Equity Outlook - October 2026

Indian equities declined in the month of September, as the renewed escalation in West Asia pushed crude back above USD 100 and offset the positive sentiment built over the previous two months. The US Fed raised rates for the first time since 2023 and signaled one more hike this year, which led to further hardening of global bond yields. Foreign investors turned sellers again after two months of buying, while domestic institutions continued to absorb the selling. The rupee touched a record low during the month. With domestic inflation staying above the RBI's target, the Indian central bank is likely to start a rate hike cycle in the near term. A prolonged period of high crude and rising rates could have a bearing on earnings and valuations going forward.

Table 1: Performance of Major Indices during the Month (CAGR Returns)

Source: Bloomberg, Data as of 30^th September 2026.
Past performance may or may not be sustained in the future.

Domestic Growth Resilient, External Pressures Intensify

• Domestic demand remains reasonable as indicated by core segments like banking, auto and real estate. However, a below normal monsoon with uneven spread, especially in southern and eastern regions, could weigh on rural income.

• Credit demand remained healthy across retail, small business and corporate segments. The recent Foreign-currency deposit (FCNR-B) inflows have increased banking-system liquidity, but they could cause temporary volatility in reported margins until the funds are deployed.

• Insurance stocks corrected in the last week of the month after the regulator released a consultation paper proposing product and channel-wise commission caps and lower expense limits. If implemented, the sector could see some near-term adjustment as insurers and their distribution partners realign business models. We see this as a one-time reset rather than a structural negative. Long-term drivers remain intact, with low penetration, rising health awareness and healthy premium growth. The final regulatory framework may also evolve after industry consultation.

• Input cost pressures intensified during the month as energy and commodity prices moved higher. While the earnings trend remains reasonable, the coming quarters will reflect the crisis-driven input costs. Margin pressure is likely in autos, cement, chemicals, consumer durables and capital goods, as price increases typically lag cost inflation. The pace at which companies pass on the higher costs will be the key monitorable.

Near-Term Drivers We Are Watching

• Durability of the West Asia de-escalation: Crude remains a key swing factor for India’s growth and inflation. A durable solution to the crisis is critical for the growth trajectory.

• Earnings and input costs: Earnings growth is likely to see moderation due to limited pass-through of crisis-driven input cost escalation, largely in cement, autos, capital goods and chemicals. Market is likely to overlook the near-term earnings impact as a durable solution to west Asia crisis would moderate input prices over medium term.

• Monsoon: After two good rural years, the progress and spread of this year’s monsoon will be keenly watched. A weak monsoon would have a bearing on rural income and inflation.

• Monsoon: After two good rural years, the progress and spread of this year’s monsoon will be keenly watched. A weak monsoon would have a bearing on rural income and inflation.

• FPI trajectory: Foreign interest hinges on India’s relative EPS growth, currency stability and US yields; As AI related foreign stocks see a growth moderation, India’s earnings growth would appear reasonable in a global context and can translate to stronger flows.

• Global yields and monetary policy: Higher US policy rates and elevated long-term bond yields could keep global liquidity conditions tight. A higher cost of capital will have a bearing on valuations across global markets, including India. Typically, the impact is likely to be pronounced in segments trading at a premium to their historical averages.

Table 2: Current Vs Historic Valuations of major indices

Source: Bloomberg; P/E: Price to Earnings; P/B: Price to Book; Data as of 30^th September 2026
Past performance may or may not be sustained in the future.

What Can an Investor Do?

Although the near-term earnings trend is tied to global developments, valuations have become conducive in several pockets - large-caps in particular trade below their long-term averages. Near-term volatility is likely to persist as the geopolitical situation evolves, but the impact of short-term disruptions on the intrinsic value of businesses is limited. Investors may consider a staggered allocation to equities to take advantage of favorable valuations and benefit from the potential volatility.

Above article is authored by Quantum.

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