Topic 1: EQUITY: LOSING STREAK

One of the most significant factors influencing Indian equities during August was the sharp rise in crude oil prices. Brent crude moved towards $93–94 per barrel by late August amid renewed tensions in the Middle East and uncertainty surrounding the Strait of Hormuz. Higher crude prices increase the country’s import bill and can widen current-account pressures, while simultaneously putting pressure on the Indian rupee. Rising oil prices can also contribute to higher domestic inflation and put pressure on corporate margins, particularly for companies and industries that are heavily dependent on energy and transportation costs. With headline CPI inflation already at 4.5% in July, the increase in crude prices added another layer of concern for investors. Consequently, oil emerged as one of the biggest factors weighing on market sentiment throughout August.

Global interest-rate expectations were another important source of volatility. Towards the latter part of August, hawkish signals from the US Federal Reserve, coupled with rising global bond yields, triggered renewed risk-off sentiment across emerging markets. Higher US yields make dollar-denominated assets relatively more attractive and can reduce the appeal of emerging-market equities such as India. A stronger dollar can also put additional pressure on emerging-market currencies, including the rupee. At the same time, higher global yields increase the discount rate applied to future corporate earnings, which can weigh particularly heavily on high-growth and interest-rate-sensitive sectors. These concerns contributed to the selling pressure on large-cap Indian equities during the latter part of the month. Foreign institutional investor flows also played a key role in market direction. At the beginning of August, foreign investors turned net buyers for several sessions, helping the domestic market remain relatively resilient despite concerns surrounding crude oil. However, as oil prices climbed and global yields increased, foreign flows became more cautious and turned negative during parts of the month. This contributed to the weakness seen towards month-end. Currency movements added to the pressure. The rupee weakened from around ₹95.17–95.20 per US dollar early in August to approximately ₹95.70 by late August, with the Reserve Bank of India intervening to contain excessive volatility around the ₹96 per dollar level. Foreign-flow uncertainty and rupee depreciation remained key concerns for investors.

Domestic inflation also remained an important consideration. July CPI inflation of 4.5% kept inflationary pressures on the radar, particularly amid rising crude oil prices. If higher oil prices persist, the potential for renewed inflation could limit the room available for further monetary easing. For equity markets, higher inflation and reduced expectations of rate cuts can act as a valuation headwind, especially for growth-oriented and rate-sensitive segments. Thus, even though domestic economic fundamentals remained relatively supportive, the market had to balance those positives against the possibility of a less accommodative monetary environment. Corporate earnings provided some support during the month. The Q1 FY27 earnings season was broadly encouraging, with several companies reporting results ahead of market expectations. This helped sustain selective buying and provided support to stocks with strong earnings visibility. Importantly, the earnings environment prevented the market correction from becoming more widespread. Instead, the market became increasingly stock-specific, with investors rewarding companies that delivered strong results while remaining cautious towards businesses exposed to macroeconomic and global risks. This also helped mid and small-cap stocks remain relatively resilient even as the major benchmark indices came under pressure. The divergence between large-cap and broader-market performance was one of the defining characteristics of August. While the Nifty 50 and Sensex declined, the Nifty Midcap 100 gained approximately 2.1%, and the Nifty Smallcap 100 rose around 3.1%. This suggests that the month was not characterised by indiscriminate selling across the equity market. Instead, investors continued to identify opportunities in mid- and small-cap companies, particularly those supported by strong earnings and domestic demand. The relative strength of these segments indicates that domestic liquidity and investor appetite for selected growth opportunities remained intact despite pressure on the headline indices. Market structure also contributed to volatility during August. India introduced the new Closing Auction Session mechanism on August 3, changing the process through which official closing prices are determined. While this structural change was not the primary reason for the monthly decline, it contributed to increased intraday volatility, particularly around the final minutes of trading, expiry sessions and index rebalancing events. The market also witnessed additional stock-specific volatility due to the MSCI index rebalancing at the end of August. Changes in index weightings resulted in significant buying and selling activity in individual stocks and amplified movements in certain large-cap names. The performance of heavyweight stocks was another factor behind the weakness in the headline indices. HDFC Bank, one of the largest constituents of both the Sensex and Nifty, came under pressure following uncertainty surrounding its future leadership after the announcement that its CEO would not seek reappointment. Given the significant weight of the bank in the benchmark indices, weakness in the stock had an outsized impact on index performance. Reliance

Industries also came under pressure following changes to its MSCI weighting, adding to the weakness in large-cap benchmarks.

Overall, August 2026 has given contrasting signals for Indian equities. The Nifty 50 declined approximately 1.2%, while the Sensex fell around 1.4–1.5%. However, the resilience of mid- and small-cap stocks, supportive corporate earnings and continued domestic liquidity demonstrated that investor confidence had not disappeared. The principal challenge came from the external environment, particularly crude oil prices, Middle East tensions, US interest-rate expectations, global bond yields and currency movements.