Good Earnings, Bad Headlines: Insights and Trends in Indian Markets
Indian Markets and the Oil Shock
India Inc. delivered its best profit growth in ten quarters, and the Nifty responded by falling for seven straight weeks. Nifty 50 companies grew profit 18% year on year in April–June 2026, yet the index closed at 23,140 on 25 September, about 12% below its January peak. The reason sits in the Strait of Hormuz. This piece looks at what the West Asian oil shock has done to Indian equities and bonds, how large, mid and small caps have behaved, and what investors should do now.
The oil shock from West Asia
Brent crude has gone from about $71 a barrel at the end of January to roughly $104 on 25 September, a rise of nearly 50%. The path has been violent. After war involving Iran broke out early in the year, Brent spiked to about $118 in late March. It slid back to around $70 by 1 July on hopes of a settlement, then rebounded above $100 by late July. Renewed attacks on shipping and energy infrastructure pushed it to $109 in early September.
The chokepoint is Hormuz. A US naval blockade and Iranian restrictions have turned the strait into a bargaining chip. Last week Iran's foreign minister offered to reopen it and resume nuclear talks within seven days, but only if Washington lifts the blockade and unfreezes Iranian assets. Markets have learned to treat such headlines with suspicion, because each truce hope this year has been followed by fresh attacks.
A second front opened on 18 September, when the US signed the Sanctioning Russia and Iran Act. It lets the President impose tariffs of up to 100% on countries that buy Russian oil and gas, and India is named among the top buyers. The White House has wide discretion over whether and when to use it, so for now it is a threat rather than a bill. But it narrows India's access to discounted barrels at exactly the moment Gulf supply is uncertain.
For India, which imports most of its crude, a sustained oil shock hurts in three ways: a wider current account deficit, higher inflation and a weaker rupee. The rupee has slid from about 85.5 per dollar in March 2025 to 91.8 at the end of January and 96.2 today, after touching 96.9 in late July.
Large, mid and small caps: two very different stretches
The two windows tell opposite stories. From 1 April 2025 to 30 January 2026, before the war, every segment made money and mid caps led. From 1 July 2026 to today, large caps have fallen hardest and small caps are the only segment in the green.
Segment (index) | 1 Apr 2025 – 30 Jan 2026 | 1 Jul 2026 – 25 Sep 2026 |
Large cap (Nifty 50) | +7.7% | –3.0% |
Mid cap (Nifty Midcap 150) | +12.4% | –1.5% |
Small cap (Nifty Small cap 250) | +4.4% | +2.5% |
Three things stand out.
Large caps have borne the brunt. The Nifty 50 is down 1.6% in total since April 2025 and about 12% below its 2 January 2026 high of 26,329. It has now fallen for seven consecutive weeks, its longest losing streak since the Covid crash of February–March 2020.
Mid and small caps have held up far better. Since April 2025 the Midcap 150 is up 17.3% and the Smallcap 250 is up 20.2%. Between February and June 2026, while the Nifty lost 5.7%, small caps gained 12.4%.
The split tracks who owns what. Foreign investors, who own a large slice of the big index names, have sold ₹2.42 lakh crore of Indian equities in 2026, including ₹17,131 crore in September alone. Domestic institutions and SIP money have kept buying, and a larger share of domestic flows goes into mid and small caps.
The bond market is sending the same signal
Indian bond yields have risen with oil. The 10-year government bond yielded 7.11% on 25 September, about 60 basis points higher than a year ago. August CPI inflation came in at 4.82%. With the repo rate at 5.25%, the market is now pricing a possible 25 basis point hike at the RBI's October meeting.
The US 10-year Treasury yield has climbed above 5.1%, its highest since 2007, after Federal Reserve officials signalled further hikes. When a risk-free dollar asset pays over 5%, the bar for emerging-market equities rises, and India's premium valuations are the first to be questioned.
A rate hike would push up the cost of capital across India. Most bank loans are now linked to the repo rate, so a 25 basis point increase passes quickly into business loans, working capital lines and home loans. Companies would pay more to borrow, and the return investors demand from equities would rise with it. That combination squeezes valuations twice: lower profits after interest, and a higher hurdle rate applied to those profits. Leveraged businesses and smaller companies that depend on bank credit feel it first, and new capex plans become harder to justify.
For equity investors this matters more than the headlines suggest. Higher yields raise the discount rate applied to future earnings. A company can grow profits 20% and still see its share price fall if the rate used to value those profits jumps. That is what has happened to Indian large caps this year.
Q1 FY27: strong numbers, no reward
The April–June 2026 quarter (Q1 FY27) was genuinely good. Nifty companies grew profit after tax 18% year on year, the fastest in ten quarters. Excluding oil marketing companies, sales also rose 18%. Nearly half of companies (48%) beat estimates, against a quarter that missed.
The growth was broad-based. Large-cap earnings rose 21%, mid caps 23% (an 11-quarter high) and small caps 31%. Financials, metals, upstream oil and gas, technology and telecom led the way.
So why did prices not follow? Three reasons.
Timing. Q1 ended in a lull, with Brent back near $70 by 1 July. The market is not pricing April to June. It is pricing October to March, with oil above $100 and the rupee at 96.
Discount rates. As the bond market shows, the rate at which future earnings are valued has gone up. Earnings rose, multiples fell, and for large caps the net effect has been negative.
Flows. Foreign selling has swamped good news in the stocks foreigners own. Domestic buying has cushioned the rest of the market.
Right now the market is assuming that input costs will squeeze margins and that capital will stay expensive. Whether that assumption proves too gloomy is the real question for investors.
A way forward for the investor
What an investor can control is allocation, pacing and what they choose to watch.
Start with the purpose of each rupee. Money needed within three years, for Need goals such as school fees or a house down payment, does not belong in equities in any market, least of all this one. Money set aside for long-horizon Aspiration goals can treat this volatility as an opportunity.
Keep SIPs running. Stopping an SIP after a seven-week fall means buying fewer units at higher prices later. Fresh lump sums are better staggered over six to twelve months through an STP than deployed in one go.
Rebalance toward large caps, not away from them. Large-cap earnings grew about 20% while prices fell, so valuations have compressed meaningfully. Small caps have outperformed on strong earnings, but they carry the least buffer if oil stays high and rates rise. Trimming small-cap overweights back to target and adding to large caps is a disciplined way to lean against the crowd.
Use the bond market. With the 10-year near 7.1% and inflation under 5%, real yields are positive. Accrual-oriented funds and staggered target-maturity or high-quality short-to-medium duration funds lock in these yields without betting on rate cuts. Avoid long-duration bets until the RBI's October decision is clear.
Know your oil exposure. Paints, aviation, tyres, chemicals and oil marketing companies use crude directly. IT and pharma exporters gain from a weaker rupee. Most diversified portfolios hold both, so check which way yours leans.
Track four signals, not daily headlines. Brent sustaining below $90, a credible reopening of Hormuz, a stable rupee and FII flows turning positive. The Q2 FY27 results in October and November will show how much of the oil shock has reached margins.
Markets have priced a lot of bad news into Indian large caps. That does not mean the bottom is in. It means the odds now favour patient investors more than they did in January, when the Nifty was at a record and nobody was worried about oil.
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