Sensex, Nifty down 8-10% in 2026; this factor needs investor attention
ICICI Securities noted that the largest chunk of India equity asset under management (AUM) from FPIs at 44 per cent or Rs 31 lakh crore originates from the US.
- Aug 31, 2026,
- Updated Aug 31, 2026 2:46 PM IST
The NSE Nifty and the BSE Sensex have fallen 8-10 per cent in the first eight months of 2026. While the two benchmarks are off March lows amid a revival in much-sought foreign inflows, another concern is weighing on prospects of Indian markets: Rising US bond yields.
ICICI Securities noted that the largest chunk of India equity asset under management (AUM) from FPIs at 44 per cent or Rs 31 lakh crore originates from the US. The steepening of the US yield curve is increasing the risk-free rate for US investors, it warned.
As the risk-free rate rises, it also increases the discount rate for the long-term growth value of equities for US investors. This trend of rising long-term bond yields in the US is likely to raise the hurdle rate for investing in emerging market (EM) markets and could limit FPI equity flows, unlike the earlier environment of low US interest rates, ICICI Securities said.
On Monday, Sensex was trading 312.64 points, or 0.40 per cent, lower at 76,951.87. The index is down 9.67 per cent year-to-date. Nifty was quoting at 24,060.50, up 115.15 points or 0.48 per cent. US remained the largest FPI investor in India; however, a high risk-free rate will require higher earnings growth for flows to sustain.
"If growth continues to pick up in India going forward, FPI flows are likely to continue despite higher yields. Also, the India equity premium — or the spread of India over the US in terms of the CDS (credit default swap) and 10-year bond yield is relatively low at 32bps and 217bps, respectively," ICICI Securities
One of the key concerns for Indian equities over the past year has been the significant sell-off by FPIs in the Indian equity markets, along with dwindling FDI and FPI debt flows.
This was exacerbated by the West Asia crisis, which had the potential to impact India’s current account deficit due to the oil price spike, thereby raising concerns around India’s balance of payments situation.
"However, towards the end of Q1FY27, FPI equity outflows began to recede and inflows began to trickle in. Simultaneously, FDI and FPI-debt inflows improved meaningfully to $7.8 billion and $5.7 billion for Q1FY27. While FDI flows data is unavailable beyond Q1FY27, FPI equity inflows during Q2FY27 have risen to $5.5 billion while debt inflows are at $3 billion," ICICI Securities said.
ICICI Securities said FPI inflows began trickling in around the time the AI chip stock story began to lose momentum, especially in markets such as Korea in July and as India’s nominal earnings growth picked up during Q1FY27. "However, the AI stock narrative is far from over, even though the raging bull market is losing momentum," it noted.
The NSE Nifty and the BSE Sensex have fallen 8-10 per cent in the first eight months of 2026. While the two benchmarks are off March lows amid a revival in much-sought foreign inflows, another concern is weighing on prospects of Indian markets: Rising US bond yields.
ICICI Securities noted that the largest chunk of India equity asset under management (AUM) from FPIs at 44 per cent or Rs 31 lakh crore originates from the US. The steepening of the US yield curve is increasing the risk-free rate for US investors, it warned.
As the risk-free rate rises, it also increases the discount rate for the long-term growth value of equities for US investors. This trend of rising long-term bond yields in the US is likely to raise the hurdle rate for investing in emerging market (EM) markets and could limit FPI equity flows, unlike the earlier environment of low US interest rates, ICICI Securities said.
On Monday, Sensex was trading 312.64 points, or 0.40 per cent, lower at 76,951.87. The index is down 9.67 per cent year-to-date. Nifty was quoting at 24,060.50, up 115.15 points or 0.48 per cent. US remained the largest FPI investor in India; however, a high risk-free rate will require higher earnings growth for flows to sustain.
"If growth continues to pick up in India going forward, FPI flows are likely to continue despite higher yields. Also, the India equity premium — or the spread of India over the US in terms of the CDS (credit default swap) and 10-year bond yield is relatively low at 32bps and 217bps, respectively," ICICI Securities
One of the key concerns for Indian equities over the past year has been the significant sell-off by FPIs in the Indian equity markets, along with dwindling FDI and FPI debt flows.
This was exacerbated by the West Asia crisis, which had the potential to impact India’s current account deficit due to the oil price spike, thereby raising concerns around India’s balance of payments situation.
"However, towards the end of Q1FY27, FPI equity outflows began to recede and inflows began to trickle in. Simultaneously, FDI and FPI-debt inflows improved meaningfully to $7.8 billion and $5.7 billion for Q1FY27. While FDI flows data is unavailable beyond Q1FY27, FPI equity inflows during Q2FY27 have risen to $5.5 billion while debt inflows are at $3 billion," ICICI Securities said.
ICICI Securities said FPI inflows began trickling in around the time the AI chip stock story began to lose momentum, especially in markets such as Korea in July and as India’s nominal earnings growth picked up during Q1FY27. "However, the AI stock narrative is far from over, even though the raging bull market is losing momentum," it noted.