Outlook for the Month of July’26

Economy Review

The key events in the month were –

Domestic Factors –

a) FPI Tax Reforms – The government has announced a series of reforms to attract long-term foreign capital, including the removal of withholding tax on interest and capital gains tax on FPI’s G-Sec investment.

b) Trade Deficit – India’s trade deficit remained steady at $28.2 bn in May’26, which was led by higher oil prices. Imports rose 21% yoy in May’26 whereas exports rose by 18% YoY.

c) Manufacturing PMI – Manufacturing PMI eased to 54.2 in June’26 Vs 55 last month.

d) RBI – The RBI MPC unanimously decided to retain the policy repo rate at 5.25%, while maintaining the stance at “neutral”. The RBI announced measures to incentivize foreign capital inflow to support rupee.

e) IMD – India's June’26 southwest monsoon saw a 40% rainfall deficit, driven by strengthening El Nino conditions. IMD has forecasted monthly average rainfall in July’26 to be below normal.

Global Factors –

a) FOMC – The FOMC kept the Federal Funds rate unchanged within the 3.50-3.75% range for the fourth consecutive time.

b) ECB – The European Central Bank raised its benchmark interest rates by 25bps in June’26, bringing the key deposit rate to 2.25%.

c) West Asia Conflict – US and Iran signed an MOU to end the was and the movement of ships along the Strait of Hormuz normalized to pre war levels.

b) Crude Oil – Brent crude oil prices dropped to $71/bbl after resolution of the West Asia Conflict.

Domestic Macro Economic Data

Inflation – India’s CPI inflation inched higher to 3.9% in May’26 from 3.5% YoY in April’26 due to higher food and fuel inflation. India’s WPI inflation has spiked to 9.7% in May’26 under the new series vs 8.3% in April’26 primarily driven by higher prices of mineral oils, crude petroleum and natural gas, manufacture of chemicals and chemical products and manufacture of basic metals.

Outlook for Equities
Indian equity markets gained 1.4% in the month of June’26 on easing geopolitical tensions. Crude prices corrected sharply to $71/bbl after MOU was signed by US and Iran ending the West Asia Conflict. Midcap index remained flat whereas the smallcap index gained 4% in June’26.

The Indian government has announced a series of reforms to attract long-term foreign capital, including the removal of withholding tax on interest and capital gains tax on FPI’s G-Sec investment. The RBI also announced measures incentivizing FCNR(B) deposits to support rupee while keeping the key policy rates unchanged. Indian rupee has appreciated to 95 levels against the USD. India's June’26 monsoon saw a 40% rainfall deficit and overall below normal monsoon is expected this year due to El Nino conditions. FIIs sold $3bn worth of Indian equities whereas DIIs bought $8.7bn of equities during the month of June’26.

Nifty is currently trading at ~17x FY28e P/E. We expect Nifty earnings to grow at 13-15% CAGR over FY26-28. We expect rerating in the Indian equity markets given correction in crude oil prices and improving macros. This can lead to strengthening of the rupee and increase in foreign capital inflow. Investors can continue to invest in equities from a medium to long-term perspective.

Outlook for Debt
RBI MPC continued on a pause in the June’26 policy, with the repo rate at 5.25%. Several measures to incentivize foreign capital inflows were announced by RBI mainly through additional securities under FAR, forex swap window for PSU ECBs and incentivizing FCNR(B) deposits and the center by withdrawal of taxation on FPI investment in G-Secs. The minutes of the June policy reaffirmed an unanimously cautious MPC as the West Asia conflict weighs on the domestic macro-outlook. While the MPC acknowledged the risks of rising inflation, they emphasized supply-driven nature of the inflation shock and adverse impact on an already deteriorated growth outlook to justify the pause. Post MPC FPI’s have invested over $5bn in Indian government bonds.

IMD has forecast monthly average rainfall in July to be below normal at 94% of long-period average (LPA). Rainfall in June was 60% of LPA compared to the IMD forecast of less than 92% of LPA. Given that the rainfall in July-August accounts for around 60% of total seasonal rainfall, a weak July rainfall will put crop production at substantial risk. GDP growth in Q4FY26 was at 7.8%, higher than NSO’s implied estimates. FY2026 real GDP growth of 7.7% was slightly above NSO’s estimate of 7.6%. Center’s 2MFY27 fiscal accounts were weak, reflecting the impact of the West Asia crisis through lower indirect taxes and higher expenditure growth. May’26 CPI inflation continued the uptrend at 3.9% yoy. Food inflation was driven by oils and fats, meat and fish, fruits and vegetables. Core inflation was at 3.9% yoy. WPI inflation for May’26 was at 9.7% yoy driven by high fuel and power inflation. May’26 trade deficit remained steady at $28.2 bn as oil trade deficit widened. Goods exports in May’26 rose 18% yoy while goods imports rose 21% yoy. Services trade surplus in May’26 at $17.7 bn fell versus the significantly downward revised print of April.

FOMC kept the Federal Funds rate unchanged within the 3.5-3.75% range for the fourth consecutive time, in line with market expectations. The policy communique was hawkish under the new Fed Chair Kevin Warsh as inflation levels remained elevated above the Fed’s 2% target due to supply side disruptions caused by the West Asia crisis. The European Central Bank hiked their policy rates by 25 bps in line with market expectations to contain inflation pressures due to the West Asia crisis. In June’26, the DXY index strengthened by 2.3% due to a stronger than expected performance of the US economy bolstering expectations of September Fed rate hike. Resolution of West Asia crisis led to crude oil prices declining, brent oil fell by 23%.

In the near term, markets await review of Bloomberg Global Aggregate Index announcement for inclusion of India Gsec, path of CPI data, FPI flows and currency movement. Globally, Federal Reserve stance, labour market data from US, inflation data and global yields will be observed. 10-year Gsec closed at 6.75% on 30th June’26 lower by 23 bps during the month. 10-year Gsec yield in the near term is likely to be in a range of 6.65%-6.85%. Spread of 10-year Gsec with corporate bond is near 50 bps and is likely to be in a range of 45-55 bps.