Monthly Investment Outlook - October 2026

Indian markets corrected over the past month as higher crude oil prices, rising bond yields and renewed foreign investor selling weighed on sentiment. Domestic growth and corporate fundamentals remain resilient, but higher inflation and tighter monetary policy call for a more measured approach to portfolio risk. This month, we discuss the volatile market environment and how portfolios are positioned in response.

Indian equity markets corrected over the past month, with the Nifty 500 declining by around 5%. The weakness was broad-based as higher oil prices, increasing bond yields and resumption of foreign investor selling weighed on sentiment. Domestic institutional buying continued to cushion the decline but was insufficient to fully offset the deterioration in external conditions.

In fixed income markets, Indian government bond yields rose sharply. The benchmark 10-year government bond yield increased from around 7.0% to 7.4%, reflecting higher inflation expectations, tighter liquidity conditions and the change in monetary-policy direction. At its recent meeting, the Reserve Bank of India increased the repo rate by 25 basis points to 5.5% and shifted its stance from neutral to calibrated tightening.

Globally, financial conditions tightened as major central banks turned more hawkish and bond yields moved higher. The conflict in West Asia remained unresolved, disrupting energy supplies and pushing Brent crude back above USD 100 per barrel for much of the period. The combination of higher energy prices, elevated global yields and continued geopolitical uncertainty reduced risk appetite across emerging markets.

Inflation became an important macro concern. Headline inflation increased to 5.5% in September from 4.8% in August, while food inflation rose to 7.7% YoY. Rural inflation also increased to 6.1%. The combination of higher food prices, increase in core inflation and currency weakness led the RBI to raise its FY27 inflation forecast to 5.2%.

Investor flows remained sharply divided. Foreign portfolio investors withdrew approximately ₹35,900 crore from Indian equities in September, reversing the inflows recorded in July and August, with selling continuing into early October. Domestic institutional investors absorbed a substantial part of these outflows, with net purchases of approximately ₹92,700 crore in September, continuing to provide an important source of market stability.

The Q2 FY27 earnings season has only just begun. Early results indicate continued revenue growth but also place greater attention on margins and cost pressures. As reporting progresses, markets are likely to focus closely on companies’ ability to protect profitability amid higher commodity prices, borrowing costs and currency volatility.

Source: Bloomberg,
Data: As of 9th October 2026

We remain constructive on Indian equities and continue to prefer equities over fixed income in our asset allocation. The recent correction reflects tighter financial conditions and resumption of foreign investor selling rather than a deterioration in domestic fundamentals. Resilient domestic growth and steady corporate earnings support our medium-term outlook. However, we remain highly focused on risks like elevated crude oil prices, higher inflation, tighter monetary policy, and geopolitical uncertainty. This warrants a measured approach to portfolios, and we are currently limiting the amount of risk we take in the portfolios.

Within equities, we continue to favor small-caps over large-caps. Smaller companies remain relatively well positioned to benefit from resilient domestic demand and the potential for stronger earnings growth. Mid-caps have outperformed over an extended period, reducing their relative valuation support, while large-cap earnings growth remains more moderate. Although small-cap valuations require careful selection, the recent correction has improved the relative risk-reward across parts of the segment.

Within fixed income, our preference for shorter-maturity investments continues. The rise in the benchmark 10-year government bond yield to around 7.4% has improved the value available in longer-maturity bonds. However, rising inflation, calibrated monetary tightening and elevated global yields continue to create uncertainty at the longer end of the curve. We therefore retain a cautious stance on longer maturity fixed income instruments while recognizing that the risk-reward has become more balanced at current yield levels.


Thank you for reading our October 2026 Investment Outlook. We look forward to sharing our latest market perspectives with you again next month.

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