Global growth remains resilient, with the IMF projecting expansion of 3.3% in 2026 and 3.2% in 2027, broadly in line with the estimated 3.3% growth in 2025. The forecast includes a modest upward revision for 2026 compared with the October 2025 outlook, driven by stronger-than-expected momentum in the U.S and sustained robust growth in India. Investment related to technology and AI continues to provide an important tailwind, particularly in North America and Asia.
Global financial conditions have tightened as widening fiscal deficits and rising public debt in advanced economies have pushed long-term bond yields higher. The U.S Federal Reserve kept policy rates unchanged in Jan policy after the 25 bps cut in December citing persistent inflation and resilient growth, and has offered limited guidance on the timing of any future rate cuts.
India’s growth outlook remains strong. The advance estimate pegs FY26 real GDP growth at 7.4%, led by a services-driven expansion. Demand conditions remain healthy with several high-frequency indicators for December pointing to continued buoyancy, supported by improving credit flows.
Inflation remains benign. Headline CPI edged up in December but stayed below the lower tolerance level. Reflecting this, the RBI MPC cut the repo rate by 25 bps to 5.25% in December 2025, while maintaining a neutral stance to support growth. However, the sharp rupee depreciation along with higher commodity prices (especially metals) increase the risk of inflation.
Budget 2026-27 : Budget 2026-27 was short of any high impact measures but has carried forward the foundations and work being done in the past few years. Nominal GDP growth is assumed at ~10%, which appears realistic given current growth – inflation dynamics and the fiscal consolidation path remains intact. Capital expenditure is sustained rather than accelerated, with defence seeing a step-up while overall capex grows in line with GDP. Tax policy remains largely unchanged, but increase in STT on F&O is negative while lower tax on buyback for minority shareholders is positive.
CY25 concluded with yet another year of positive returns for the Indian markets, marking the 10th consecutive year of positive returns. The Nifty briefly touched a fresh high of 26,326 in Dec’25 but has been consolidating in a tight range (24000-26000) for the past 9-10 months. During the last 12 months, smallcaps declined by 6%, underperforming largecaps and midcaps, which rose 11% and 6%, respectively.
Indian equity markets appear in a favorable space with multiple market-supportive, growth-positive building blocks already in place. In CY25, India had to endure a constant flow of disproportionate and punitive US trade measures, which were instrumental in catalyzing a ~USD22b in FII outflows since January 2025. Additionally, the INR depreciated by ~6% against the USD, especially as the dollar index slid. We believe many of these adverse trends are now likely to reverse.
Adjusted for exceptional costs related to provisioning due to change in labor code, Nifty earnings growth for Q3’26 stood at 9%. However, Mid-caps reported an earnings growth of 20% whereas PAT growth for Small-caps stood at 28%. This is the second consequent quarter of double-digit earnings growth, which in Q2’26 stood at 12% and this quarter stood at 18% indicating that the earnings growth has accelerated.
A key highlight of the quarter was the improved sectoral breadth of earnings growth. Autos, Cement, Capital Goods, Telecom, Metals, Oil & Gas and Financials did better than expectation whereas IT, Chemicals, Real Estate and Energy were some of the sectors which lagged in terms of performance.
With the decisive moves on the landmark India-US trade agreement (even if an interim one), coupled with the proposal of a historic Indo-EU FTA, should help calm the frayed sentiments of FII investors and assuage concerns over India’s geopolitical isolation. Consequently, we expect abatement in FII outflows over the course of the year, helping India retrace its underperformance vs key global markets.
Further, we believe that the market will now begin to accord correct weightage to the improving trajectory of corporate earnings growth, which has shown successive improvement over the quarters with an improving earnings revision trend.
We feel India’s long-term story shines brighter than short-term volatility. Also, for a long-term investor, there is no alternative to enduring this volatility. Equity investment does not work on guarantee or certainty but works on probabilities and we believe, current probabilities are heavily in favour of Indian equities, especially small caps.
