Indian markets flat as IT selloff persists; RBI tightens broker lending rules

India's stock market opened Monday morning with barely a pulse. The Nifty 50 inched up 0.08 percent to 25,493.3, while the BSE Sensex gained 0.07 percent to 82,685.68 by mid-morning. On the surface, stability. Beneath it, a market still digesting last week's damage and bracing for more.

The IT sector, which had cratered 8.2 percent in the previous week—its worst performance in ten months—continued its descent. The Nifty IT index fell another 0.5 percent Monday, a visible wound that kept bleeding. The sell-off had been triggered by anxiety over AI automation tools and their potential to hollow out traditional software businesses, the kind of work that has long been India's export engine. Eight of the market's sixteen major sectors posted losses. Small-cap and mid-cap stocks each dropped 0.2 percent. The broader market was not collapsing, but it was not moving forward either.

VK Vijayakumar, chief investment strategist at Geojit Investments, saw the weakness persisting. "The IT sell-off will continue to weigh on markets in the near term," he said, adding that institutional investors were likely to keep dumping IT holdings and rotate into sectors with clearer earnings growth ahead. This was not panic selling; it was reallocation. Money was moving, not fleeing.

Fractal Analytics, the country's first pure-play artificial intelligence company, made its market debut Monday and immediately disappointed. The stock fell 2.7 percent below its issue price of 900 rupees on its opening day—a telling signal about investor appetite for AI-focused plays in the current climate. Meanwhile, the stock exchange operator BSE tumbled 9 percent. Brokerages took hits across the board: Groww, Motilal Oswal, and Angel One each lost between 1 and 7 percent.

The pressure on these financial intermediaries came from a specific regulatory move. The Reserve Bank of India had issued a new circular tightening the amount of capital that banks could deploy in the stock market. Devarsh Vakil, head of prime research at HDFC Securities, explained the mechanics: the stricter rules would raise borrowing costs for brokers and proprietary trading desks, curbing the leverage and liquidity that fueled derivatives trading. Proprietary traders—firms trading their own capital rather than client money—account for 40 percent of all futures and options turnover. Tighter access to cheap capital meant less fuel for that engine.

Not every sector was retreating. Pharmaceuticals rose 0.9 percent, buoyed by specific wins. Torrent Pharma gained 5.6 percent after reporting an uptick in December-quarter profit. Natco Pharma climbed 9.5 percent on news that it had received regulatory approval to launch Semaglutide in India, the weight-management and type-2 diabetes drug that has become a global phenomenon. In a market where IT was being repriced downward and financial leverage was being squeezed, pharma offered a different story—one of demand, approval, and growth.

The day's flatness masked a market in transition. Institutions were rotating. Regulators were tightening. Some sectors were being abandoned while others attracted fresh capital. The question hanging over the close was whether this was a temporary pause before a deeper correction, or the beginning of a more durable rebalancing toward businesses with tangible earnings and less exposure to the AI disruption narrative that had spooked sellers all week.