Indian markets advance in May, powered by 22% defence rally and microcap strength

Indian equities posted broad-based gains in May 2025, led by a stellar 22% surge in defence stocks and strong double-digit returns in microcap indices, as investors rotated into risk-on segments amid improving domestic sentiment and supportive global cues.

The Nifty Microcap 250 jumped 12.10% in May, marking the strongest performance among major indices, while the Nifty Smallcap 250 gained 9.59% and the Nifty Midcap 150 rose 6.30%, according to Motilal Oswal. The benchmark Nifty 50 advanced 1.71% during the month, while the broader Nifty 500 climbed 3.50%, aided by sustained buying in industrials, consumer discretionary, and financial services.

Defence sector leads gains

Sectorally, defence stocks delivered the most significant outperformance in May, rallying 21.84%, supported by strong order visibility, government-led indigenisation efforts, and continued investor interest in strategic manufacturing.

The defence index has now gained 30.78% over the past 12 months, making it the top-performing sector both on a monthly and annual basis.

“All major sectors shown positive trend except for FMCG and Utilities which saw a downtrend during this period of -0.09% and -0.04% respectively,” Motilal Oswal said in the report.

Factor strategies show consistent gains

Factor-based investing strategies also posted solid gains. The Momentum index rose 5.40%, followed by the Quality index with a 4.82% gain. The Enhanced Value index advanced 4.20%, while the Low Volatility index recorded a 1.39% uptick.

The strength in factor strategies, particularly Momentum and Quality, reflected investor preference for trend-following and fundamentally sound stocks amid a backdrop of robust earnings and favourable macro indicators.

Broader market outshines large caps

The broader market significantly outperformed large-cap peers through the month. The Nifty Next 50 gained 3.49%, while the Nifty 500’s 3.50% rise was underpinned by strong participation from mid-cap and small-cap segments.

The microcap rally stood out not just in monthly performance but also in year-on-year returns. The Nifty Microcap 250 delivered a 13.74% gain over the past year, while the Nifty Smallcap 250 rose 7.72%.

This risk-on shift signalled a return of investor confidence in smaller companies, many of which are seen as high-growth bets with greater exposure to domestic consumption and capex cycles.

RBI surprise rate cut fuels early June gains

The rally gained further momentum into June, after the Reserve Bank of India delivered a larger-than-expected policy rate cut on Friday, June 6.

The RBI slashed the repo rate by 50 basis points and cut the cash reserve ratio (CRR) to improve banking sector liquidity—moves that were seen as highly accommodative and aimed at stimulating credit growth.

Rate-sensitive sectors responded sharply, with the realty index surging nearly 5% on the day. The BSE Sensex and Nifty 50 snapped a two-week losing streak, registering their first weekly gains in three weeks. The Sensex rose 737.98 points or 0.90%, while the Nifty added 252.35 points or 1% for the week ended June 6.

Global backdrop remains supportive

Global equity markets also contributed to the upbeat tone. The S&P 500 gained 6.15% in May, led by strength in information technology and consumer discretionary sectors. The Nasdaq 100 advanced 9.04%, while the Dow Jones Industrial Average added 3.94%.

Emerging markets posted mixed results. Taiwan rose 12.52%, Korea gained 7.69%, and South Africa climbed 4.87%, helped by easing trade tensions and optimism around tariff negotiations.

Gold prices declined 0.74% in May as geopolitical risks eased and demand for safe-haven assets moderated. In digital assets, Bitcoin rallied 11.11%, while Ethereum ended the month flat.

Nifty 50 closes May With gains

India’s large-cap benchmark, the Nifty 50, ended May with a 1.71% gain, its third consecutive monthly rise, capping a rally driven by sectoral strength, broader market leadership, and supportive domestic and global tailwinds.

With June beginning on a bullish note following the RBI’s unexpected rate easing, investors now turn to macroeconomic data and corporate earnings for further cues on the market’s trajectory.

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