RBI Annual Report FY 2025-26: Equity Markets, FPI-DII Flows & Rupee

The RBI Annual Report FY 2025-26 presents a year of sharp two-way movements across Indian financial markets. The equity market initially benefited from supportive monetary and fiscal conditions, but later faced pressure from tariff uncertainty, geopolitical tensions and AI-related concerns. At the same time, strong domestic institutional buying partly offset substantial foreign portfolio outflows, while the Indian rupee depreciated significantly against the US dollar. For RBI Grade B, UPSC, banking examinations and interviews, this chapter is important because it connects equity markets, capital flows, exchange rates, investor behaviour and external-sector pressures.

1. Indian Equity Market: A Year of Two Halves

The Indian equity market experienced bi-directional movements during 2025-26.

The broad pattern was:

Supportive domestic factors → equity gains in the first half → external/global shocks → decline in the second half

The first half was supported by:

monetary-policy easing,
fiscal-policy measures,
improving macroeconomic conditions,
strong domestic economic activity,
and favourable investor sentiment at various points.

The second half witnessed greater pressure from:

renewed tariff uncertainty,
geopolitical tensions,
developments in the Middle East,
foreign portfolio outflows,
and concerns related to artificial intelligence and technology valuations.

The result was a substantial decline in the benchmark equity index over the full financial year.

Sensex Performance

The BSE Sensex declined by 7.1 per cent during 2025-26, closing at 71,948 at end-March 2026.

Exam Point

Sensex in FY 2025-26: ↓ 7.1%, closing at 71,948.

This is a highly probable factual question.

2. Quarterly Equity-Market Story

The annual movement becomes easier to remember if we divide FY 2025-26 into four quarters.

Quarter	Major developments	Market implication
Q1	Tariff announcements, India-Pakistan conflict, Middle East tensions; RBI surplus transfer and June monetary easing	Two-way movement, then support
Q2	Tariff uncertainty, H-1B visa fee increase; rating upgrade, GST reforms and strong macro data	Market declined
Q3	Better Q2 earnings, positive global cues, US Fed rate cut, rising AI investment	Market gained
Q4	Tariff uncertainty, Middle East escalation, AI concerns; India-EU trade deal provided support	Market declined

This quarterly sequence is more useful for examinations than memorising the annual decline alone.

3. Q1: Monetary Easing and Domestic Policy Support

The first quarter saw considerable uncertainty.

Markets reacted to:

US tariff announcements,
the India-Pakistan conflict,
geopolitical developments in the Middle East.

However, domestic policy developments supported sentiment.

Two developments were particularly important:

3.1 Record RBI Surplus Transfer

The RBI transferred a record surplus to the Government of India.

This supported market sentiment because it strengthened perceptions regarding the government’s fiscal position and provided additional fiscal-space implications.

3.2 Front-Loading of Monetary Easing

The RBI’s monetary easing in June also supported financial-market sentiment.

Therefore, Q1 should be remembered as:

Global uncertainty + geopolitical risk + domestic monetary/fiscal support = volatile but supported equity market

4. Q2: Tariff Uncertainty Dominates

The second quarter was more challenging for equities.

The principal negative factors included:

continuing tariff uncertainty,
the increase in the US H-1B visa fee.

These developments created concerns regarding India’s export prospects and sectors dependent on global demand.

However, several domestic positives acted as counterweights:

India’s sovereign rating upgrade,
GST reforms,
strong macroeconomic data.

Despite these positives, the overall equity market declined during the quarter.

Why is this important?

It illustrates a central principle of financial markets:

Strong domestic fundamentals do not always prevent equity-market corrections when global risk sentiment deteriorates.

5. Q3: Earnings and Global Cues Improve Sentiment

The third quarter brought a reversal.

Equities benefited from:

better-than-expected Q2 corporate earnings,
positive global market cues,
a US Federal Reserve rate cut,
increased investment interest in technology and AI.

