India's Equity Market Faces Significant Global Headwinds in February 2026

India's Equity Market Faces Significant Global Headwinds in February 2026

The Indian equity market is experiencing considerable turbulence in February 2026, as global investors re-evaluate their strategies in response to a confluence of international and domestic pressures. Persistent Foreign Institutional Investor (FII) outflows, a cautious stance from the US Federal Reserve (Fed) on interest rate cuts, and recent Union Budget 2026 policy changes are collectively challenging investor sentiment and impacting benchmark indices like the Nifty 50 and Sensex. Despite robust domestic institutional buying and strong corporate earnings in certain segments, the market remains susceptible to external shocks and evolving global economic narratives.

The Catalyst

Several interwoven global and domestic factors are acting as catalysts for the current market reassessment. Globally, the US Federal Reserve's decision in late January 2026 to keep interest rates unchanged at 3.5-3.75% has led to tighter global liquidity and sustained foreign capital outflows from emerging markets, including India. While markets anticipate potential Fed rate cuts later in 2026, the cautious approach by the US central bank, driven by inflation remaining above its 2% target, is influencing investor decisions to keep capital in higher-yielding US bonds rather than riskier emerging market equities.

Domestically, the Union Budget 2026, presented on February 1, 2026, triggered a sharp market reaction, with the Sensex dropping over 1,800 points and the Nifty 50 closing below 25,000 on the budget day. This immediate downturn was primarily attributed to an increase in Securities Transaction Tax (STT) on futures and options (F&O) trades, which raised concerns about higher trading costs and reduced volumes, especially for speculative activities. The budget's capital expenditure for FY27, set at ₹12.2 lakh crore, though higher than FY26's ₹11 lakh crore, was also below some market expectations, contributing to a muted reaction.

Furthermore, the Indian market has witnessed significant FII selling pressure, particularly in the Information Technology (IT) sector, with outflows exceeding ₹10,956 crore in the first half of February 2026 alone. This exodus is largely driven by concerns over the disruptive potential of Artificial Intelligence (AI) on traditional software services business models and pessimistic forecasts from major US technology firms impacting their Indian counterparts. Geopolitical tensions, notably concerning Iran, and a firm US dollar further add to the cautious global sentiment, impacting capital flows into India.

Financial Forensics

The recent financial data paints a mixed picture for the Indian equity market. While FIIs have been net sellers, Domestic Institutional Investors (DIIs) have consistently provided a crucial counterbalance, indicating strong domestic liquidity and confidence.

FII and DII Activity (February 1-15, 2026)

Investor Type	Net Activity (₹ Crores)	Key Sectors of Outflow	Key Sectors of Inflow
FIIs	-13,000+	IT, FMCG, Healthcare, Consumer Durables, Telecom	Capital Goods, Financial Services, Oil & Gas, Metals, Power, Construction
DIIs	Significant Net Buying	(Countering FII selling)	Financials, Industrials, Auto, PSU Banks
Total FII Holdings in IT (as of Feb 15, 2026)	₹4.49 lakh crore (down 16% from Jan-end 2026)
Source: NSDL, Moneycontrol, FinScann Analysis

India's corporate earnings season for Q3 FY26 has shown resilience, with the Nifty 500 index recording its strongest earnings expansion in eight quarters, with aggregate profits climbing 19% year-on-year. This broad-based performance, coupled with an 11% revenue increase, is partly attributed to GST 2.0 reforms. Small-cap companies have led this growth, with a 22% year-on-year earnings surge, surpassing mid-caps (15%) and large caps (14%), signaling a wider recovery across corporate India. However, profitability in the IT sector has come under pressure, with some major players like Infosys reporting a 2.2% year-on-year decline in net profit despite revenue growth, primarily due to increased employee expenses and operational costs.

The Reserve Bank of India (RBI), in its February 2026 Monetary Policy Committee (MPC) meeting, revised its retail inflation forecast for FY26 upward to 2.1% from 2% earlier, projecting Q4 estimates at 3.2%. For Q1 and Q2 of FY27, CPI inflation is projected at 4% and 4.2%, respectively. While the RBI kept the repo rate unchanged at 5.25%, the upward revision in inflation outlook, though slight, signals a shift from earlier disinflation expectations, influenced partly by precious metal prices and slower food price deflation.

