The month gone by – A snapshot

Global markets: Global macro-economic situation is witnessing heightened uncertainty due to divergent monetary policy stance by major central banks. The announcement of tariff imposition by the US government on its key trading partners has added to this uncertainty. At the domestic level, the recent budget announcements with regards to tax exemptions for the middle-class augurs well for the consumption sector. The budget provisions and well-coordinated fiscal and monetary policy stance are expected to reinvigorate both domestic demand as well as investment-led growth.

The US economy continues to maintain its momentum, while economic growth in Europe has stagnated. Divergence in growth prospects has led to divergent monetary policy responses. The US Fed held its policy rates unchanged last month after three consecutive rate cuts, while European Central Bank continues to reduce policy rates. The Bank of Japan has increased policy rates by 25bps as inflation continues to trend higher. Crude oil prices increased by 3% last month as US imposed additional sanctions on Russia’s oil exports.

Economy: Union Budget provides relief to the middle-class

The Union Budget for FY 2026 balanced macro-economic stability amidst a volatile global environment, with the need to provide support to middle-class taxpayers. The government delivered on its fiscal consolidation roadmap and has projected fiscal deficit for FY 2026 at 4.4% of GDP. It also announced a target to reduce the central government’s debt-GDP ratio to 50% by FY 2031. In a major initiative, tax on income of upto Rs 12 lacs per annum has been removed. This measure can potentially support urban consumption, which has been lagging lately. The Finance Ministry announced rationalisation of import duties on select items, which is likely to support trade amidst global volatility.

Recent economic datapoints such as GST collections, PMI data, and vehicle sales, indicate that Indian economic momentum is gradually reviving. The World Bank has projected India’s GDP to grow at 6.7% in each of the next two years, which would be the highest amongst large economies globally.

Equity Markets: Correction amidst consolidation

Indian equity markets witnessed a correction in January owing to increased global uncertainties, lower-than-expected corporate earnings and sell-off by foreign investors. While the Nifty index was down 0.6%, the Midcap (-7.2%) and Smallcap (-10%) indices saw significant correction. Amongst sectors Fast Moving Consumer Goods (FMCG) and Private Banks outperformed while Capital Goods and Power sectors underperformed. Flows from domestic investors remained strong at US$ 10 bn while Foreign Institutional Investors (FIIs) sold equities worth US$ 9 bn.

Outlook

Post the sharp correction, we expect markets to consolidate in the near term. Our stance on equity markets remains positive driven by improving economic prospects, resumption of corporate earnings and stable domestic market flows.

Fixed Income market: RBI expected to initiate monetary easing in the upcoming meeting

The retail inflation for December declined to 5.2% y-y from 5.5% in November. The inflation trajectory is projected to trend downwards given softer food prices. Amidst declining inflation trend, RBI’s monetary policy committee may initiate rate cuts later this week. The monetary policy easing cycle is expected to provide support to economic growth. FPIs inflows into Indian debt markets increased to US$ 12.7 bn in January as Indian Government Bonds got included in Bloomberg EM Local Currency Government Index.

Outlook: The central government continues on path of fiscal prudence and has indicated further consolidation in the coming years. The start of monetary policy easing cycle in the near term, combined with liquidity easing measures by RBI indicate that domestic yields may continue to exhibit a declining trend.