The combination of improving earnings and supportive global financial conditions helped Indian equities recover.

Exam Connection

A US Fed rate cut can influence Indian markets through:

US monetary easing → lower global yields → improved risk appetite → potential capital flows towards emerging markets → support to equities

However, the actual impact depends on global risk perception, valuation, domestic fundamentals and currency expectations.

6. Q4: Geopolitical Risk Returns

The final quarter reversed much of the improvement.

Indian equities came under pressure from:

renewed tariff uncertainty,
escalation of Middle East geopolitical tensions,
persistent concerns surrounding AI.

There were also positive developments, including:

the India-EU trade deal,
higher GDP growth projections for 2025-26,
upward revisions to growth projections for Q1 and Q2 of 2026-27 in monetary policy statements.

Yet these positives were insufficient to prevent the market decline.

Important lesson

Financial markets are forward-looking.

Therefore, good domestic economic data and positive policy developments can coexist with falling stock prices if investors simultaneously price in higher global risks.

7. Mid-Cap and Small-Cap Stocks

The correction was not restricted to the Sensex.

During FY 2025-26:

BSE 150 Midcap Index declined 1.0%
BSE 250 SmallCap Index declined 6.5%

This gives an important comparative picture:

Index	FY 2025-26 movement
BSE Sensex	-7.1%
BSE 150 Midcap	-1.0%
BSE 250 SmallCap	-6.5%

Exam Trap

Do not automatically assume that mid- and small-cap indices performed worse than the Sensex.

In this year:

Sensex (-7.1%) > SmallCap (-6.5%) > Midcap (-1.0%)

in terms of magnitude of decline.

8. Foreign Portfolio Investors: Heavy Equity Outflows

One of the most important developments was the large-scale selling by foreign portfolio investors (FPIs).

FPIs recorded net sales of ₹2.7 lakh crore in the domestic equity market during 2025-26, compared with ₹2.6 lakh crore in 2024-25.

FPI Flow

FY 2025-26: ₹2.7 lakh crore net sales

This means foreign investors, on a net basis, withdrew substantial funds from Indian equities.

Possible market implications include:

FPI selling → lower demand for equities → downward pressure on stock prices

But the impact on the broader Indian market was partly counterbalanced by domestic institutional investors.

9. Domestic Institutional Investors: The Major Counterweight

Domestic institutional investors (DIIs) were strong buyers.

During FY 2025-26, DIIs recorded:

₹8.5 lakh crore of net purchases

compared with:

₹6.1 lakh crore in 2024-25.

This is one of the most important numbers from the chapter.

FPI vs DII

Investor group	FY 2025-26
FPI	₹2.7 lakh crore net sales
DII	₹8.5 lakh crore net purchases

What does this tell us?

Indian equity markets increasingly have a strong domestic institutional support mechanism.

When FPIs sell heavily, domestic institutions can absorb part of that selling pressure.

This does not mean FPI flows have become irrelevant. Foreign flows remain important because they influence:

market liquidity,
asset prices,
exchange rates,
investor sentiment,
and India’s integration with global capital markets.

10. Primary Equity Market Remains Strong

An important contrast emerges from the report:

Secondary-market equity prices weakened, but primary-market mobilisation remained strong.

This distinction is extremely important for exams.

The primary market relates to new securities being issued to raise capital, whereas the secondary market involves trading of already-issued securities.

Despite volatility in listed equity prices, Indian companies continued to mobilise significant resources.

11. QIP and Preferential Allotments

Qualified institutional placements (QIPs) and preferential allotments mobilised:

₹2.2 lakh crore

during FY 2025-26.

This was broadly the same as in the previous year.

Why does this matter?

Strong QIP activity indicates that companies continued to have access to equity financing despite volatility in secondary markets.

