Market Update
Equity
The Nifty slid 6.1% MoM in Sep’26, the second consecutive month of decline amid geopolitical headwinds and elevated crude prices. The Nifty is down 13.4% in 2026 YTD. Over the last 12 months, largecaps have fallen 8%, underperforming midcaps (+5% YoY) and smallcaps (+10% YoY). All major sectors ended lower. Technology (-11%), Financials Ex Banks (-9%), Automobiles (-9%), PSU Banks (-7%), and Capital Goods (-6%) were the top laggards MoM. In Sep’26, FIIs recorded outflows of USD 4.1 bn after two consecutive months of inflows. FII equity outflows stand at USD 28.3 bn in 2026YTD. DII inflows remained strong in Sep’26 at USD 8 bn, taking DII equity inflows to USD 67.8 bn in 2026YTD. 2QFY27 corporate earnings season has started on a strong note, demonstrating widespread outperformance across all key aggregates in pre-quarter updates of corporates. We expect strong broad-based earnings growth, with aggregate earnings for the NSE 200 surging 20% YoY+ (the highest growth in 11-quarters).
India’s economy and financial markets are caught between two contrasting forces. On one hand, healthy high-frequency indicators – including GDP growth, IIP, GST collections, all time high forex reserves, strong credit growth, and auto and cement volumes – all point to buoyant economic activity. Alongside a resilient corporate earnings trajectory, strong domestic liquidity and a vibrant primary market and rich deal pipeline further reinforce the constructive structural outlook for Indian equities. Conversely, persistent FII outflows from secondary markets and subdued foreign investor sentiment continue to act as a key burden.
India’s ongoing market consolidation, alongside continued earnings recovery from FY25 lows, has led to a sustained cooling in valuations from the highs seen in 2024. Large- and mid-caps have witnessed the steepest valuation corrections of 31% and 36%, respectively, from their respective peaks, while small-caps have corrected 7% on a 12-month forward P/E basis. The Nifty-50 and mid-cap indices now trade at 18% and 4% below their respective 10 year averages, while small-caps remain 24% above their 10 year average. With valuations well below their peaks, healthy earnings growth, and a resilient macroeconomic environment, we believe the risk-reward profile for Indian equities has improved meaningfully. The earnings trajectory over the next two quarters will be closely watched, particularly as the lagged impact of global headwinds, the potential impact of an El Niño-related monsoon shortfall, and the strength of festive demand become more evident. Despite these near-term uncertainties, we expect the underlying momentum in mid-teen double-digit earnings growth to remain intact.
Fixed Income
We believe global fixed income markets are undergoing a structural transition from the ultra-low interest rate environment that prevailed for much of the past two decades toward a regime characterized by a higher cost of capital. Persistent inflationary pressures, elevated fiscal deficits, increasing sovereign borrowing requirements and significant private-sector investment demand, particularly in technology and AI-related infrastructure, are creating sustained competition for savings and capital. Consequently, long-term bond yields and term premia are likely to remain higher than historical averages, limiting the scope for a return to the exceptionally low interest rates experienced in prior cycles.
India enters this environment from a position of relative strength, supported by healthy economic growth, strong foreign exchange reserves, a credible policy framework and a resilient financial system. However, because of external dependence on energy and capital outflows due to relative unattractiveness of Equities, India cannot remain fully insulated from global financial conditions. Elevated US Treasury yields, a stronger US dollar and higher crude oil prices increase funding costs, influence capital flows and raise the hurdle rate for attracting foreign investment.
Inflation risks have also broadened beyond food and fuel, with underlying price pressures becoming more persistent. Headline inflation has increased to 5.5% in Sep’26 from 4.8% last month. Core and Core ex precious metals have also inched up to 4.2% and 3.1% respectively. While growth remains resilient, RBI has accordingly adopted a more defensive stance, balancing inflation management, currency stability through repo rate hike of 25 bps and change in stance to ‘Calibrated Tightening’ in latest policy.
Against this backdrop, we expect interest rates to remain relatively elevated and volatile over the medium term. While recent market corrections have improved bond yields and enhanced carry opportunities, duration risk remains sensitive to global yield movements, inflation expectations and energy prices
Accordingly, our investment strategy remains focused on high-quality fixed income assets, with emphasis on accrual, carry and roll-down opportunities. We favour a measured approach to duration extension and will selectively increase interest rate exposure as visibility improves on inflation, crude oil trends and the global rate cycle.
