Macro to Micro: Tracing the Shifting Gears of India’s Equity Allocation

From 2023 through July 2025, the Indian equity market has experienced a complex and evolving pattern of sector rotation, underpinned by macroeconomic realignments, structural policy implementations, and adaptive institutional capital behavior. This period has reflected a pronounced shift from beta-driven positioning to fundamental sectoral screening and thematic conviction. As capital increasingly pursues sustainable growth trajectories, sector leadership has migrated in response to regulatory reforms, fiscal priorities, and earnings durability. This paper aims to synthesize a granular, empirically validated perspective on sector rotation by integrating proprietary institutional flow data, performance metrics, and valuation benchmarks across leading equity segments. Key data sources include SEBI, BSE, NSE, Bloomberg, Moneycontrol, and institutional disclosures from DIIs, FIIs, and leading brokerage research platforms.

From Finance to IT : How Institutional Capital Swapped Sectors Post-2023

Sectoral Transition Trajectory (2023–July 2025) :

In 2023, Indian equity markets saw a pronounced rotation toward cyclicals, led by Auto, Capital Goods, and Real Estate sectors. This trend was buoyed by increased gross fixed capital formation, PLI-linked private investments, and robust rural consumption. FIIs infused over ₹1.7 lakh crore during this phase, heavily favoring capital-intensive and policy-supported segments. Conversely, by mid-2024, global liquidity tightening, heightened geopolitical tensions, and rising volatility indices prompted a strategic retreat from high-beta sectors. The capital narrative pivoted towards earnings consistency, balance sheet hygiene, and structural scalability.

• Full Year 2023: Auto and Capital Goods delivered benchmark outperformance. The Auto sector’s EBITDA margins expanded by ~280 bps YoY, while order books in industrials grew by 1.6x, supported by core sector recovery.

• Early to Mid 2024: Institutional flows reallocated to Financials, particularly private-sector lenders and NBFCs, driven by sequential ROA improvement (~15–18%), declining GNPAs, and improving credit-deposit ratios.

• Second Half 2024: Telecom and service-intensive sectors surged, underpinned by digital inclusion, rising ARPU, aviation rebound, and supply chain integration. Hotel occupancy surpassed 75%, and logistics EBITDA margins breached 18%.

• 2023–Mid 2025: IT and Pharma sectors lagged as their earnings compression aligned with global demand softening. However, July 2025 witnessed the onset of FII accumulation in mid-cap IT firms capitalizing on GenAI-led transformation and intellectual property monetization.

• Q2 2025 Onward: Oil & Gas re-emerged due to pricing visibility, refining margin stabilization, and PSU capital efficiency enhancements. DIIs increased allocation in upstream and integrated entities.

By July 2025, the consensus allocation has markedly moved towards domestic secular themes, supported by monthly SIP inflows exceeding ₹30,000 crore and enhanced participation from domestic long-only funds.

Quarterly Table of FII Capital : Where the Money Moved and Why

The above flow trajectory validates a broad-based preference for sectors with operational visibility, margin resilience, and minimal global exposure. Notably, flows into Telecom and Financial Services highlight institutional willingness to underwrite medium-term re-rating potential.

What Drove the Shift : Valuation Compression, ROE Gaps & Macro Sensitivity

Sector-Wise Re-Rating and KPI Analysis (July 2025) :

• Information Technology: Nifty IT trades at 26.4x trailing P/E. Declining enterprise deal flow, TCV attrition (~7% YoY), and delayed digital onboarding in BFSI constrain earnings visibility. However, cost arbitrage and ER&D specialization are supporting mid-cap re-ratings.

• Pharma & Healthcare: Forward P/E has corrected to 19.7x. While export-linked earnings remain volatile, domestic hospitals and specialty formulations-maintained EBITDA margin growth above 18%. R&D/Sales ratios are rising, signaling long-term IP focus.

• Telecom: With ARPU crossing ₹180 and capex efficiency improving, sector ROCE has expanded to 14%. Structural re-rating to 23x forward P/E is supported by regulatory easing and data monetization.

• Financials: Stable GNPA (<3.1%), CASA improvement, and credit growth (~14.5% YoY) have resulted in steady valuation bands (15–18x forward P/E). Microfinance and MSME lending remain high-yield subthemes.

The Verdict : Sector Winners, Laggards, and What the Data Says About 2025

Over the 30-month period from early 2023 to July 2025, the Indian equity market has undergone a demonstrable pivot in capital allocation preferences, reflecting institutional adaptation to valuation discipline, policy recalibration, and sectoral earnings asymmetry. Financial Services has entrenched itself as the foundational overweight across portfolios, reinforced by robust credit performance, superior ROE, and benign asset quality metrics. Telecom’s transformation into a capital-efficient, ARPU-led compounder signals its transition from tactical to semi-structural allocation.

Service sectors have witnessed a sustained uplift in operating metrics, aided by mobility normalization and discretionary spend recovery. Meanwhile, IT and Pharma, despite near-term valuation contractions, continue to command strategic interest in innovation-heavy sub-segments. Investors are increasingly filtering opportunities through sector-specific metrics such as Same Store Sales Growth (Retail), TCV and R&D intensity (IT), Net Realization (Oil & Gas), and Load Factor or ADR (Services).

In essence, the future of sector rotation will likely align more closely with intrinsic growth drivers and operational rigor rather than pure macro extrapolation. The investor alpha in the next cycle may rest on the precision of sector KPI interpretation, as domestic liquidity continues to support broader market breadth. As of July 2025, the data articulates a maturing market intelligence regime among institutions, deeply rooted in metrics-driven analysis and policy-contextualized sector exposure.