The month gone by – A snapshot

The global macro-economic situation continues to face challenges on multiple fronts. The recent geopolitical tension in the Middle-East is expected to induce further volatility across asset classes. From a local market perspective, data points remain sanguine across industrial, financial and consumer segments. The recently concluded Q3FY26 result season turned out to be better than expected with higher upgrades than previous quarters. The tariff related developments bode well for India and are likely to have positive impact on export-focused sectors. However, in the near-term, we expect markets to remain volatile owing to adverse external events and rising energy prices. The recent market consolidation along with improving fundamentals begets attractive view on Indian equities from a medium to long term perspective.

Economy: New GDP series indicates robust economic momentum

India has revised the base year of GDP calculation from FY12 to FY23. Overall size of the economy is marginally lower than what was estimated earlier, with the share of farm sector moving up. Recent datapoints such as GST collections, automobile sales, credit growth and manufacturing PMI indicate continuation of strong economic momentum. Improvement in relations with key trade partners is expected to provide tailwind to external trade and provide impetus to growth. In its February meeting, the monetary policy committee has revised growth forecast higher, driven by robust corporate performance, resilient services sector, and improved agricultural activity.

Increase in geopolitical tensions in the Middle-East, and its potential adverse impact on energy supplies, has emerged as a key variable to monitor. While the economy is expected to weather short-term disruptions in oil and gas supplies, a scenario of prolonged disruption can act as a significant headwind to growth.

Equity Markets – Consolidation continues

Indian markets were largely unchanged in the month of February amidst significant volatility. The Nifty index posted -0.6% return while Midcap (+0.6%) and Small Cap (+0.3%) index outperformed. Amongst sectors, PSU Banking and Capital Goods sectors outperformed while Information Technology and Real Estate sectors underperformed. Flows from Domestic Institutional Investors (DIIs) remained strong at US$ 4bn while Foreign Institutional Investors (FII) turned buyers of Indian equities with net buying of US$1.5 bn.

MSCI World Index rose by 1% in January, while MSCI Emerging Market Index outperformed with a 5% return. Crude oil prices have increased as geopolitical tensions have affected energy supplies from key producing economies. The increase in geopolitical tensions has led to depreciation of INR to 91.6 against the USD.

Fixed Income market: Policy rates expected to remain stable

Retail inflation for January, under the new CPI series, edged up to 2.8% from 1.3% in December. Underlying core inflation (excluding food and fuel prices) declined sharply to 3.4% from 4.7%. The monetary policy committee has projected inflation to remain benign for the foreseeable future and held policy rates unchanged. In a recent interview, RBI Governor has stated that he expects ‘the policy rate to be around this level or lower for a long time, barring any shocks’.

RBI continues to infuse liquidity through Open Market Operations. Foreign Portfolio Investors infused US$ 1.2bn into Indian debt markets last month. Ample systemic liquidity is expected to keep domestic yields range bound in the near term. However, possible disruption to energy supplies may lead to deterioration in inflation outlook and can lead to upward pressure on yields.