Indian Equities: Continued Underperformance Amid Global Strength
Indian equity markets remained subdued in February 2026, continuing their phase of relative underperformance against global peers. This occurred despite a series of constructive developments, including progress on key global trade agreements, early signs of corporate earnings recovery, and a notable turnaround in foreign institutional investor flows after seven consecutive months of outflows. However, these positives were overshadowed by emerging concerns around the potential impact of artificial intelligence on the Indian IT services sector, alongside heightened geopolitical tensions in the Middle East, particularly the escalation of the Israel–Iran conflict. These factors weighed on investor sentiment through the month.

As a result, Indian equities ended February broadly flat on a month-on-month basis, surrendering most intra-month gains. In USD terms, the market declined about 1% during the month. On a CY26 year-to-date basis, India has emerged as the weakest-performing major equity market globally, down approximately 5%. This contrasts sharply with the performance of most global markets. Several international indices delivered strong gains during February, including South Korea (+20%), Taiwan (+11%), Japan (+9%), Brazil (+7%), and MSCI Emerging Markets (+5%). Developed markets such as France, the UK, and Germany also recorded gains of 3–5%. In comparison, the US S&P 500 remained broadly flat.

Persistent geopolitical uncertainties and ongoing tensions around global trade tariffs further contributed to subdued investor confidence toward Indian equities.

Sector Performance: Public Sector Banks Lead While Technology Corrects Sharply
Sectoral performance during February was relatively muted across most segments. The Nifty-50 index declined about 1% month-on-month, while mid-cap and small-cap indices remained broadly flat. Among sectoral trends, Public Sector Banks continued to outperform meaningfully, supported by strong earnings momentum and improving balance sheets. In contrast, Private Banks, Consumer sectors, and Defence stocks remained largely unchanged during the month.

The most notable underperformance came from the Technology sector, which declined nearly 20% monthon- month. The sharp correction was largely driven by rising concerns regarding the potential disruption from artificial intelligence technologies on traditional IT services business models.

AI Disruption Concerns Weigh on Global IT Services Valuations
The global IT services industry has entered a phase of structural uncertainty following the rapid advancement of Large Language Models (LLMs), beginning with the launch of ChatGPT by OpenAI in November 2022. The acceleration in AI capabilities has intensified investor concerns regarding long-term disruption to the conventional outsourcing and services model.

Market participants increasingly fear that automation driven by generative AI could replicate many routine programming, testing, and service delivery tasks historically performed by large human workforces. This could lead to structural pricing pressure, changes in revenue mix, and potential compression in operating margins for global IT services firms.

The anticipation of significant AI-driven productivity gains has also created expectations of deflationary pressures on traditional services pricing. As a result, global IT services stocks including several Indian technology companies have witnessed meaningful valuation corrections.

Over the past three years, returns for many global IT services firms have turned negative, reflecting both a prolonged slowdown in sectoral growth and the amplification of disruption fears stemming from AI adoption.

Institutional Flows: FII Inflows Return While Domestic Flows Moderate
Foreign institutional investor flows strengthened meaningfully in February 2026. After eight consecutive months of weak flows, FIIs recorded inflows of approximately USD 2.3 billion during the month, marking the strongest monthly inflow in eight months.

Domestic institutional investors continued to provide strong liquidity support to the market. DIIs invested approximately USD 4.2 billion in February, although this represented a moderation to a ten-month low. Robust retail participation and sustained SIP inflows into mutual funds have enabled DIIs to maintain their consistent buying trend.

Domestic institutions have now recorded 31 consecutive months of net inflows into Indian equities. On a CY26 year-to-date basis, FIIs remain marginal net sellers with outflows of about USD 1 billion, while DIIs have remained strong buyers with cumulative inflows of roughly USD 12 billion.

Over the longer period from CY21 to CY26YTD, domestic institutional investors have cumulatively invested approximately USD 232 billion into Indian equities. In contrast, FIIs have been modest net sellers with cumulative outflows of around USD 12 billion during the same period. This highlights the structural shift in market liquidity increasingly supported by domestic capital.

India Macro: Strong GDP Growth Despite External Headwinds
India's recently revised GDP series, with base year 2022–23, reported robust economic growth for the December quarter.

Real GDP growth for 3QFY26 was recorded at 7.8% year-on-year, moderating slightly from 8.4% in the previous quarter but still significantly stronger than market expectations. The expansion was primarily driven by strong performance in manufacturing and services sectors.

Manufacturing growth remained particularly strong at 13.3% year-on-year, marking its strongest expansion in eight quarters and reflecting improved corporate profitability. Within services, sectors such as trade, hotels, transport, communication, financial services, and professional services also recorded strong growth. On the demand side, private consumption emerged as the key growth driver, expanding 8.7% year-on-year compared with 8.0% in the previous quarter and 6.0% in the same quarter last year. The improvement was supported by GST-related tax reductions and favourable interest rate conditions.

Investment growth remained healthy at 7.8% year-on-year, although it moderated slightly from 8.4% in the previous quarter, largely due to weaker government capital expenditure during the period. Net exports made a modest negative contribution to growth due to slower export growth and stronger imports.

Nominal GDP growth stood at 8.9%, indicating a relatively low deflator.

A notable change in the revised GDP series is the higher weight assigned to the financial sector. With the expansion of NBFC activity, the financial sector now accounts for approximately 27% of nominal GVA compared with 24% in the earlier series.

FY26 Growth Estimates Revised Upward
The Second Advance Estimates for FY26 real GDP growth have been revised upward to 7.6%, compared with the earlier estimate of 7.4%. Nominal GDP growth has also been revised higher to 8.6% from 8.0%. The revised GDP framework improves measurement accuracy through several methodological changes. These include greater use of GST data, better coverage of the informal and unincorporated sector, adoption of double deflators for improved real growth measurement, and refined accounting of government pension liabilities.

These methodological improvements have reduced the statistical discrepancies previously observed in GDP data. As part of the revisions, earlier growth estimates have been recalibrated to better reflect underlying economic activity. For instance, FY24 growth has been revised downward by around 2 percentage points, while FY25 growth has been revised upward to 7.1%.

Overall, the revised data series provides a more consistent and realistic representation of India's economic growth trajectory.

Outlook: Improving Earnings Environment with Select Sector Opportunities
The 3QFY26 corporate earnings season has broadly progressed in line with expectations.

Importantly, the macroeconomic environment has improved meaningfully due to supportive policy actions from both the Reserve Bank of India and the Government of India. A combination of accommodative monetary policy and targeted fiscal measures has begun to provide incremental support to corporate earnings.

This improvement was reflected in the 3QFY26 earnings performance, with the Nifty delivering approximately 7% year-on-year PAT growth, marginally ahead of the earlier estimate of around 6%. With earnings stabilising, Indian equities appear positioned for improved performance through CY26, particularly following the significant underperformance in CY25 where India lagged MSCI Emerging Markets by roughly 26% in USD terms.

The recent announcement of multiple trade agreements including India–EU, India–UK, and the landmark India–US deal has helped remove several macro overhangs that had weighed on investor sentiment over the past nine months. These developments are also beginning to reflect in improving FII flows into Indian equities.

A key monitorable in the near term remains the ongoing disruption narrative within the IT services sector and its potential spillover effects on broader market sentiment.

Earnings growth for the Nifty is expected to average approximately 12% over FY25–FY27. Valuations for the Nifty currently stand at around 20.2x one-year forward earnings, marginally below the long-period average of 20.9x. However, valuations within the broader mid-cap and small-cap segments remain relatively stretched.

Source: ABSL AMC Research, MOSL

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