12. IPO, FPO and Rights-Issue Mobilisation

Through:

Initial Public Offerings (IPOs),
Follow-on Public Offers (FPOs),
rights issues,

companies mobilised approximately:

₹2.3 lakh crore

in FY 2025-26, compared with ₹2.1 lakh crore in the previous year.

Thus, primary-market activity remained resilient.

Quick Comparison

Segment	FY 2025-26
QIP + preferential allotments	₹2.2 lakh crore
IPO + FPO + rights issues	₹2.3 lakh crore

13. FPIs Were Net Buyers in the Primary Market

An interesting contrast emerges within FPI activity.

While FPIs were net sellers in the secondary domestic equity market, they were net purchasers in the primary market.

This distinction is highly useful for analytical questions.

It suggests that foreign investors did not uniformly withdraw from Indian equity exposure. Their behaviour differed depending upon the type of issuance and investment opportunity.

Remember:

FPI = net seller in secondary equity market

but

FPI = net purchaser in primary market

for the period discussed in the report.

14. Mutual Funds and SIPs: Domestic Savings Supporting Markets

Another major structural development was the continued strength of systematic investment plans (SIPs).

The average monthly SIP contribution to mutual funds increased to ₹29.1 thousand crore in FY 2025-26, from ₹24.1 thousand crore in 2024-25.

Increase

₹29.1 thousand crore − ₹24.1 thousand crore = ₹5.0 thousand crore

So average monthly SIP contribution increased by approximately ₹5,000 crore.

Why is this significant?

SIPs represent a relatively systematic channel through which household savings enter financial markets.

This contributes to the growing importance of domestic institutional and retail participation.

The broader chain is:

Household savings → mutual funds → equity/debt markets → corporate financing

This helps strengthen domestic sources of market liquidity.

15. Equity Markets: The Complete Flow Picture

The FY 2025-26 equity-market story can therefore be represented as follows:

Global uncertainty increased

↓

FPIs sold ₹2.7 lakh crore of domestic equities

↓

Domestic institutional investors purchased ₹8.5 lakh crore

↓

SIP contributions remained strong at ₹29.1 thousand crore per month

↓

Primary-market mobilisation remained robust

↓

Nevertheless, Sensex declined 7.1%

This is much more important than memorising individual numbers separately.

16. Indian Rupee: Significant Depreciation

The second major theme of the chapter is the Indian rupee.

During FY 2025-26, the rupee depreciated significantly against the US dollar.

Full-Year Movement

The Indian rupee depreciated by:

9.9% during FY 2025-26

This was one of the major developments in India’s financial markets.

17. Rupee Movement During H1

The rupee initially strengthened during the first half.

It reached a year-high of:

₹83.75 per US dollar on May 2, 2025

It subsequently weakened and ended the first half at:

₹88.79 per US dollar

This represented a depreciation of 3.8% during H1.

Memory Chain

May 2, 2025 → ₹83.75/$ → H1-end ₹88.79/$

18. H2: Depreciation Accelerates

The rupee weakened further during the second half.

At end-March 2026, it closed at:

₹94.83 per US dollar

The rupee depreciated by 6.4% during H2.

Therefore:

Period	Rupee movement
H1	-3.8%
H2	-6.4%
FY 2025-26	-9.9%
End-March 2026	₹94.83/USD

19. Why Did the Rupee Face Depreciation Pressure?

The report points towards a combination of:

trade uncertainty,
portfolio-equity outflows,
geopolitical developments,
and global financial-market conditions.

A particularly important relationship was:

Foreign portfolio equity outflows

↓

Reduced demand for Indian financial assets

↓

Potential pressure on capital flows

↓

Depreciation bias for INR

This is also why the equity-market and forex-market sections should be studied together rather than separately.

20. Forward Premia

Forward premia remained broadly range-bound until November 2025.

From December onwards, forward premia increased amid heightened geopolitical tensions.

Exam Interpretation

Forward premium can be influenced by:

interest-rate differentials,
expectations regarding the exchange rate,
demand and supply for forward contracts,
and hedging requirements.

