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The fall was broad-based, with nearly 71% of the stocks listed on the NSE declining during the session. Banking and insurance stocks were among the worst hit as sweeping changes to the insurance industry proposed by the Insurance Regulatory and Development Authority of India (IRDAI) weighed on the sentiment.

The rupee declined to a near one-week low against the dollar intraday, but reports suggested that intervention by the Reserve Bank of India (RBI) stabilised the currency. The rupee ended the session at 95.95 against the greenback, down 0.2% from its previous close.

Oil prices, bond yields climb

Crude oil prices climbed above $102 a barrel during the day as the war in West Asia showed no signs of ending. Both Iran and the US remain far apart on how to end their war, a Reuters report cited an Iranian official as saying. 

Meanwhile, Iranian President Masoud Pezeshkian on Wednesday accused US President Donald Trump of a “bullying mentality” during an address at the United Nations, a day after his US counterpart had threatened to “annihilate” the Gulf country if no peace deal was agreed between both parties.

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Both countries have seesawed during peace negotiations that have stretched for months, with a deal seeming close on multiple occasions in the past just for negotiations to break down. India, a huge net importer of crude oil, has been among the worst hit by the exorbitant oil prices in the wake of the war.

The yields on 10-year US Treasury bonds also climbed to their highest level since 2007 during the session as expectations of an interest rate hike by the US Federal Reserve intensified, dealing a double-whammy to an emerging market like India already battling with high crude prices.

The ⁠S&P Global’s flash US Composite PMI Output Index, a widely tracked measure for business activity in the country, jumped to its highest level since July 2021 in September, indicating that the economy continues to grow at a robust pace despite past concerns of a slowdown. Meanwhile, input prices paid by businesses in the country climbed to a near four-year high, stoking inflation fears.

This led to expectations of a 25-basis-point rate hike by the Fed in its October meeting jumping to 75% overnight from around 71%, according to the CME Fedwatch tool. Just a week ago, the expectations of a rate hike were at around 55%, while a month ago it was at just 11%. The US central bank had already hiked its key interest rate by 25 bps earlier this month — the first such hike since July 2023.

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Rate hike expectations in the US drive up yields on Treasury bonds, as the new bonds issued after a rate hike promise higher returns to investors. Higher bond yields, meanwhile, hurt equity markets in countries like India, as investors have a safer and more lucrative avenue like US bonds for parking their money, with a weak currency also making dollar-denominated assets more shiny. This could lead to a selloff by foreign investors.

Foreign portfolio investors (FPIs) have already pulled out $2.1 billion from Indian equities so far this month, following two straight months of buying. In 2026, these investors have cumulatively sold over $26 billion of Indian equities, plagued by the concerns pointed out above. 

Insurance stocks nosedive

Banking and insurance stocks were among the worst hit on Thursday as the sweeping changes proposed by IRDAI threatened to add to operational costs in the near term and squeeze margins. Some of these changes include lower expense of management limits for insurers, tighter commission caps, and new transparency requirements for policyholders.

PB Fintech, the parent company of Policybazaar, crashed 34%. ICICI Prudential and HDFC Life Insurance fell 4-6%. 

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“IRDAI’s consultation paper is near-term negative for insurance stocks, particularly distributors and insurers dependent on high-cost channels,” said Vinit Bolinjkar, Head of Research at Ventura Securities. “Proposed caps on commissions, tighter expense-management limits and greater transparency could pressure new-business growth and margins, while the restriction on loan-linked insurance bundling may affect distribution volumes. PB Fintech and other broker-led platforms appear most vulnerable because their earnings are directly linked to commissions and take rates,” he explained.

While the insurance regulator was expected to announce big changes to the industry, many believe the proposed changes have been more sweeping than what was expected.