Equity
The Nifty slid 6.1% MoM in Sep’26, the second consecutive month of decline amid geopolitical headwinds and elevated crude prices. The Nifty is down 13.4% in 2026 YTD. Over the last 12 months, largecaps have fallen 8%, underperforming midcaps (+5% YoY) and smallcaps (+10% YoY). All major sectors ended lower. Technology (-11%), Financials Ex Banks (-9%), Automobiles (-9%), PSU Banks (-7%), and Capital Goods (-6%) were the top laggards MoM. In Sep’26, FIIs recorded outflows of USD 4.1 bn after two consecutive months of inflows. FII equity outflows stand at USD 28.3 bn in 2026YTD. DII inflows remained strong in Sep’26 at USD 8 bn, taking DII equity inflows to USD 67.8 bn in 2026YTD. 2QFY27 corporate earnings season has started on a strong note, demonstrating widespread outperformance across all key aggregates in pre-quarter updates of corporates. We expect strong broad-based earnings growth, with aggregate earnings for the NSE 200 surging 20% YoY+ (the highest growth in 11-quarters).
India’s economy and financial markets are caught between two contrasting forces. On one hand, healthy high-frequency indicators – including GDP growth, IIP, GST collections, all time high forex reserves, strong credit growth, and auto and cement volumes – all point to buoyant economic activity. Alongside a resilient corporate earnings trajectory, strong domestic liquidity and a vibrant primary market and rich deal pipeline further reinforce the constructive structural outlook for Indian equities. Conversely, persistent FII outflows from secondary markets and subdued foreign investor sentiment continue to act as a key burden.
India’s ongoing market consolidation, alongside continued earnings recovery from FY25 lows, has led to a sustained cooling in valuations from the highs seen in 2024. Large- and mid-caps have witnessed the steepest valuation corrections of 31% and 36%, respectively, from their respective peaks, while small-caps have corrected 7% on a 12-month forward P/E basis. The Nifty-50 and mid-cap indices now trade at 18% and 4% below their respective 10 year averages, while small-caps remain 24% above their 10 year average. With valuations well below their peaks, healthy earnings growth, and a resilient macroeconomic environment, we believe the risk-reward profile for Indian equities has improved meaningfully. The earnings trajectory over the next two quarters will be closely watched, particularly as the lagged impact of global headwinds, the potential impact of an El Niño-related monsoon shortfall, and the strength of festive demand become more evident. Despite these near-term uncertainties, we expect the underlying momentum in mid-teen double-digit earnings growth to remain intact.
Fixed Income
We believe global fixed income markets are undergoing a structural transition from the ultra-low interest rate environment that prevailed for much of the past two decades toward a regime characterized by a higher cost of capital. Persistent inflationary pressures, elevated fiscal deficits, increasing sovereign borrowing requirements and significant private-sector investment demand, particularly in technology and AI-related infrastructure, are creating sustained competition for savings and capital. Consequently, long-term bond yields and term premia are likely to remain higher than historical averages, limiting the scope for a return to the exceptionally low interest rates experienced in prior cycles.
India enters this environment from a position of relative strength, supported by healthy economic growth, strong foreign exchange reserves, a credible policy framework and a resilient financial system. However, because of external dependence on energy and capital outflows due to relative unattractiveness of Equities, India cannot remain fully insulated from global financial conditions. Elevated US Treasury yields, a stronger US dollar and higher crude oil prices increase funding costs, influence capital flows and raise the hurdle rate for attracting foreign investment.
Inflation risks have also broadened beyond food and fuel, with underlying price pressures becoming more persistent. Headline inflation has increased to 5.5% in Sep’26 from 4.8% last month. Core and Core ex precious metals have also inched up to 4.2% and 3.1% respectively. While growth remains resilient, RBI has accordingly adopted a more defensive stance, balancing inflation management, currency stability through repo rate hike of 25 bps and change in stance to ‘Calibrated Tightening’ in latest policy.
Against this backdrop, we expect interest rates to remain relatively elevated and volatile over the medium term. While recent market corrections have improved bond yields and enhanced carry opportunities, duration risk remains sensitive to global yield movements, inflation expectations and energy prices
Accordingly, our investment strategy remains focused on high-quality fixed income assets, with emphasis on accrual, carry and roll-down opportunities. We favour a measured approach to duration extension and will selectively increase interest rate exposure as visibility improves on inflation, crude oil trends and the global rate cycle.
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