Indian equities endured a turbulent first half of 2026 as geopolitical tensions, persistent foreign selling, earnings downgrades and concerns over artificial intelligence weighed on investor sentiment.
The war in West Asia heightened volatility in crude oil prices, bond yields, and the rupee, while an unusually harsh summer raised concerns about agriculture and rural consumption. Technology stocks bore the brunt of the sell-off as investors reassessed the outlook for traditional IT services amid rapid advances in generative AI.
India trails global peers
Amid this backdrop, India ranked among the weakest-performing major equity markets in the first half of 2026. The Nifty 50 declined 8.7%, marking its worst first-half performance since 2022.
South Korea’s Kospi, Taiwan’s Taiex and Japan’s Nikkei 225 emerged as top gainers, gaining about 40-100% during the six-month period. India, however, still managed to outperform Indonesia and Hong Kong, where benchmark indices declined 11-34%.
“India’s underperformance in the first half was driven more by global developments than by weakness in the domestic economy,” said Feroze Azeez, joint chief executive officer at Anand Rathi Wealth Ltd.
According to Azeez, the US-Iran conflict pushed crude oil prices above $100 a barrel, raising India’s import bill, while the rupee’s nearly 6% depreciation further reduced returns for overseas investors. Global capital also shifted towards AI-led markets such as Taiwan and South Korea, although strong domestic participation helped limit the decline in Indian equities.
Valuations remained relatively elevated despite the correction. India traded at 22.2 times trailing twelve months earnings, compared with 17 times for the UK, 17.2 times for Germany, 11.9 times for Hong Kong and 19.4 times for China. It was, however, cheaper than the US at 27.7 times, Japan at 25.9 times, and Taiwan at 30.8 times.
“Nifty’s relative underperformance reflects high valuations and repeated earnings downgrades over the past two years,” said Anand K. Rathi, co-founder of Mira Money. India’s premium had historically been supported by consistent earnings growth, while domestic institutional flows cushioned the decline, he added.
IT bears the brunt
Information technology was the worst-performing major sector, with the BSE IT index plunging a record 30%. Consumption-linked sectors also struggled. The BSE FMCG index declined more than 10%, while automobiles ended in the red, registering a 6% fall. Realty and oil and gas indices fell 4-9%.
But there were standout winners. The BSE Power index gained about 25%, capital goods advanced 22%, and telecommunications rose 17%. Healthcare, utilities and metals climbed 9-13%.
Mira Money’s Rathi said IT could remain under pressure until investors gain clarity on how AI will affect earnings and business models. Some bottom-fishing may emerge, but a sustained recovery would require better visibility on growth.
A recent report by Motilal Oswal Financial Services also expects IT demand to remain weak in the first quarter of FY27 due to macroeconomic uncertainty, geopolitical risks, and AI-related disruptions. Infosys and HCLTech have trimmed the upper end of their FY27 guidance.
The brokerage expects large-cap IT companies to report constant-currency growth ranging from a 1.5% decline to a 2% increase. Mid-cap companies may fare better, with growth estimated between a 1% decline and a 4.8% increase.
Though analysts see better opportunities in domestic-facing sectors. Rathi said banking stocks appeared more attractive following recent Reserve Bank of India measures and supportive credit growth conditions. Select chemical companies could also benefit from import substitution.
Azeez expects financial services, capital goods, infrastructure and construction to remain in focus, supported by healthy credit growth, government capital expenditure, strong order books and improving economic activity. He said the correction had brought valuations closer to reasonable levels, creating opportunities for long-term investors.
Foreign selling intensifies
Persistent foreign selling was another major drag on the Indian market. Foreign portfolio investors withdrew a record ₹2.74 trillion from domestic equities during the first six months of 2026. But domestic institutional investors continued to provide a counterweight. Mutual funds, insurance companies and other local institutions invested a net ₹4.63 trillion in equities—the highest for the comparable period since 2017—helping absorb foreign outflows and limit the decline in the broader market.
Rathi expects overseas flows to improve once corporate earnings show a sustained recovery. Small- and mid-cap companies have begun showing signs of earnings improvement, valuations are more attractive, and the rupee appears relatively stable, he said.
According to Azeez, “Earnings are expected to grow 12% in FY27 and 14% in FY28, while valuations have become more reasonable after the correction.”
The main risks for the second half include another spike in crude oil prices, renewed geopolitical tensions, a weak monsoon and any global risk-off event that pushes money back into dollar assets. If these risks remain contained, foreign flows are likely to improve gradually, he added.
About The Author