Market Impact

The combination of global liquidity concerns and domestic policy changes has led to increased volatility in the Indian equity market. The Nifty 50 and Sensex have seen fluctuations, with the Nifty consolidating in the 25,400-25,900 range in recent sessions. The underperformance of Indian equities relative to other emerging markets in 2025, where MSCI India saw about 4% growth compared to an average 34% for EM equities, highlights the ongoing sensitivity to global capital flows.

The sharp FII outflows from the IT sector underscore a re-rating or a cautious approach towards a sector that has been a significant contributor to India's market cap. This capital rotation sees FIIs shifting funds from IT, FMCG, and healthcare towards capital-intensive sectors like capital goods, financial services, and energy, indicating a strategic reallocation based on evolving global and domestic themes. This sectoral divergence, alongside elevated valuation premiums in the broader market, necessitates careful stock selection for investors.

Key Takeaways

• Global Liquidity Squeeze: The US Fed's sustained higher-for-longer stance is curtailing global liquidity, making emerging markets less attractive for FIIs.
• Sectoral Reallocation by FIIs: Foreign investors are actively rotating out of traditional growth sectors like IT due to AI disruption concerns and into capital goods, financials, and energy.
• Domestic Resilience: Strong DII buying continues to provide a vital buffer against FII outflows, showcasing robust domestic participation.
• Inflation Outlook: The RBI's upward revision of inflation forecasts for FY26 and FY27 suggests a cautious monetary policy stance, with potential implications for future rate decisions.
• Budgetary Impact: The increase in STT on F&O trades and lower-than-expected capex growth have created short-term market apprehension, particularly among traders.
• Corporate Earnings Strength: Despite some sectoral pressures, overall Q3 FY26 earnings growth, especially in small and mid-caps, indicates fundamental economic strength.

FinScann Verdict

The Indian equity market, while fundamentally strong with resilient corporate earnings and robust domestic flows, is currently navigating a period of heightened external vulnerabilities. Global investor strategies are clearly shifting, demanding a recalibration of portfolios. Investors should prioritize quality businesses with strong balance sheets and sustainable growth, especially those poised to benefit from domestic capital expenditure and sectoral rotation themes. Long-term investors are advised to focus on bottom-up investing and consider India's unique position for supply chain diversification.

Q: What is the primary reason for FII outflows from Indian equities in early 2026? A: The primary reasons include the US Federal Reserve maintaining higher interest rates, which makes US assets more attractive, and specific concerns regarding the disruptive impact of Artificial Intelligence on the Indian IT sector's business models.

Q: How did the Union Budget 2026 impact the Indian stock market? A: The Union Budget 2026 led to an immediate market downturn, particularly due to an increase in Securities Transaction Tax (STT) on futures and options trades, raising fears of higher trading costs. Lower-than-expected capital expenditure growth also contributed to muted sentiment.

Q: What is the RBI's inflation forecast for FY26 and FY27? A: The RBI has revised its retail inflation forecast for FY26 slightly upward to 2.1% and projects CPI inflation for Q1 and Q2 of FY27 at 4% and 4.2%, respectively.

Q: Which sectors are witnessing FII inflows despite overall outflows from the Indian market? A: While there are overall FII outflows, certain sectors are attracting inflows, including Capital Goods, Financial Services, Oil & Gas, Metals & Mining, Power, and Construction, indicating a sectoral rotation strategy.

Q: What is the outlook for Indian corporate earnings in Q3 FY26? A: Indian corporate earnings for Q3 FY26 have shown strong resilience, with the Nifty 500 index recording its highest profit expansion in eight quarters (19% year-on-year), notably led by small-cap companies.

Disclaimer: For information only; not investment advice. Stock market investments carry risks. Please consult a SEBI-registered advisor before investing. FinScann assumes no liability for decisions made based on this report.