inflows.

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From market performance to foreign flows, the period between the previous Union Budget and the upcoming one has been marked by sharp divergences across sectors, market segments and geographies, underscoring how global cues, policy expectations and earnings trends have reshaped investor behaviour.

Domestic markets: gains uneven, leadership narrow

Between the last Budget and now, benchmark indices delivered modest returns, masking wide dispersion beneath the surface. Midcaps outperformed, but smallcaps slipped marginally, down 0.5 percent, reflecting tighter liquidity and selective risk-taking.

Sectorally, metals and PSU-linked themes dominated. Nifty Metal surged 43.4 percent, while PSU Bank rallied 45.1 percent, emerging as the best-performing pocket of the market. Banking and financials also held firm, with Nifty Bank up 20.7 percent and Nifty Finance gaining 18.2 percent. Commodities rose 21 percent and auto stocks advanced nearly 15 percent, aided by pricing power and resilient demand.

In contrast, defensives and export-oriented sectors lagged. FMCG fell 12.5 percent, IT dropped 9.6 percent, and real estate corrected sharply by 17.9 percent. Pharma delivered muted gains of just 1.8 percent, while energy stocks rose a modest 5.6 percent, reflecting concerns around margins and policy uncertainty.

Global markets race ahead

India’s underperformance becomes more pronounced when viewed against global peers in dollar terms. While the Sensex and Nifty delivered returns of just 0.3 percent and 1.8 percent respectively (in dollar terms), several global indices posted outsized gains. The Nasdaq climbed 20.7 percent, the S&P 500 rose 15.4 percent, and Japan’s Nikkei jumped 37 percent.

Emerging markets also saw strong rallies, with Brazil’s Ibovespa surging 62.7 percent and South Korea’s Kospi posting a striking 109.5 percent gain. Even China-linked indices such as the Hang Seng and Shanghai Composite delivered returns in excess of 30 percent, highlighting how India ceded relative leadership over the budget-to-budget period.

FII behaviour: primary inflows, secondary outflows

Foreign investor behaviour reflects this cautious stance on Indian equities. Data from ACE Equities show a consistent divergence between primary and secondary market flows. While FIIs continued to deploy capital in primary issuances almost every month, secondary market flows were largely negative and volatile.

Notably, October 2024 saw a massive secondary market outflow, while January and February 2025 also recorded heavy selling. Even in months where secondary flows turned positive, such as March 2024, June 2024 and September 2024, the trend failed to sustain. This pattern suggests selective long-term interest via IPOs and blocks, alongside persistent risk-off positioning in listed equities.

DIIs hold the fort.

Domestic institutional investors emerged as the key stabilising force in equities over the budget-to-budget period, consistently absorbing supply amid persistent FII selling. DII equity inflows remained strong through most months, reflecting steady inflows from mutual funds and long-term domestic savings.

This robust domestic participation helped cushion market volatility, supported headline indices and underscored the growing role of local capital in offsetting global risk-off flows.

Stock-level churn across market caps

At the stock level, leadership changed dramatically. Among largecaps, Shriram Finance and Muthoot Finance nearly doubled, while metal names like Hindalco, Vedanta and Hindustan Zinc posted strong gains. PSU banks such as Canara Bank and Union Bank also featured among the top performers.

On the flip side, several former favourites corrected sharply. Siemens, Trent and ITC lost between 30 percent and 46 percent, while IT services majors like TCS and Wipro also featured among the top largecap losers.

Midcaps and smallcaps saw even sharper dispersion. MCX, Nalco and L&T Finance topped the midcap gainers list, while in smallcaps, Hindustan Copper and Force Motors delivered multi-bagger returns.

At the same time, stocks such as Aditya Birla Fashion and Tejas Networks listings saw steep drawdowns of over 50 percent.

What’s changed heading into this Budget

Compared with the previous Union Budget, markets are entering the new one with lower risk appetite, and heightened sensitivity to policy signals. The strong rally in PSU banks, metals and commodities contrasts with fatigue in consumption, IT and real estate, while persistent FII selling in secondary markets has capped headline index gains.

Against this backdrop, investors are looking to the upcoming Budget for clarity on growth support, fiscal discipline and sector-specific triggers that could broaden participation and restore confidence. Whether the next budget can reverse India’s relative underperformance and revive risk appetite remains the key question as markets turn the page to a new fiscal year.