D-Street’s September blues: SENSEX, NIFTY plunge 6%; FIIs, crude, IPOs and the asset-allocation call

It has been a painful month for market bulls on Dalal Street, with Indian equities falling sharply after a brief recovery in July and August.

September has turned into a month of relentless selling, with the NIFTY50 and BSE SENSEX each down around 6%, putting the benchmarks on course for one of their weakest monthly performances in recent months.

The sell-off has also broadened across sectors as investors grapple with a confluence of domestic and global headwinds.

A key concern is that India has not been a direct beneficiary of the global artificial intelligence-led investment boom to the same extent as markets such as the US, Taiwan, South Korea and Japan.

Bernstein expects foreign institutional investor (FII) flows into India to remain flat to modestly positive over the next 12 months and does not expect a meaningful return of foreign capital even after the current AI-driven investment cycle peaks, unless India builds new globally competitive growth engines in areas such as semiconductors, batteries and energy storage.

At the same time, elevated crude oil prices, rising US Treasury yields and renewed geopolitical tensions have made the global backdrop increasingly challenging for emerging markets. Brent crude has climbed above $100 a barrel amid tensions between the US and Iran, while the US 10-year Treasury yield has risen above 5%, adding to concerns over inflation, financial conditions and FII flows.

On the domestic front, the much-awaited earnings recovery has also failed to provide the market with the strong catalyst investors had been looking for. This has left valuations, earnings visibility and foreign flows as key factors for market participants to watch heading into the final months of 2026.

Takeaways for investors

ICICI Prudential AMC’s S Naren believes investors need to look beyond equity allocation and focus on a broader asset-allocation strategy. Naren said small-cap stocks remain expensive and flow-dependent, while large-cap valuations appear more attractive. He also sees banking and insurance as relatively favourable sectors, describing them as contrarian spaces to consider.

Naren also pointed to the large supply of paper through IPOs and block trades, which is absorbing liquidity from the market. According to him, investors have been advised to recalibrate their asset allocation since 2023 as the current market environment calls for a more diversified approach.

Naren added that a meaningful decline in oil prices could provide some relief to Indian equities, while the US AI trade continues to absorb a significant share of global capital.

What Bernstein said recently on Indian markets

Bernstein does not expect FIIs to return to Indian equities in large numbers even after the current artificial intelligence-driven investment cycle peaks. According to the brokerage, a sustained revival in foreign inflows will depend on India's ability to build globally competitive industries in areas such as semiconductors, batteries and energy storage.

Over the next 12 months, FII flows are likely to remain broadly flat to modestly positive, Bernstein said. However, it cautioned that any improvement would largely reflect an easing of recent headwinds rather than a meaningful change in the structural factors that drive long-term foreign investment decisions.

“We do not believe FIIs will return in large numbers even after the AI trade peaks,” Bernstein said, adding that a structural revival would require India to create new engines of competitiveness, innovation and global relevance. The brokerage said India needs to build capabilities in advanced semiconductor manufacturing, batteries and energy storage, energy self-sufficiency and businesses capable of gaining meaningful global market share.

India’s large-cap status

Last week, Bernstein said foreign investors had little reason to invest in the world’s fastest-growing major economy, citing concerns over Indian large-cap companies struggling to reinvent their businesses amid disruption from new technologies.

“Many of India’s large caps represent a bygone economic era,” Bernstein said in a report, adding that these businesses do not offer the “high growth” rates that can justify the “sky-high valuations” of Indian markets.

The investment bank also argued that many large corporates are not investing sufficiently in emerging areas such as electric vehicles and semiconductors, while smaller and mid-cap companies can be difficult for institutional investors to access at scale.

After a brief hiatus in July and August, foreign investors have resumed selling Indian equities in September, data from depository firm NSDL showed.