Dalal Street Under Pressure: What’s Driving the 2026 Market Correction?

Indian equity markets have witnessed a sharp correction in the opening weeks of 2026, reversing a significant portion of the gains built over the previous year. From their recent highs, the BSE Sensex and Nifty 50 have declined in the range of 7–9%, slipping below key technical supports such as the 50-day and 100-day moving averages and triggering broad-based selling across sectors, including banking, IT, metal, and capital goods.

Since the start of the year, investors have witnessed multiple sessions of extreme volatility, with the Sensex recording intraday swings of 700–1,000 points on several occasions, reflecting heightened risk aversion. The sell-off has led to a sharp erosion in wealth, with the total market capitalisation of BSE-listed companies shrinking by over ₹18–22 lakh crore in a matter of weeks, underlining the scale and speed of the correction.

The weakness has not been confined to frontline indices. Mid-cap and small-cap stocks have borne a disproportionate brunt, with their respective indices falling 10–14% from recent peaks, and several individual stocks correcting 15–25%, as investors cut exposure to higher-risk segments amid tightening liquidity and rising uncertainty.

Foreign Investors Pull Back Sharply

A key driver behind the correction has been persistent selling by foreign institutional investors (FIIs). After sustained outflows through much of 2025, foreign investors have continued to reduce exposure to Indian equities in early 2026, putting consistent pressure on market liquidity. Since the start of the year, FIIs have sold equities worth an estimated $4–6 billion (₹33,000–50,000 crore), extending the selling streak that saw over $18–20 billion exit Indian markets in 2025, one of the highest annual outflows on record.

This selling has often overwhelmed domestic inflows, even as mutual funds and retail investors continued to deploy capital through SIPs and direct equity participation. While domestic institutional investors (DIIs) have provided partial support, their buying has not been sufficient to fully offset foreign selling, resulting in net market pressure. The impact has been most visible in large-cap stocks and index heavyweights, particularly in sectors such as banking, IT, and oil & gas, where foreign shareholding is relatively high and incremental selling has had an outsized effect on benchmark indices.

According to Jeet Mukesh Chandan, Group Managing Director of BizDateUp, the correction is largely externally driven.

“The ongoing market correction is predominantly due to global political uncertainty, tariff concerns, and consistent foreign investor outflows that have resulted in short-term investor caution. That is also evident in the sharp plunge in benchmark indices,” he said.

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Geopolitics, Tariffs, and Global Uncertainty

Global political developments have emerged as a major overhang on markets. Renewed tariff rhetoric from the United States,  which has imposed tariffs of up to 25–50% on certain Indian exports, unresolved trade negotiations, tightening sanctions on Russia, and fresh geopolitical flashpoints have pushed global investors into risk-off mode. Concerns around possible steep tariff actions, disruptions to global trade flows, and uncertainty over energy supplies have led investors to reduce exposure to emerging markets, including India, where the Nifty 50 fell over 0.4% to 25,578, and the Sensex declined nearly 0.5% to 83,168. Global political developments have emerged as a major overhang on markets. Renewed tariff rhetoric from the United States, unresolved trade negotiations, tightening sanctions on Russia, and fresh geopolitical flashpoints have pushed global investors into risk-off mode.

Afaq Hussain, Nonresident Senior Fellow and Co-founder & Director of BRIEF, said geopolitics has made foreign investors cautious.

“Foreign investors are not willing to invest due to geopolitics. We are also approaching the Union Budget, so people want to wait. Trade deals are not happening, sanctions on Russia are adding pressure, and tariff threats are creating uncertainty. That is why investors are cautious,” he said.

Budget Proximity Adds to Wait-and-Watch Mood

With the Union Budget just weeks away, investors have largely stepped back from aggressive positioning. Historically, markets tend to turn cautious ahead of major policy announcements as participants wait for clarity on taxation, spending priorities and sectoral support. In 2026, this pre-budget caution has coincided with global uncertainty, intensifying selling pressure rather than being offset by optimism. This year, foreign portfolio investors (FPIs) have pulled about $1.3 billion in January alone, adding to last year’s $19 billion net outflow, reflecting heightened caution before budget announcements.

Earnings Visibility Still Patchy

While India’s macroeconomic fundamentals remain comparatively strong, with GDP projected at 7.4% for FY 2025–26, near-term corporate earnings visibility has been uneven. Some sectors have reported resilience, but others have struggled with margin pressures, weak demand, or higher input costs. For instance, engineering and textiles exports are expected to be reduced by $4–5 billion due to trade disruptions. This mixed earnings picture has made investors unwilling to pay premium valuations, particularly after a strong multi-year rally, resulting in a valuation correction alongside sentiment-driven selling.

Volatility Becomes the New Normal

Market volatility indicators have risen sharply in recent weeks, signaling expectations of continued swings. The India VIX has spiked over 8% to around 12.1, and technical breakdowns in key indices have triggered algorithmic selling and stop losses, further accelerating declines.

Chandan cautioned that volatility could persist.

“Though the volatility may continue for some time till earnings visibility improves and global cues stabilise, it is worth remembering that phases of volatility are a built-in part of the markets,” he said.

Also read: Amid Global Risks How Will India's Equity Market Fare In 2026?

Long-Term Outlook Remains Constructive

Despite the current correction, experts broadly agree that India’s medium- to long-term fundamentals remain intact. Strong domestic consumption, infrastructure investment, and India’s deeper integration into global manufacturing and technology supply chains continue to support the structural growth story.

Chandan added that once stability returns, capital flows could rebound.

“Over the medium to long term, India continues to look robust. When stability is re-established, foreign capital inflows should return, bringing liquidity and confidence needed for a sustainable market recovery,” he said.