Outlook for the Month of October’26

Economy Review

The key events in the month were –

Domestic Factors –

a) Trade Deficit – Goods deficit narrowed by $ 5bn to $ 27bn in August’26. Goods exports in August’26 rose 26% yoy to $ 44bn led by oil exports, engineering goods and electronics. Goods imports rose 14% yoy to $ 71bn.

b) IIP – IIP growth in August’26 was at 8% with manufacturing at 9%, electricity production growth at 12.3%, water, sewage and waste at 6.3% and mining at -5.6%.

c) IMD – Monsoon activity remains weak with cumulative rainfall 13% below its the long-term average. On a cumulative basis, rainfall was deficient in south, east and northeast while rainfall was normal in central and north-west India.

Global Factors –

a) FOMC – FOMC hiked the Fed funds rate by 25 bps to 3.75-4%, in line with market expectations.

b) ECB – The ECB also increased interest rates by 25bps on the back of high inflation.

c) West Asia Conflict – The West Asia crisis continue with no resolution in sight and the Strait of Hormuz continues to remain shut.

d) Crude Oil – Brent crude oil prices continue to remain elevated at above $100/bbl.

Domestic Macro Economic Data

Inflation – India’s CPI inflation inched up to 4.8% in August’28 marking the tenth straight month of acceleration, while core inflation crossed 4% for the first time this year. India’s WPI inflation continues to remain elevated at 9.9% in August’26.

Outlook for Equities
Nifty-50 corrected sharply by 6.1% in the month of Sepetmebr’26 on the back of rising crude prices and elevated global interest rates. Mid-cap and Small-cap indices also corrected by 7.6% and 3.4% respectively. Indian equity markets remains under pressure on persistent uncertainty over the US-Iran war leading to broad-based risk aversion. Primary market activity remained strong despite weak secondary market conditions, with 32 IPOs raising $4.1bn during September’26.

Brent crude oil prices continue to remain elevated at above $100/bbl. FOMC, ECB and Bank of Japan raised policy rates by 25bps. Monsoon activity remains weak with deficit of about 13%. FIIs sold $3.2bn worth of Indian equities whereas DIIs bought $8.0bn of equities during the month of Sepetmber’26.

Indian markets stand at an ideal inflexion point, backed by strong economic indicators and nominal GDP growth of 11-12%. On the back of which Indian corporate earnings are well-positioned to deliver a 13-15% CAGR from FY26-28. Nifty is currently trading at ~16x FY28e P/E, below its long term average. We expect Nifty earnings to grow at 13-15% CAGR over FY26-28. Investors can continue to invest in equities from a medium to long-term perspective.

Outlook for Debt
September’26 saw several actions by RBI on the liquidity front as they took measures to mop surplus liquidity in the system post FCNR (B) inflows. Total inflows under the scheme reached a massive $ 143bn till 31st August’26 of which FCNR (B) inflows were $ 133bn. RBI announced OMO sales of Rs1tn in three tranches of Rs 50bn and Rs 250bn to absorb the surplus liquidity in the banking system which had reached over Rs 10.7tn in middle of September. RBI also conducted sell/buy FX swap (in the up to 1-year bucket) to mop up the surplus banking system liquidity and offset the massive, short-forward book.

Till 25th September cumulative rainfall was 13% below long-term average, rainfall was deficient in south, east and northeast while rainfall was normal in central and north-west India. Overall basins and reservoirs levels were 11.5% below long-term average for week-ending 24th September’26. The central government announced its H2FY27 borrowing program of Rs 7.86tn, taking total FY27 gross borrowing to Rs 16tn. Supply in the 3Y, 5Y and 10Y segments was lower as compared to H1FY27 and comparatively higher for the remaining buckets. Gross supply in the near end of the curve fell to 19% (from 22.8% in H1FY27). Meanwhile, supply in the far end of the curve rose to 28% (from 25.2% in H1FY27). August’26 CPI inflation rose to 4.8% yoy, with both food and core inflation registering an uptick. Core inflation at 4.2% was driven by transport, likely due to the second-order effects of rising oil and input prices. WPI inflation for August’26 was at 9.9% yoy. India’s good trade deficit narrowed to $ 27bn in August’26. Goods exports in August rose 26% yoy to $ 44bn led by oil exports, engineering goods and electronics. Goods imports rose 14% yoy to $171bn. Services trade surplus in August’26 at $ 17.5bn remained healthy even as it moderated marginally.

In the global markets ECB hiked rates by 25 bps and FOMC hiked the Fed funds rate by 25 bps to 3.75-4%, in line with market expectations. The policy communique did not signal any forward guidance. However, the concerns about inflation remaining above the target continued to be highlighted. FOMC’s median projections indicate one more 25-bps rate hike in CY2026 and none in CY2027. Bank of Japan also raised their benchmark policy rate by 25 bps to 1.25%, the highest level since 1995 with a 7-2 majority as the bank aims to stabilize underlying inflation at around 2%. US 10 year yields have reached 2002 highs rising to 5.34%, up by a massive 53bps during the month as market priced in 50bps of further rate hikes by FOMC in the year.

In the near term, market will watch for RBI MPC in October with a close eye on action regarding key rates and liquidity measures. Market will also watch the impact of FCNR (B) inflows on currency, forward rates and RBI FX forward book. CPI inflation data in India as well as US, labour data outcome in the US and market pricing of future FED action will be closely watched. 10-year Gsec closed at 7.18% on 30th September’26, higher by 23 bps during the month. 10-year Gsec yield in the near term is likely to be in a range of 7.00%-7.30%. Spread of 10-year Gsec with corporate bond is near 65 bps and is likely to be in a range of 60-70 bps.