The month gone by – A snapshot

Global markets:

The global markets started 2026 on a positive note given resilient economic growth. Elevated geopolitical uncertainty led to significant volatility in asset prices during the month. The US Fed, after delivering three consecutive rate cuts last year, held interest rates steady in January. China announced subsidies to support consumption, as the economy continues to face headwinds from industrial overcapacity and downturn in the real estate market.

MSCI World Index rallied by 2% in January, while MSCI Emerging Market Index outperformed with a 9% return. Commodity prices, especially precious metals, exhibited sharp volatility, while crude oil prices rallied by 16% due to increase in geopolitical risks. Depreciation pressure on INR is expected to abate as India has reached trade agreements with key partners.

Economy: Union Budget focuses on growth

The Union Budget for FY27 focused on providing support to key sectors such as semi-conductors, electronics and rare earths to promote economic growth amidst a challenging and volatile external environment. For services sector, incentives have been provided for attracting foreign investment in Data Centres, Global Capability Centres (GCCs), tourism, healthcare and educational sectors. Taxation structure has been left largely unchanged. Securities Transaction Tax (STT) on derivative instruments has been increased with a view to curb excessive speculation.

Despite significant shortfall in revenues on account of reduction in direct and indirect taxes, the government achieved its fiscal deficit target of 4.4% of GDP. The pace of fiscal consolidation is projected to be gradual for FY27, as the government has now transitioned towards targeting a reduction in Debt-to-GDP ratio. Global rating agency S&P, which raised India’s credit rating last year, has expressed confidence that India’s fiscal dynamics will continue to improve.

Recent datapoints demonstrate continuation of economic momentum. India’s manufacturing PMI has rebounded, and automobile sales continue to show strong traction. In a major development, India has secured trade deals with the US as well as the EU. The economic integration with these two largest economies is expected to provide a major tailwind to external trade and generate impetus for economic growth.

Equity Markets: Volatility persists

Amidst significant volatility, Nifty index declined by 3% while Mid and Small cap indices corrected by 4% and 6%, respectively. Banking and Metals sectors outperformed while Automobile and Fast-Moving Consumer Goods (FMCG) sectors underperformed. Flows from domestic investors remained strong at US$7.6 bn, while foreign investors sold equities worth US$3.5 bn.

The global macro-economic landscape continues to remain fragile underpinned by bouts of volatility across asset classes and divergent monetary policy stance by major central banks. The Indian economy continues to witness steady recovery driven by domestic demand and stable financial conditions. A fiscally prudent Union Budget, announcement of trade deals and government’s continued focus on reforms provides a strong platform for sustainable growth. Measures announced in the budget provide a strong framework to augment manufacturing-led growth, across various sectors, which is expected to improve job creation, consumption, and exports. Corporate results, announced so far, have been largely better than expectations. Post the consolidation, valuations look reasonable. We maintain our positive view on equity markets.

Fixed Income market: Higher government borrowing likely to weigh on bond yields

Retail inflation for December continued to remain low at 1.3%. Given improved growth prospects, RBI’s monetary policy committee may adopt a cautious approach and keep policy rates unchanged this week.

The Union Government has gradually reduced its fiscal deficit from 9.2% of GDP in FY21 to 4.4% this year. Further consolidation is expected to be gradual with FY27 fiscal deficit projected at 4.3%.

The slowdown in fiscal consolidation is expected to lead to increase in supply of government securities in FY27. This, coupled with increase in volatility in global debt markets, is expected to keep domestic bond yields elevated in the near term.