Sensex logs worst H1 decline since pandemic as broader indices outperform

The Sensex declined 10.3 per cent in H1CY26 amid persistent FPI selling, while small- and mid-cap indices outperformed on strong domestic investor support

The benchmark Sensex declined 10.3 per cent in the first half of calendar year 2026 (H1CY26), the worst first-half decline since 2020, when Covid-19-led disruptions rattled markets. The Nifty declined 8.7 per cent, its worst first-half performance since 2022. Turbulence was a constant during the last six months as markets grappled with one headwind after another.

 

Indian equities in H1, according to analysts at ICICI Securities, were impacted by a series of challenges that included a valuation premium versus emerging market (EM) peers, low nominal GDP and earnings growth, global (sans India) AI-led stock euphoria, geopolitical concerns, the US tariff threat, an oil price spike due to the West Asia crisis, the rupee's underperformance, and relentless foreign portfolio investor (FPI) selling.

 

 

Meanwhile, small- and mid-cap indices outperformed their large-cap peers during the period. The Nifty Smallcap 100 index gained 6.5 per cent, while the Nifty Midcap 100 index moved up 2.2 per cent in H1CY26.

 

The key reason for the outperformance of small- and mid-cap stocks in H1, according to G Chokkalingam, founder and head of research at Equinomics Research, is that they mostly escaped FPI selling, which was largely concentrated in the large-cap segment.

 

"That apart, relative valuation had become attractive after a sharp underperformance in CY25. As a result, retail investors also stocked up on the small- and mid-cap segment, which in turn triggered an upside in these segments," he said.

 

Foreign portfolio investors (FPIs), meanwhile, withdrew nearly Rs 2.74 trillion ($29.28 billion) from Indian equities in H1CY26.

 

Domestic institutional investors (DIIs) supported the market with a net inflow of Rs 4.63 trillion during this period, of which Rs 2.92 trillion came from mutual funds (MFs).

 

IT stocks feel the heat

 

The Nifty IT index, the worst performer among the sectoral indices, tanked 30.6 per cent as rising concerns around artificial intelligence (AI)-led disruption spooked investors. Defence, energy and metal shares gained in H1CY26, with the Nifty India Defence index surging 22.9 per cent.

 

Of the 1,400 stocks in the BSE MidCap and BSE SmallCap indices, nearly 40 per cent, or 552 stocks, outperformed by surging more than 6.5 per cent. Of these, 114 stocks rallied more than 50 per cent.

 

The road ahead

 

Markets are likely to take cues from the proposed India-US trade deal, developments in West Asia and domestic factors such as the progress of the monsoon, inflation, interest rates and corporate earnings in the months ahead. While some analysts expect quality mid- and small-cap stocks to continue outperforming, elevated crude oil prices and the possibility of further earnings downgrades could keep markets range-bound.

 

Saurabh Mukherjea, founder and chief investment officer of Marcellus Investment Managers, said the next phase of market leadership will depend on the interplay between foreign portfolio investor (FPI) flows and domestic inflows.

 

"The relative performance of large caps versus mid- and small-cap stocks will depend on which side of the current market dynamic changes first," Mukherjea said. "Over the past couple of years, persistent FPI selling has weighed on large-cap indices, while strong domestic institutional and retail inflows have continued to support mid- and small-cap stocks, which are less dependent on foreign capital. If foreign investors return in a meaningful way, large caps are likely to outperform. Conversely, if domestic inflows begin to weaken, the outperformance of mid- and small-cap stocks is also likely to fade."

 

Mukherjea said he remains sceptical about a sustained revival in FPI flows, arguing that India's capital gains tax on foreign equity investors remains a key deterrent. "India is the only major economy that levies capital gains tax on foreign investors in equities. Until a similar exemption, like the one extended to foreign bond investors, is introduced for equities, it is difficult to see a sustained turnaround in FPI inflows," he said.

 

Mukherjea also cautioned that weakening white-collar employment could eventually weigh on household savings and SIP inflows. Despite these concerns, he said quality large-cap stocks remain attractively valued after a prolonged period of underperformance and offer a compelling opportunity for long-term investors.

 

(Additional inputs from Sundar Sethuraman)