Indian equity markets in May 2026 consolidated after April’s rebound, with the Nifty50 declining by 1.9% amid uncertainty surrounding the US–Iran peace deal and below-average monsoon rainfall forecasted by the IMD. Despite foreign outflows, broader markets held firm, with midcap and small-cap indices advancing 3.2% and 1.6%, respectively, supported by strong liquidity from DIIs. Sectoral indices ended mixed, with healthcare, capital goods, and metals gaining 4.9%, 4.7%, and 3.7%, respectively, while PSU, oil & gas, and FMCG declined by 4.3%, 3.4%, and 3.3%. Flows remained divergent, as foreign investors pulled out nearly USD 5.8 billion from Indian equities in May 2026—marking the third consecutive month of net outflows—while DIIs added USD 8.7 billion. However, the pace of FII selling slowed in May compared to USD 7.4 billion in April and USD 12.7 billion in March 2026.

Other key developments in May 2026 included the government raising the effective import duty on gold and silver from 6% to 15% (increasing the Basic Customs Duty on gold and silver from 5% to 10% and raising the Agriculture Infrastructure and Development Cess from 1% to 5%). Retail prices of petrol and diesel were increased by ₹7.5 per liter from May 15, 2026. The RBI approved an all-time high dividend of ₹2.87 trillion (0.7% of GDP) to be transferred to the Central Government for FY27, compared to ₹2.7 trillion (0.7% of GDP) in FY26. The IMD retained its forecast for below-average monsoon rainfall in 2026, warning that the El Niño weather pattern is likely to develop during June and July.

High-frequency indicators for May 2026 remained resilient. Vehicle registrations, a proxy for retail demand, continued to show double-digit growth in both two-wheelers (11%) and passenger vehicles (29%), with PVs maintaining strong demand momentum. However, weak rainfall due to El Niño remains a risk to rural two-wheeler demand in FY27. The Services PMI expanded to 59.8 from 58.8, indicating the strongest expansion since November, driven by demand in freight, digital solutions, e-commerce, and IT. While the Manufacturing PMI rose to 55 in May versus 54.7 in April, signaling an improvement in manufacturing sector’s health over the past three months, primarily driven by domestic demand. India’s power demand grew ~11% YoY to 165 BU in May 2026, marking a record five consecutive months of growth, supported by seasonal trends (peak summer), which drove electricity demand to an all-time high of 270.8 GW on May 21. GST collections rose to INR 1.94 trillion (+3.2% YoY), though this figure is distorted by a significant base effect that included a one-off GST payment of INR 100 billion. Excluding this one-off, GST collections grew 9% YoY, in line with recent monthly trends. Bank credit growth edged up to 16.2% YoY for the fortnight ended May 15, 2026, driven by strong demand in the services, industry, and MSME sectors. Overall, incoming high-frequency data suggests a largely resilient trend across indicators: GST revenues remain robust, credit growth is improving, PMI readings are stable, and power demand has strengthened compared to last month’s levels.

While the West Asia conflict resolution is still hanging in balance, it is our belief that the compulsions to convert the current ceasefire into a more lasting peace agreement are rising on both sides and hence this war is unlikely to be long drawn. Any solution to the blockade – one of the most important elements of this conflict – will make India its biggest beneficiary and can lead to considerable easing of the risk premium that hovers above the Indian markets. We also believe the present situation would propel India to undertake significant reforms in the area of energy security, accelerating domestic manufacturing, encouraging foreign investments and exports in the coming years.

May 2026 also saw the conclusion of the March quarter corporate earnings reporting. 4QFY26 performance was a broad-based beat. The aggregate earnings of a universe of over 350 companies grew 16% YoY, a second back-to-back quarter of mid-double-digit growth. BFSI (+18%), Metals (+50%), and OMCs (+62%) led the earnings growth. Further, Technology (+13% YoY), Telecom (+8.4x YoY), and Automobiles (+13% YoY) propelled the earnings. In contrast, aggregate earnings growth was dragged by Oil & Gas (ex-OMCs), which posted a profit dip of 10% YoY. Cost inflation, while a likely given, will take 3-6 months to feed into earnings. On expected lines, inflation is expected to mean revert in FY27 but will be welcome as it will lift nominal GDP, push up revenue growth and possibly help margins as well. All this reaffirms a cyclical recovery in earnings for India in FY27 that had come into question with the onset of the conflict.

