Liquidity, Flows & Reform Tailwinds: The Real Drivers Behind India’s 1,400-Point Rally

Indian markets have delivered 0% returns over the past 12 months, yet they've seen a remarkable 1400-point surge in just four weeks. This begs the question: what exactly is happening with Indian markets?

Trading View Chart showing Nifty 50 Returns over 12 months vs Last 4 months

The Disconnect: Stagnation vs. Short-Term Gains

The apparent contradiction between long-term stagnation and recent rapid gains points to a market grappling with multiple forces. While the past year might suggest a lack of overall growth, the recent upward momentum indicates underlying shifts and renewed investor interest in specific segments or broader sentiment changes.

Factors Contributing to Recent Volatility

Several factors could be at play:

• Global Cues:
  • International market trends, particularly from major economies, often have a significant ripple effect on Indian markets. Positive global sentiment or specific economic news could be driving the recent uptick.

Central Bank Actions: Major central banks, like the Federal Reserve, cutting interest rates can inject liquidity into global markets and signal a more accommodative monetary policy. For example, Jerome Powell cut interest rates on 17th September 2025 by 25 basis points, and he is expected to cut rates again this Wednesday by 25 basis points. Such actions can make emerging markets like India more attractive to investors seeking higher returns.

FedWatch - Probability for a 25 Basis Rate Cut

• Domestic Policy and Reforms:
  •  Any recent announcements regarding government policies, economic reforms, or fiscal measures could be injecting fresh optimism into the market. Investors often react positively to initiatives perceived as growth-oriented.

Recent Reforms by RBI

• Raised limit for loans against shares from ₹20 lakh to ₹1 crore per person.

Raised limit for IPO financing from ₹10 lakh to ₹25 lakh per person.

Removed ceiling on bank lending against listed debt securities.

Allowed banks to finance mergers and acquisitions of listed profitable companies.

Introduced continuous cheque clearing for same-day settlement.

Revised co-lending framework requiring lenders to retain at least 10% of each loan.

Launched retail sandbox for digital currency (CBDC) innovation.

Mandated two-factor authentication for digital payments from April 2026.

Proposed risk-based deposit insurance premium and Basel III implementation from April 2027.

Reduced provisioning for under-construction infrastructure projects to 1%.

Proposed limits on banks’ exposure to capital markets and acquisition financing.

We have already covered this in detail, here

• Goods and Services Tax (GST) Reforms: Recent GST reforms, implemented from September 22, 2025, have played a significant role. While September was primarily a compliance period, the positive impact on market demand became visible in October, subsequently reflecting in corporate earnings reports.

US - India Trade Deal:

• There are strong indications of an impending US-India Trade Deal, which is expected to significantly reduce tariffs on Indian goods. Concurrently, reports suggest that the US is in the final stages of a trade deal with China, which would result in the removal of 100% tariffs on Chinese imports. Both these developments are poised to inject considerable optimism into global markets, including India, by fostering increased trade and economic stability.

• Corporate Earnings Expectations:
  • Stronger-than-expected corporate earnings reports or positive outlooks from key companies could be fueling the rally. This suggests that while the broader market might have been flat, specific sectors or companies are performing well.

Recent corporate earnings reports have largely exceeded expectations, providing a significant boost to market sentiment. This positive trend indicates a robust performance from several key companies and sectors. The market anticipates further favorable earnings reports in the near future, which could continue to fuel the upward momentum.

FII/DII Activity:

•  The buying and selling patterns of Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs) significantly influence market movements. A surge in FII or DII buying could explain the rapid point increase.

Over the past two weeks, Foreign Institutional Investors (FIIs) have slowly re-entered Indian markets, moving away from their all-time low positions. This renewed interest culminated today, October 29, 2025, with FIIs making significant purchases exceeding ₹10,000 crores in the Indian markets. This influx of foreign capital is a strong indicator of improving global sentiment towards India and could be a major driver behind the recent market surge.

FII, DII Activity for 29 October, 2025

Outlook for the Remainder of 2025

Given the confluence of positive factors, the outlook for Indian markets for the rest of 2025 appears optimistic. The recent surge, coupled with favorable global and domestic conditions, suggests that the market is poised for continued growth.

Key Drivers for Continued Momentum:

• Sustained FII Inflows: The renewed confidence from FIIs, as evidenced by significant purchases, is a critical indicator. If this trend continues, it will provide substantial support to market valuations.

Further Rate Cuts: Anticipated rate cuts by major central banks, including the Federal Reserve, are expected to further enhance liquidity and make emerging markets like India more attractive to global investors.

Impact of Domestic Reforms: The full effect of recent domestic policy and GST reforms is yet to be completely realized. As these reforms mature and their benefits become more widespread, they are likely to provide additional impetus to economic growth and corporate performance.

Positive Corporate Earnings Trajectory: The consistent outperformance in corporate earnings reports suggests strong underlying business fundamentals. This positive trend is expected to continue, providing further justification for higher market valuations.

Government Focus on Growth: Ongoing government initiatives aimed at boosting economic activity and investor confidence are expected to create a conducive environment for market appreciation.

While global uncertainties always remain a factor, the current momentum, coupled with a series of positive announcements and reforms, points towards a strong finish for Indian markets in 2025. Investors will be closely watching the upcoming week for further clarity on US market developments and central bank actions, which will undoubtedly influence short-term movements.