India’s Long Market Correction May Be Creating Room for a Reversal, Says DSP Mutual Fund

Indian equities have spent more than a year struggling to regain momentum, but that long period of weakness may have left parts of the market in a better position than they were before the correction began. 

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DSP Mutual Fund, in its October Netra report, said the combination of prolonged consolidation, India’s sharp underperformance against other emerging markets and more reasonable large-cap valuations has created a more favourable setup for a possible reversal. 

That does not mean a turnaround is certain or around the corner. What has changed, according to the fund house, is the starting point. 

Instead of a dramatic market crash resetting valuations, much of India’s adjustment has happened quietly over time. 

Nifty’s Correction Was Long Rather Than Deep 

The Nifty remained below its 200-day moving average for 145 consecutive trading sessions, making it the eighth-longest such stretch in the dataset studied by DSP Mutual Fund. 

Yet the index’s maximum decline below that average was only 11.5%. 

DSP MF described this as a “time correction” — a prolonged period in which the market consolidates without experiencing the kind of deep fall normally associated with a major correction. 

That matters because time itself can change valuations. 

While share prices remain subdued, company earnings, dividends and book values can continue to grow. Over time, that can make valuations less demanding even without a steep decline in stock prices. 

India Has Fallen Far Behind Other Emerging Markets 

The more striking adjustment has come from India’s performance relative to other emerging markets. 

Between July 2025 and September 2026, the MSCI Emerging Markets index gained 39.3% in US dollar terms. 

Over the same period, the Nifty declined 14.6%. 

That leaves a gap of 53.9 percentage points between the two. 

DSP Mutual Fund believes such a wide divergence has improved the relative case for Indian equities. India’s adjustment has come through a combination of weaker prices, time and currency movements. 

The fund house cautioned that this does not guarantee an immediate reversal. But after such significant underperformance, it sees a more favourable setup for Indian equities to move closer to their longer-term relative trend. 

Large Caps Look More Comfortable After the Reset 

Not every part of the market looks equally attractive. 

DSP Mutual Fund sees the clearest valuation improvement among large-cap stocks. 

The Nifty 50’s trailing price-to-earnings ratio has fallen to 19.26 times, below its historical median of 20.9 times. 

Its price-to-book ratio stands at 2.75 times, compared with a historical median of 3.5 times. 

That makes large caps relatively more attractive in DSP MF’s assessment. 

Mid- and small-cap stocks tell a different story. 

Their valuations relative to the Sensex remain elevated, with small-cap valuations around 72% above their historical median and mid-cap valuations about 56% higher. 

The correction, in other words, has not made every corner of the market inexpensive. 

IT, Private Banks and FMCG Lose Their Old Premium 

The valuation reset is also changing the picture across sectors. 

Traditionally defensive areas such as IT, private banks and consumer staples are now trading at roughly the same forward valuations as cyclical sectors. 

Historically, these defensive sectors commanded a premium of around 70%. 

DSP MF’s analysis places IT, private banks, FMCG, financial services, chemicals and cement near the lower end of their own historical return distributions. 

The picture is quite different for CPSEs, PSU banks, telecom and capital goods, which remain well above their historical base rates. 

A Better Starting Point, Not a Guaranteed Turnaround 

DSP Mutual Fund’s argument is ultimately less about calling the exact bottom of the market and more about how much has changed during India’s prolonged correction. 

Indian equities have underperformed emerging markets by a wide margin. Large-cap valuations have moved closer to historical averages. Several sectors that once carried sizeable premiums have also become less expensive. 

But pockets of the market particularly mid- and small-cap stocks continue to trade at elevated relative valuations. 

That leaves investors with a more nuanced picture after a long period of weakness: the market as a whole may have a better starting point than it did before the correction, but the opportunity is far from uniform. 

For DSP Mutual Fund, the strongest case currently lies in large caps, where the combination of lower valuations and India’s unusually wide underperformance against emerging markets has created a more favourable setup for a potential reversal.