Indian stock markets, including the Nifty and Sensex, have seen a sharp selloff, with the Nifty dropping below the 23,000 mark and the Sensex falling by 1,124 points (1.52%) to a nearly six-month low of 72,771 points. This downturn is attributed to several factors: Brent crude oil prices rising above $100 a barrel and reaching around $108, increasing US 10-year Treasury yields to 5.2%, and geopolitical tensions in the Middle East, particularly around the Strait of Hormuz. These global headwinds are impacting investor sentiment and adding pressure on the rupee and domestic inflation in India. Foreign Portfolio Investors (FPIs) have been net sellers, withdrawing approximately $2.1 billion from Indian equities in September, contributing to a total outflow of $26.2 billion so far this year, following $18.9 billion in 2025.
Despite the market's struggles, the earnings backdrop for Indian companies remains somewhat positive. June-quarter Nifty profit growth reached 18%, and ICRA expects India Inc's revenue growth to be between 13% and 15% in Q2 FY27. However, this has not been enough to offset concerns about India's valuation premium, as the Nifty is trading at 17.6 times forward earnings, a 77% premium to the MSCI Emerging Markets index, and 21.1 times compared to 11.7 times for Asia ex-Japan. Analysts note that global investors are finding cheaper valuations and stronger AI-linked earnings momentum elsewhere in Asia.
Major brokerages have revised their Nifty targets downwards. Citi cut its 12-month Nifty target to 26,000 from 27,000, lowering its valuation assumption to 18 times forward earnings from 19 times, citing geopolitical risks, potential earnings downgrades, and India’s limited exposure to the AI investment cycle. DBS maintains a neutral stance on India, highlighting that Indian equities are expensive compared to Asia ex-Japan, with estimated earnings-per-share (EPS) growth of 7.4% for India in 2026, significantly lower than the 76.3% projected for Asia ex-Japan. Domestic liquidity has provided some cushion, with local funds buying approximately $5.18 billion, but this has not been sufficient to restore India’s position in global portfolios or recreate the foreign demand needed to sustain its premium valuation.
The market's short-term outlook remains cautious. Nifty support levels are identified at 22,650-22,500, with 22,900-22,950 acting as a crucial resistance area. All major sectoral indices ended lower, with PSU Bank, Realty, and Financial Services leading the decline. The decline also saw NSE's stock price fall below its IPO price for the first time. The ongoing geopolitical tensions in the Middle East, particularly involving Iran and the Strait of Hormuz, are expected to keep oil market risks elevated and continue to influence market movements.
