PSU banks, metals lead rally in FY26 as consumption and IT stumble

As FY2026 came to a conclusion, the year turned out to be a period of sharp divergences across India’s equity markets. While the headline indices slipped around 4-5%, the winners of the year shifted decisively away from some of FY2025's themes towards more income-generating and cyclical plays.

At the sectoral level, leadership was firmly with cyclicals. The Nifty PSU Bank Index surged 32%, making it the top-performing sectoral index of FY26. Strong credit growth, improved asset quality, and better capital adequacy drove a re-rating of public sector lenders. Metals followed closely, with the Nifty Metal Index gaining 23%, which was aided by firm global commodity prices.

Automobiles also delivered solid returns, with the Nifty Auto Index rising 14%, while the mobility and pharma indices posted modest gains of 9% and 7%, respectively.

On the flip side, rate-sensitive and global-facing sectors bore the brunt of the downturn. The real estate sector was the worst performer, with the Nifty Realty index plunging 21% as softening demand and lower investor sentiment hit the stocks. Information technology stocks were also under pressure, with the Nifty IT Index falling 20% amid concerns over AI impacting IT services and recessionary risks in key markets.

Defensive sectors did not provide much shelter either. The Nifty FMCG Index declined 13%, reflecting margin pressures and subdued volume growth, while the Nifty Media Index dropped 12%.

At the thematic level, the standout performer was the Nifty REITs & InvITs Index, which delivered a robust 19% return during the year. The rally was a result of the growing investor preference for stable yield-oriented assets amid global uncertainty. Infrastructure-linked vehicles, backed by predictable cash flows, gained traction as investors rotated out of more volatile segments.

Defence, one of FY25’s strongest themes, continued to hold investor interest, though with more moderate gains. The Nifty India Defence Index rose 16% in FY26, compared with a sharp 38% surge in the previous year. The moderation suggests some cooling after a euphoric run, even as analysts suggested that the long-term structural story around indigenisation and government spending remains intact.

Public sector undertakings also remained in favour. The Nifty CPSE Index advanced 13%, supported by strong earnings visibility. Meanwhile, logistics and manufacturing themes saw steady gains, with both the Nifty Transportation & Logistics Index and Nifty India Manufacturing Index ending the fiscal year up 9%.

However, the year was far from uniform. Consumption, which is a key pillar of India’s growth narrative, emerged as one of the biggest disappointments. The Nifty MidSmall India Consumption Index fell 12%, reversing its 18% gain in FY25. Persistent inflationary pressures and uneven urban demand weighed on discretionary spending, particularly in the mid- and small-cap segments.

Housing-linked plays also struggled, with the Nifty Core Housing Index declining 11%, while broader digital and SME-focused themes saw corrections. The Nifty India Digital Index and Nifty SME EMERGE Index both dropped around 10%, suggesting a pullback in risk appetite for high-growth but richly valued pockets of the market.

At the stock level, the year belonged to a mix of industrial, commodity, and niche financial plays. GE Vernova T&D India topped the charts with a staggering 140% return, followed by Multi Commodity Exchange (MCX) and Force Motors, both of which surged 126%. Metals and mining names such as Hindustan Copper and GMDC also featured among the top gainers, reflecting the strength in commodity-linked themes.

In contrast to FY25 when defence, SME, and consumption themes dominated, in FY26, there was a clear rotation toward value, yield, and cyclicals. The shift signals a more cautious market environment, where earnings visibility and balance sheet strength are taking precedence over high-growth narratives.