Why Sensex, Nifty Are Heading For Their Worst 9-month Run In 15 Years

Indian equities are heading towards one of their weakest starts to a calendar year in 15 years, with the Sensex down around 15% and the Nifty 50 lower by nearly 13% in the first nine months of calendar year 2026 (9MCY26). While the benchmarks have staged a modest recovery from their March lows in the current financial year, that bounce has done little to change the broader picture for 2026.

The Sensex and Nifty are now on course for their worst nine-month performance since 2011, when the two indices had plunged 19.8% and 18.9%, respectively, during the first nine months of the year. The current sell-off, however, has been shaped less by a domestic economic shock and more by a combination of global headwinds that have disproportionately affected large-cap stocks.

Foreign portfolio investor (FPI) selling has been at the centre of the pressure. FPIs pulled out around ₹2.50 lakh crore ($26.75 billion) from Indian equities during 9MCY26, according to NSDL data, even as domestic institutional investors (DIIs) pumped in ₹6.28 lakh crore, according to stock exchange data.

That domestic buying has provided an important cushion, but it has not been enough to offset the pressure on heavyweight stocks.

Large-caps Lead The Fall

The current market weakness is a story of external headwinds overpowering domestic tailwinds.

Elevated crude oil prices, rising US bond yields, geopolitical uncertainty and a weak rupee have combined to make emerging-market equities less attractive to foreign investors. Brent crude touched $106, while the US 10-year Treasury yield moved to around 5.2%, increasing pressure on inflation expectations, corporate margins and capital flows.

“The 5.67% sharp correction in Nifty in September, so far, was triggered mainly by elevated crude and high US bond yields. The correction turned intense during the last few days when FIIs turned big sellers,” said V K Vijayakumar, Chief Investment Strategist at Geojit Investments.

He pointed to ₹24,054 crore of FII equity selling over the last four trading days, describing the selling as rational in the context of US 10-year bond yields hovering around 5.2%.

The impact has been particularly visible in India's largest companies. Reliance Industries, HDFC Bank and Bharti Airtel, the three largest companies by market capitalisation, have declined between 16% and 27% during 9MCY26.

TCS, Infosys, Hindustan Unilever, Maruti Suzuki India, ITC, Mahindra & Mahindra and HCL Technologies have also fallen between 19% and 37%. With several of these companies carrying significant weight in benchmark indices, their declines have had an outsized impact on the Sensex and Nifty.

The sectoral picture reinforces the same trend. The Nifty IT index has plunged 27%, making information technology the biggest wealth destroyer during the period. Nifty FMCG has fallen 19%, while Nifty Oil & Gas and Nifty Financials have declined 13.6% and 10.7%, respectively.

“Persistent foreign institutional investor selling, driven by elevated US Treasury yields and shifting monetary policies, has directed significant sell-side pressure toward large-cap stocks,” said Mayank Jain, Market Analyst at Share.Market by PhonePe.

He added that fluctuating crude prices and cautious IT spending in international markets have created additional headwinds for energy and technology stocks.

September Made The Sell-Off Worse

The pressure on the benchmarks intensified sharply in September, as foreign investors became more defensive in the derivatives market.

According to Axis Direct, FII index shorts rose 41.9% to 2.95 lakh contracts from 2.08 lakh in August, while index longs increased by only 16.9% to 27,879 contracts. As a result, FIIs' net index short position widened to 2.67 lakh contracts from 1.84 lakh at the start of the September series.

The positioning showed that foreign investors were reluctant to rebuild meaningful long exposure to Indian benchmarks amid continued volatility. After two consecutive months of buying, FIIs also recorded net outflows of $3 billion during the September series.

The bearish positioning was more pronounced in index futures than individual stocks. FIIs remained net long in stock futures, although their exposure declined to $3.645 billion from $4.546 billion at the previous expiry. Nuvama Institutional Equities put FIIs' net long position in stock futures at 4.96 lakh contracts, compared with 6.01 lakh contracts at the beginning of the September series.

The selling pressure made September the worst Nifty derivatives series in a quarter century. The index fell 6.7% during the series, its sharpest such decline since September 2001, when it dropped 6.5%.

