India’s benchmark equity index Nifty50 is facing a heavy-lifting problem. Foreign investors may return, crude prices may stabilise and bond yields may ease but a durable Nifty recovery will remain difficult unless the two heavyweight sectors of the market, banks and IT, begin to participate.

Financial services account for 36.47% of Nifty’s weightage, while IT has an 8.48% weight. Together, they represent nearly 45% of the index, making their performance a substantial swing factor for bluechip stocks.

So far in calendar 2026, the Nifty has fallen nearly 10%. The Nifty Bank has declined about 5%, while the Nifty IT index has lost 21% of its value. HDFC Bank, which is down 29% this calendar year, is the biggest drag on Nifty where it carries a weightage of 9.85%.

The latest setback has come from foreign flows. FIIs have withdrawn around ₹14,000 crore from Indian equities in September so far, after investing nearly ₹50,000 crore in the previous two months. Rising global bond yields and soaring crude oil prices have revived pressure on emerging market flows.

“It is difficult for the Nifty and Sensex to deliver any meaningful performance, even if FII flows were to turn dramatically favourable, unless their largest constituents - financials and IT - begin to participate,” said N ArunaGiri, Founder and CEO of TrustLine Holdings.

Banks and IT are on different clocks

The two sectors are recovering from different problems. Banks are dealing with the near-term earnings impact of a large influx of FCNR(B) deposits, even as the new liquidity could support credit growth and funding costs over time.

IT companies, meanwhile, are navigating uncertainty around artificial intelligence, automation and the possibility of weaker demand for traditional technology services.

“Banks and IT are on different recovery clocks,” Manish Bhandari, CEO and Portfolio Manager at Vallum Capital, told ET Markets.

He said exceptionally strong FCNR(B) inflows had pushed banking system liquidity to a multi-year high and meaningfully lowered wholesale funding costs, including certificate of deposit rates. That is likely to weigh on net interest margins in the near term, but the cheaper funds should gradually work through bank balance sheets and support margin recovery and earnings through fiscal 2027.

Bhandari described the banking benefit as “a slow-burn tailwind rather than an immediate one.”

That distinction could be critical for investors. Banks may have better earnings visibility, but the sector may not deliver an immediate re-rating if margins remain under pressure while the deposits are deployed.

Why banks may recover faster

Sunny Agrawal, Head of Fundamental Research at SBI Securities, expects banking stocks to recover faster than IT over the next one to two years.

The recent FCNR deposit mobilisation, which exceeded $130 billion, should help banks improve their credit-to-deposit ratios. As these deposits are deployed over the next four to six quarters, credit growth could accelerate and support net interest income.

“Net interest margins could remain under some pressure in the near term, as the deployment of these newly mobilised deposits will take time,” Agrawal said.

Once the liquidity is deployed, however, the operating backdrop could improve. Agrawal expects the banking sector to deliver mid-teen growth, providing stronger earnings visibility. Industry credit growth is already tracking at 15% or higher, and the upcoming festive season could help sustain that momentum.

“Therefore, between banking and IT, we believe banking is better positioned to outperform over the next one to two years,” he said.

The view also reflects the relative performance of the two sectors. Banking stocks have declined about 5% this year, compared with a 21% drop in IT. Banks therefore have a liquidity and credit-growth catalyst ahead, while IT must first overcome concerns around AI-led productivity and demand disruption.

IT has a lower bar to clear

The case for IT is not necessarily one of a broad-based sector recovery. It is more a valuation and expectations story.

“IT looks more mispriced,” Bhandari said. Current valuations appear to price in near-permanent demand stagnation for large IT incumbents. But order book momentum at the sector bellwether remains healthy, which does not fit neatly with a “demand destruction” narrative.

With expectations set so conservatively, IT companies have greater scope to deliver positive surprises. Bhandari believes the sector could see a sharper rerating over the next two years if order book strength translates into revenue growth and earnings stability.

The AI threat is nevertheless real. ArunaGiri said the technology sector must navigate growing uncertainties and headwinds arising from AI. Even a sharp turnaround in FII flows may not be enough to trigger a meaningful rally in large-cap IT stocks if investors remain concerned about automation and the impact on traditional technology services.

Agrawal expects the IT sector as a whole to remain range-bound or sideways, partly because a significant amount of negativity has already been priced into IT stocks. But he sees opportunities in selected companies with clear visibility of mid-teen or double-digit growth.

Coforge offers an example of that selective approach. The stock has nearly doubled from its recent low, highlighting that investors are willing to take targeted bets in IT companies where growth visibility is stronger.

“While we expect banking to lead the sectoral performance, select IT stocks could continue to outperform the broader IT index and, in some cases, potentially deliver returns comparable to those from the banking sector,” Agrawal said.

FII flows may not be enough

The immediate market risk is that the foreign flow recovery has already lost momentum. ArunaGiri said FII flows had turned decisively positive in July and continued in August, but the recent rise in global bond yields had pushed flows back into negative territory in the last week.

That leaves the Nifty dependent on two conditions: a revival in foreign buying and participation from its largest sectors.

ArunaGiri said it was difficult to identify a near-term trigger for a meaningful turnaround in large caps or the benchmark indices. Investors, meanwhile, continue to show strong interest in small- and mid-cap stocks, which are trading at lifetime highs after a relatively soft phase lasting one-and-a-half to two years.

The market is therefore sending a divided signal. Small and mid-caps have regained momentum, while large caps remain hostage to banks, IT and global liquidity.

For the Nifty, banks appear to have the faster recovery path because FCNR(B) liquidity, credit growth and lower funding costs offer a visible earnings bridge. IT, however, may deliver the sharper stock-specific rebound because expectations are deeply depressed.

The next broad market rally will need both warhorses awake. But if investors are looking for the sector more likely to move first, the current evidence points to banks with selective IT stocks capable of closing the gap quickly.

Disclaimer: This article has been written by Nikhil Agarwal, who is not a SEBI-registered Research Analyst or an Investment Adviser. Nikhil Agarwal and his/her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here