Indian equities in a downturn: Why retail investors should stay disciplined

Many retail equity investors are perplexed by the downturn in the Indian equity market over the last one year. Ups and downs are common in the equity market. However, when retail investors see a continuous decline without knowing where the bottom lies, they worry.

Over the past year (as of late October 2026), India's benchmark indices have seen a sharp downturn.

The BSE Sensex is down approximately 13.17% compared with the same period last year, trading in the 72,650–73,100 range (down from higher levels over the preceding 12 months).

Also read | Specialised investment funds: What investors should know before investing

The NSE Nifty 50 is down roughly 14% year-to-date and is trading around the 22,400–22,500 level amid an extended weekly losing streak.

What is driving the market downturn?

The following key factors are driving the continued decline.

• Geopolitical and energy shocks: Tensions in West Asia and a surge in Brent crude oil prices (remaining above $100 per barrel) have strained India's import-dependent economy.

• Global yields and capital flight: Elevated US bond yields (surpassing 5%) have led to massive foreign portfolio withdrawals from emerging markets.

• Valuation pressures: High stock valuations relative to earnings growth have triggered persistent profit-booking and long-term institutional selling.

Now the question arises: how should retail investors approach their investments at this juncture?

First, they must maintain discipline and stick to their asset allocation plan. Under normal circumstances, if one has followed an asset allocation plan, one would naturally have shifted funds from fixed-income instruments and other investments into the equity portfolio.

Investors should also consider the following factors, which provide reassurance that the market may rebound one day and that equity investors may be rewarded for their patience.

Corporate earnings show resilience

In the long run, share prices reflect companies' profits. Let us analyse the sales and profit figures of companies.

For a common sample of 357 companies that have declared their September-quarter results so far, revenue grew at a nine-quarter high of 22.1% year-on-year, while net profit growth of 27.5% was faster than the 9.7% growth recorded in the June quarter.

This provides reassurance to investors that companies are performing well despite several headwinds, such as international geopolitical tensions and higher energy prices.

Valuations hit six-year low

India’s equity valuations are at their lowest levels in six years following the recent market decline, which was triggered by a range of factors, including foreign selling, a weaker rupee, higher crude oil prices and rising US bond yields.

It is a different matter that Indian equities remain more expensive than their emerging-market (EM) peers from the perspective of foreign investors. This may be relevant for foreign investors and not for domestic investors. However, this valuation gap is also relevant to Indian investors when comparing investment opportunities across asset classes and markets.

Also read | Repo rate up, stocks down: Should equity investors worry? History offers hope

The dollar-denominated MSCI India Index trades at around 18.5 times its 12-month forward price-to-earnings ratio, the lowest level since May 2020. It hit a record high of 24.54 times in September 2024, when the Sensex and Nifty reached their all-time highs.

Equity mutual funds sustain inflow

According to the Association of Mutual Funds in India (AMFI), net inflows into open-ended equity mutual funds during the last one year were as follows:

The above figures indicate continued support for the equity market from retail investors through the mutual fund route.

IPO market remains active

Initial public offerings (IPOs) indicate investors’ willingness to invest in newly listed companies. During the calendar year 2026, mainboard IPOs raised over ₹1.04–1.10 lakh crore across 81–84 or more issues.

High-profile issues, such as Reliance Jio’s massive public offering, attracted unprecedented investor demand, drawing record institutional and retail bids totaling over ₹64 lakh crore. Strong domestic mutual fund inflows, heavy retail participation through systematic investment plans (SIPs), and robust institutional appetite continue to drive the primary market boom, despite selective pricing by issuers.

Inflation and interest-rate pressures

India's retail inflation climbed to a 23-month high of 5.54% in September 2026, driven sharply by surging food and fuel prices. In response to rising price pressures, the Reserve Bank of India increased its benchmark repo rate by 25 basis points to 5.50% on 7 October 2026, marking its first-rate hike in nearly four years.

It is expected that interest rates may harden further in the coming months. As in the past, the RBI may succeed in bringing inflation down towards its target of 4%, within the permitted range.

Also read | IRDAI insurance reforms: Lower costs may not be enough without better claims

While other countries face inflation alongside relatively modest GDP growth, India remains one of the fastest-growing major economies.

The RBI has projected real GDP growth of 7.1% for FY 2026–27, an upward revision of 40 basis points. The World Bank has also upgraded its FY 2026–27 GDP growth forecast to 7.1%, from 6.6% predicted in April.

Staying the course amid volatility

Equity investors should prepare to stay invested for long-term gains and avoid panic-driven exits. As noted earlier, maintaining discipline and sticking to your asset allocation plan are essential.

(The content above is for information only, and does not constitute investment advice.)