India market valuations turn reasonable; domestic sectors to outperform in 2026
Synopsis
India's equity valuations have reset to more reasonable levels after a correction, but the real story is the sectoral divide: Axis Mutual Fund is backing domestic-facing plays — banking, capital goods, manufacturing — while steering clear of IT as US headwinds bite. With the RBI on hold at 5.25% and the 10-year G-Sec yield expected between 6.75%–7.10%, the fund house sees a market that rewards selectivity, not broad bets.
Key Takeaways
Axis Mutual Fund says India's market valuations are more reasonable post-correction, especially in large caps and select cyclical sectors, as of 15 June 2026 .
Domestic-facing sectors — banking , capital goods , manufacturing — are preferred over global-facing sectors like IT .
The BSE Sensex fell 2.8 per cent and Nifty 50 dropped 1.9 per cent in May 2026 amid geopolitical tensions and crude oil volatility.
The RBI held the repo rate at 5.25 per cent with a neutral stance and introduced measures to attract foreign capital into debt markets.
The 10-year G-Sec yield is expected to trade between 6.75 per cent and 7.10 per cent in the second half of 2026.
Inflation is near 3.5 per cent but risks remain from crude prices, weather disruptions, and food inflation.
India's equity market valuations have turned more reasonable following a recent correction, particularly in large caps and select cyclical sectors, according to a report released on Monday, 15 June by Axis Mutual Fund. The fund house favours domestic-facing sectors over global-facing ones as geopolitical headwinds and earnings downgrades cloud the near-term outlook.
Preferred Sectors and Market Positioning
Banking, capital goods, manufacturing, and selective consumption themes are the fund house's top picks, preferred over global-facing sectors such as information technology, which remain exposed to slowing US discretionary spending. Mid-cap and small-cap segments have held up relatively well, supported by strong domestic liquidity and selective earnings visibility.
Corporate earnings have remained broadly healthy, though the outlook has softened as FY27 earnings downgrades have increased amid rising global uncertainties and cost pressures, the report noted.
Geopolitical Risk and Crude Oil Impact
The US-Iran conflict is creating sector-specific divergences across Indian markets. Upstream energy players stand to benefit from elevated crude prices, while downstream oil marketing companies (OMCs) face margin constraints. Sectors with high fuel dependence — including aviation, logistics, and transportation — are facing immediate cost pressures.
Other segments such as autos, pharmaceuticals, and industrials are affected more indirectly through higher raw material costs and weaker demand sentiment. This geopolitical overlay adds a layer of uncertainty that the fund house says warrants selective positioning rather than broad-based exposure.
Benchmark Index Performance in May
Indian equities came under pressure in May 2026 due to a combination of geopolitical tensions and crude oil volatility. The BSE Sensex declined 2.8 per cent during the month, while the Nifty 50 fell 1.9 per cent, reflecting the broader risk-off sentiment that gripped emerging markets.
Fixed Income Outlook and RBI Stance
On the fixed income side, Axis Mutual Fund expects the 10-year government securities (G-Sec) yield to trade in the 6.75 per cent–7.10 per cent range during the second half of 2026. The fund house favours short-duration and accrual-focused strategies in this environment.
Bond yields remained volatile, easing briefly on softer crude prices before climbing again as geopolitical tensions in West Asia persisted. The Reserve Bank of India (RBI) kept the repo rate unchanged at 5.25 per cent and maintained a neutral stance, while introducing measures to attract foreign capital into debt markets.
Inflation and Structural Drivers
Inflation remains relatively contained at around 3.5 per cent, though risks persist from higher crude prices, weather-related disruptions, and food inflation. On a structural note, potential inclusion in global bond indices, FCNR(B) deposits, and external commercial borrowing (ECB) inflows could support sustained foreign investment into Indian debt markets, providing a longer-term tailwind even as near-term volatility continues.
Point of View
But the earnings upgrade cycle has not yet arrived. The preference for domestic-facing sectors over IT is a rational hedge against US macro risk, but it also reflects a deeper structural concern: India's growth story increasingly has to be self-funded. What the report does not address is whether the RBI's neutral stance at 5.25% is doing enough to stimulate the capex cycle that banking and capital goods stocks are being asked to price in. If FY27 earnings downgrades deepen, the 'reasonable valuation' thesis could face a stress test sooner than the market expects.
NationPress
31 Jul 2026
Frequently Asked Questions
Why are India's market valuations considered more reasonable now?
According to a report by Axis Mutual Fund released on 15 June 2026, valuations have become more reasonable following a market correction, particularly in large caps and select cyclical sectors. The BSE Sensex and Nifty 50 fell 2.8 per cent and 1.9 per cent respectively in May 2026, contributing to this reset.
Which sectors does Axis Mutual Fund prefer in the current environment?
Axis Mutual Fund favours domestic-facing sectors — banking, capital goods, manufacturing, and selective consumption themes — over global-facing sectors such as information technology. IT remains exposed to US discretionary spending slowdowns, making it less attractive in the near term.
What is the RBI's current repo rate and monetary stance?
The Reserve Bank of India has kept the repo rate unchanged at 5.25 per cent and maintained a neutral monetary stance. The RBI has also introduced measures aimed at attracting foreign capital into Indian debt markets.
What is the outlook for Indian government bond yields in 2026?
Axis Mutual Fund expects the 10-year G-Sec yield to trade in the 6.75 per cent–7.10 per cent range during the second half of 2026. The fund house recommends short-duration and accrual-focused fixed income strategies in this environment.
How is the US-Iran conflict affecting Indian markets?
The US-Iran conflict is having sector-specific effects on Indian equities. Upstream energy companies benefit from higher crude prices, while oil marketing companies face margin pressure. Aviation, logistics, and transportation sectors face direct cost headwinds, while autos, pharmaceuticals, and industrials are indirectly affected through raw material costs and softer demand sentiment.
