Large-caps gain favor as oil prices and bond yields climb

Analysts are growing increasingly optimistic about large-cap stocks as rising oil prices, higher bond yields, and a more aggressive stance from global central banks raise concerns over the broader equity market outlook. The US 10-year Treasury yield has surged to 5.32 percent from 4.15 percent at the end of 2025, marking an increase of 117 basis points this year. Meanwhile, Brent crude oil prices are hovering near $100 per barrel, a drop from the $125 level seen earlier this year due to ongoing geopolitical tensions in West Asia.

This shift in market dynamics has prompted global central banks to adopt tighter monetary policies. The US Federal Reserve raised rates by 25 basis points to 3.75-4 percent, its first hike in three years. The Bank of Japan has raised rates twice to 1.25 percent, while the European Central Bank increased rates by 25 basis points to 2.25 percent. In India, bond yields have risen nearly 50 basis points over the past two months to 7.21 percent, reflecting expectations of tighter monetary policy.

Mahesh Nandurkar, managing director and head of equity research at Jefferies India, noted in an October 6 report that the risk-reward for large-caps is becoming more favorable due to better relative valuations compared to mid-caps. G Chokkalingam, founder and head of research at Equinomics Research, expects large-caps to outperform smaller peers, especially if oil prices and bond yields start to cool. He anticipates foreign institutional investors (FIIs) to return to Indian equities, particularly large-caps, as these developments unfold.

The valuation argument for large-caps is strengthening. The MSCI India’s one-year forward PE has dropped to 18.4x, about 7 percent below its 10-year average, though it remains 90 percent higher than emerging-market peers. Companies accounting for 39 percent of MSCI India’s weight now trade at valuations at least 10 percent below their historical averages. The Nifty 50 has slipped nearly 13 percent this year, while the Nifty Smallcap 250 and Nifty Microcap 250 have gained around 7 percent and 16 percent, respectively.