For the FY 2025-26 narrative, remember the timing:

Range-bound until November → increased from December amid geopolitical tensions.

21. NEER and REER: What Happened to the Rupee in Effective Terms?

The bilateral INR/USD exchange rate does not tell the complete story.

The RBI therefore also monitors:

NEER — Nominal Effective Exchange Rate
REER — Real Effective Exchange Rate

These are broader measures of the rupee against a basket of currencies.

According to the report:

40-currency NEER depreciated 6.9% year-on-year
REER depreciated 7.5% year-on-year

by end-March 2026.

Exam Table

Indicator	FY 2025-26 / end-March 2026
INR/USD depreciation	9.9%
40-currency NEER depreciation	6.9%
REER depreciation	7.5%
End-March INR/USD	₹94.83

22. NEER vs REER: The Conceptual Difference

This distinction is extremely important for RBI Grade B and UPSC.

NEER

Nominal Effective Exchange Rate measures the weighted average value of the domestic currency against a basket of foreign currencies, without adjusting for relative price levels.

REER

Real Effective Exchange Rate adjusts the effective exchange rate for relative price/inflation differences.

Therefore:

NEER = nominal competitiveness indicator

REER = inflation-adjusted competitiveness indicator

For examination purposes, never treat NEER and REER as interchangeable.

23. What Does REER Depreciation Imply?

A depreciation in REER, other things equal, can indicate an improvement in India’s price competitiveness relative to trading partners.

But interpretation requires caution.

Exchange-rate competitiveness depends on:

relative inflation,
productivity,
trade structure,
global demand,
commodity prices,
and other external factors.

Thus, REER depreciation should not automatically be interpreted as an improvement in export performance.

24. Equity–Forex Link: One of the Most Important Analytical Connections

The RBI Annual Report FY 2025-26 provides an excellent example of how financial markets interact.

Consider the sequence:

Step 1: Global uncertainty rises

Tariffs, geopolitical tensions and global risk concerns increase.

Step 2: Foreign investors reduce equity exposure

FPIs record large net equity sales.

Step 3: Domestic market comes under pressure

Equity indices decline.

Step 4: Capital-flow pressures affect the rupee

Lower portfolio inflows/outflows can contribute to exchange-rate pressure.

Step 5: INR depreciates

The rupee ends FY 2025-26 at ₹94.83/USD.

The report itself notes a depreciating bias for the rupee amid trade uncertainty and portfolio equity outflows.

This is an excellent framework for descriptive and interview answers.

25. But Domestic Investors Provided a Shock Absorber

The Indian market had an important counterbalancing mechanism.

While:

FPI net sales = ₹2.7 lakh crore

domestic institutional investors recorded:

DII net purchases = ₹8.5 lakh crore

and average monthly SIP contributions reached:

₹29.1 thousand crore.

Therefore, India’s domestic financial savings increasingly provide support during episodes of foreign-investor risk aversion.

This does not eliminate market volatility, but it can reduce dependence on foreign portfolio flows.

26. Primary vs Secondary Market: A Crucial Exam Distinction

One of the best conceptual lessons from this chapter is the difference between the primary and secondary markets.

Primary Market	Secondary Market
New securities are issued	Existing securities are traded
Raises fresh capital	Provides liquidity and price discovery
IPOs, FPOs, rights issues, QIPs	Stock-exchange trading
FY25-26 mobilisation remained strong	Sensex declined 7.1%

Thus:

Weak secondary-market performance does not necessarily mean weak corporate fundraising.

This is precisely what FY 2025-26 demonstrated.

27. High-Value Numbers to Memorise

For RBI Grade B preparation, the following numbers deserve priority.