Nifty lost more than 1,400 points during the September series as elevated crude prices, a weak rupee, hardening bond yields and persistent foreign selling weighed on risk appetite.

The weakness has also extended beyond the monthly expiry. Nifty has ended seven consecutive weeks in the red and could record an eighth straight weekly decline if a recovery fails to materialise this week. Such a streak would be its longest since 2001, when the index declined for nine consecutive weeks.

Midcaps And Smallcaps Are Holding Up

The striking part of the 2026 market sell-off is that it has not been uniform.

While the Sensex and Nifty have fallen sharply, the Nifty Smallcap 100 has gained around 8-9% and the Nifty Midcap 100 has declined only around 1-2% during 9MCY26. That divergence reflects the different composition of the broader market and the stronger support coming from domestic investors.

The BSE Smallcap index provides an even clearer picture. Of its 1,345 constituents, around 651 stocks delivered positive returns during the first nine months of the year. Among them, 83 stocks more than doubled, 125 gained between 50% and 99%, while another 205 rose between 20% and 49%.

“Midcaps and smallcaps have performed relatively better, with lower FPI participation and strong domestic liquidity, including SIP flows above ₹30,000 crore a month, providing support,” said Ravi Singh, Chief Research Officer at Master Capital Services.

Jain said the broader market's resilience is also linked to its greater exposure to domestic themes. Unlike the large-cap benchmarks, which have substantial exposure to traditional banking, IT and energy, mid- and small-cap indices have greater representation from capital goods, power, defence and manufacturing.

“These industries continue to benefit directly from ongoing government infrastructure spending and local economic expansion,” Jain said.

Domestic mutual fund flows have therefore helped create a buffer against the foreign selling that has weighed heavily on large-caps.

The Economy-Market Disconnect

The market's weak performance has created an unusual divergence between the economy and equities.

“Two apparently contradictory trends - in the economy and markets - deserve attention. The economy is resilient and corporate earnings are improving, but the market is steadily going down,” Vijayakumar said.

He described the situation as one where external headwinds are overpowering domestic tailwinds. Brent crude at elevated levels and US 10-year yields around 5.2% have become major pressure points, while renewed FPI selling in September has added to the strain.

At the same time, foreign investors have not abandoned every segment of Indian equities. Vijayakumar noted that while FPIs have been sellers in large-caps, they have continued buying mid- and small-caps despite their relatively elevated valuations.

That divergence, however, may not persist indefinitely. The valuation gap between large-caps and the broader market could narrow if external pressures ease.

“The valuation differential between large-caps on one side and mid-and small-caps on the other, will not last long. A reversion to mean is inevitable. This will happen only when crude and US bond yields cool,” Vijayakumar said.

What Could Turn The Market Around?

The final quarter of the year could hinge heavily on factors outside India's direct control.

A decline in crude prices would ease pressure on India's import bill, inflation and corporate margins, while lower global bond yields could make emerging-market assets more attractive and encourage foreign investors to return to large-caps.

Jain said any de-escalation in US-Iran geopolitical tensions could lower global crude prices and provide a macroeconomic boost to India. He also pointed to festive-season demand, reasonable large-cap valuations after a prolonged period of consolidation and a possible year-end acceleration in government capital expenditure as potential domestic supports.

For Singh, a combination of softer crude, a stable rupee, lower global yields and renewed FPI inflows could support a recovery, with strong festive demand and improving earnings visibility providing additional triggers.

Vijayakumar also sees the correction differently from a purely defensive perspective. According to him, large-caps with strong growth prospects have reached more attractive valuations after the sell-off.

“From the Indian investors’ perspective, this sharp correction in the market presents an opportunity. Large-caps with good growth prospects have reached attractive valuations,” he said.

He identified financials, particularly large banks, along with capital goods, telecom and automobiles as segments where he sees buying opportunities.

The bigger question for the market, however, is whether the external pressures that have driven the 9MCY26 sell-off will ease. For now, domestic liquidity has prevented the weakness from spreading uniformly across the market, but elevated crude prices, high US yields, a weak rupee and persistent foreign selling continue to weigh on the benchmark indices.