Our base case of a mean reversion in the performance of the Indian economy and of the market remains albeit with some delay. The plethora of policy measures and the fiscal space that India has should support growth even under current conditions. The sharp underperformance of India in FY26 and CYTD, along with record FII outflows has established a favourable base for Indian equities and makes the risk-reward much more attractive than at the start of CY26. We reckon event driven disruptions in the market generally end up being opportunities in hindsight.

We believe investors could consider a range of options such as flexi-cap strategies (for medium risk investors) to staggered investments in small cap funds (for high-risk investors) and well-structured multi-asset funds (for low-risk investors). However, patience as a virtue and staying one’s course of investments cannot be emphasized enough under such circumstances.

The West Asian conflict continues to linger on, imposing global financial markets volatility. Brent crude prices remained well above $ 100 per barrel before moderating lower towards the month end. This sharp price variability spilled over into global rates, with the 10-year UST yield crossing 4.65% during the month and settled 6 bps higher on month-on-month basis at 4.44%.

Domestic markets also mirrored this turbulence with 10 yr Gsec benchmark yield touching recent highs of 7.13%, although it managed to close flat at ~7% by month end. Corporate bond yield curve under-performed the G-Sec, with a flattening bias. Average banking liquidity moderated sharply from Rs 3.86 trillion in April to Rs 1.64 trillion in May, due to RBI’s Fx intervention and higher currency in circulation. INR remained under excessive selling pressure and touched all-time lows against the US Dollar. Overall, market sentiments remained cautious with a close watch on US-IRAN ceasefire talks and upcoming RBI’s monetary policy.

Outlook

West-Asia conflict has crossed 100 days, surpassing the market expectations. Even though the current ceasefire appears fragile & any concrete resolution remains elusive, market is hopeful of a favorable outcome anytime soon as also reflected in moderation in crude oil prices. Nonetheless, still elevated energy prices & supply chain disruption have complicated the monetary policy trade-off between growth – inflation dynamics. Elevated inflationary pressures and healthy US’s jobs market data have increased the market expectations of a US rate hike in CY2026 as against the ~50 bps rate cut expectations earlier. Other Developed Central banks are also expected to undertake rate hikes in CY2026 for inflation management. Many Asian Central banks have already started an aggressive rate hike cycle to tame inflationary pressures and to also arrest excessive depreciation pressure on currency.

Amidst the challenging backdrop, the RBI’s MPC has maintained its pragmatic approach of using policy rates for inflation management while relying on other measures for currency support. Even as inflationary pressures are inching up, MPC in its June policy has maintained a status quo on policy rates and a neutral stance. Nonetheless, the 50 bps increase in FY27 inflation projections to 5.1% and core inflation to 4.7% highlights forward-looking risks stemming from the prolonged West Asia conflict and monsoon-related uncertainties. The FY27 growth projection has also been moderated to 6.6%. The reaffirmation of RBI’s commitment to providing sufficient liquidity is a welcome relief. However, what clearly stole the show was the series of measures announced by RBI to boost capital inflows, including an expanded FAR security universe, a concessionary hedged facility for ECBs, and fully hedged 3–5 year FCNR(B) deposits. Separately, the government has relaxed taxation rules for FPIs investing in G-Secs, which could also enhance the likelihood of their inclusion in the Bloomberg Global Bond Index. These measures can trigger huge capital inflow of the order of USD 50-100 bn dollar over a period of time, thereby strengthening the macro fundamentals.

Overall, while the global volatility may remain high depending upon the West-Asia developments and the overhang of potential policy rate hikes by RBI remain in forthcoming monetary policies, immediate domestic concerns have been adequately addressed by these measures and are likely to trigger a market rally across the yield curve. The spreads on the AAA curve are still at elevated levels particularly in 2-5 year tenor, compared to their long-term averages. If the measures taken by RBI to attract foreign capital give the desired results, we may see the improvement in banking deposits thereby easing off the supply pressures. With lower CD supply from banks, we expect the short end yields to come down faster and the spreads on AAA security over G-Sec to revert to their mean over a period of time. Funds like low duration, short duration and corporate bond funds are suitably placed to capture such opportunity. G-Sec yield curve, especially in the longer end is also expected to get the benefit from the tax relaxations and expanded FAR security universe which can also open the doors for inclusion in Bloomberg global bond index. Gilt funds with longer duration exposure may be considered tactically by higher-risk investors, particularly in anticipation of a gradual yield curve flattening