Equity Market

Sensex decline: 7.1%
Sensex closing level: 71,948
Midcap decline: 1.0%
SmallCap decline: 6.5%

Institutional Flows

FPI net equity sales: ₹2.7 lakh crore
DII net equity purchases: ₹8.5 lakh crore

Primary Market

QIP + preferential allotments: ₹2.2 lakh crore
IPO + FPO + rights issues: ₹2.3 lakh crore

Mutual Funds

Average monthly SIP: ₹29.1 thousand crore
Previous year: ₹24.1 thousand crore

Forex Market

INR depreciation: 9.9%
H1 depreciation: 3.8%
H2 depreciation: 6.4%
Year high: ₹83.75/USD on May 2, 2025
H1-end: ₹88.79/USD
End-March: ₹94.83/USD
40-currency NEER depreciation: 6.9%
REER depreciation: 7.5%

28. Most Probable Exam Questions

Q1. By how much did the BSE Sensex decline during FY 2025-26?

Answer: 7.1%.

Q2. At what level did the Sensex close at end-March 2026?

Answer: 71,948.

Q3. What was the net FPI flow into India’s domestic equity market?

Answer: Net sales of ₹2.7 lakh crore.

Q4. What were DII net purchases?

Answer: ₹8.5 lakh crore.

Q5. What was the average monthly SIP contribution?

Answer: ₹29.1 thousand crore.

Q6. What was the INR/USD exchange rate at end-March 2026?

Answer: ₹94.83 per US dollar.

Q7. How much did the rupee depreciate during FY 2025-26?

Answer: 9.9%.

Q8. What was the depreciation of the 40-currency NEER?

Answer: 6.9%.

Q9. What was the REER depreciation?

Answer: 7.5%.

Q10. What was the mobilisation through IPOs, FPOs and rights issues?

Answer: ₹2.3 lakh crore.

RBI Annual Report FY 2025-26 — Key Takeaways

Sensex declined 7.1% during FY 2025-26.
Sensex closed at 71,948 at end-March 2026.
The equity market showed two-way movements, with stronger performance in parts of H1 and weakness in H2.
Global tariff uncertainty and geopolitical tensions were important sources of market volatility.
FPI net equity sales stood at ₹2.7 lakh crore.
DII net purchases reached ₹8.5 lakh crore, providing substantial domestic support.
Midcap declined 1.0%, while SmallCap declined 6.5%.
QIP and preferential allotments mobilised ₹2.2 lakh crore.
IPOs, FPOs and rights issues mobilised ₹2.3 lakh crore.
Average monthly SIP contribution rose to ₹29.1 thousand crore.
The rupee depreciated 9.9% during FY 2025-26.
INR ended March 2026 at ₹94.83/USD.
The 40-currency NEER depreciated 6.9%, while REER depreciated 7.5%.
Forward premia increased from December amid geopolitical tensions.
The year demonstrates the increasing importance of domestic institutional flows as a counterweight to foreign portfolio outflows.

RBI Grade B / UPSC Revision Box

Remember this chain:

Sensex ↓ 7.1%

FPI → ₹2.7 lakh crore net sales

DII → ₹8.5 lakh crore net purchases

SIP → ₹29.1 thousand crore/month

IPO + FPO + Rights → ₹2.3 lakh crore

QIP + Preferential → ₹2.2 lakh crore

INR depreciation → 9.9%

INR end-March → ₹94.83/USD

NEER → -6.9%

REER → -7.5%

One-line analytical conclusion

FY 2025-26 combined equity-market volatility and significant rupee depreciation with strong domestic institutional participation and resilient primary-market mobilisation.

Final Exam Perspective

For RBI Grade B, do not study this chapter as a collection of stock-market statistics. The real value lies in understanding the interaction among global risk, FPI flows, DII support, primary-market financing, domestic savings, equity prices and exchange rates.

The most probable questions are likely to test either exact figures or relationships between variables. A strong answer should therefore connect the numbers rather than merely list them.

Next Part — Part 8:
RBI Annual Report FY 2025-26: Government Finances — Fiscal Deficit, Revenue, Expenditure, Borrowing and Public Debt