Outlook for the Month of March’26

Economy Review

The key events in the month were –

Domestic Factors –

a) CAD – The current account deficit moderated to $13 bn (1.3% of GDP) in Q3FY26, buoyed by a higher services surplus, while capital account net outflows were $10 bn.

b) GDP – Real GDP growth in Q3FY26 stood at 7.8% under the new series Vs 8.4% in Q2FY26.

c) Trade Deficit – India’s trade deficit widened sharply to $35bn in Jan’26, up from $25bn in Dec’25, driven largely by a spike in gold imports. Gold imports jumped from $4bn in Dec’25 to $12bn in Jan’26 due to high gold prices.

d) Manufacturing PMI – India’s Manufacturing PMI rose to a 4 month high of 56.9 in February’26.

e) RBI Policy – In the February’26, RBI meet kept key policy rates unchanged and maintained the stance at neutral.

d) Currency – The Indian rupee breached the 92-per-dollar mark on geopolitical tensions in West Asia weighing on oil and gas supply disruption.

Global Factors –

a) West Asia Crisis – US-Israel strike on Iran that hit strategic targets including Iran’s nuclear and military sites and elimination of its leader Ayatollah Ali Khamenei. Iran’s immediate retaliation extended to attacks on Israel and US bases in Israel and Middle East deepening the West Asia Crisis.

b) US Tariffs – The US Supreme Court in a 6-3 majority ruled the reciprocal tariff imposition by the US administration ineffective.

c) Crude Oil – Brent crude oil prices crossed $80/bbl as West Asia crisis escalates, as the movement of vessels through the Strait of Hormuz gets impacted.

Domestic Macro Economic Data

Inflation – India’s CPI inflation in January’26 stood at 2.8%, based on the new CPI series with the base year as 2024. The new basket has changes in terms of both item composition and weightages compared to the old CPI basket. India’s WPI inflation increased to 1.8% in January’26 from 0.8% in December’25.

Outlook for Equities
The Indian equity markets declined in February’26 with Nifty down 0.6% as rising geopolitical tensions between Iran and Israel-US and persistent concerns over AI-led disruption leading to sharp correction in IT stocks. The Indian rupee breached the 92-per-dollar mark and Brent crude oil crossed $80/bbl on escalating West Asia crisis.

The US Supreme Court in a 6-3 majority ruled the reciprocal tariff imposition by the US administration ineffective. US-Israel strike on Iran and Iran’s immediate retaliation on Israel and US bases in Middle East deepened the crisis. Blockage of the Strait of Hormuz, disruption at certain refineries and oil fields in Middle East can lead to energy crisis. On the domestic side, the current account deficit moderated to $13 bn (1.3% of GDP) in Q3FY26, buoyed by a higher services surplus, while capital account net outflows were $10 bn. Real GDP growth in Q3FY26 stood at 7.8%.

Indian Equity markets are looking attractive due to a prolonged consolidation in large cap companies and a severe correction in broader markets, low FII ownership, rising India’s economic growth, corporate earnings growth inflection, stable policy regime, strong domestic flows, US India & EU FTA deals. Nifty is currently trading at ~18x FY27e P/E, which is below its 10 year average. We expect Nifty earnings to grow at 12-13% CAGR over FY25-27. Investors can continue to invest in equities from a medium to long-term perspective. The key monitorable is the ongoing Middle East crisis and how that can have an impact on India’s macros.

Outlook for Debt
RBI MPC in February’26 kept key rates unchanged and came across as balanced in approach and at the same time lauding the growth prospects of the economy. Governor in the speech and post policy press conference spoke of various initiatives taken in the union budget as well as trade deals done with major partners and impending trade deal which augur well for future growth trajectory. MPC minutes showed that members unanimously acknowledged better growth prospects since the December’25 policy meeting. The upward revision to the growth outlook reflects strong domestic drivers, driven by continued infrastructure push, sustained rural consumption and an emerging recovery in urban demand. Members acknowledged that underlying inflation remains benign, with core-core inflation (excluding precious metals) staying within a comfortable range. Most MPC members view the current policy rate as appropriate.

RBI actions have led to banking system liquidity being in comfortable surplus of over Rs 2tn in February’26 with the durable system liquidity also rising to over Rs 5.5tn for the fortnight ending 15th February’26. The NSO estimated FY26 real GDP growth of 7.6% based on the new series with the base year FY23 led by consumption growth and Gross Fixed Capital Formation. India’s goods trade deficit accelerated to $34.7 bn in January’26, driven by a sharp rise in gold imports. Services trade surplus improved significantly to $24 bn. The India January’26 CPI under the new series with 2024 as the base year came in at 2.8%, however food inflation changed trend from deflation, while core inflation was at 3.4% vs 4.5%+ prints in the old series. January’26 WPI inflation also inched higher to 1.8%.

The European Central Bank (ECB) kept interest rates unchanged for the fifth consecutive time in line with market expectations, citing an unpredictable macro-outlook. Bank of England kept their benchmark policy rates unchanged at 3.75% with a 5-4 majority, with mentions of a cut in the subsequent policy as inflation is expected to subside below their target rate. Markets have been pricing in 2 rate cuts from Federal Reserve this year, however the current geopolitical tensions have raised inflationary concerns and shifted rates cut bets further in the year. For other central banks like ECB, bets of rate hike in the current year are rising. Brent prices were in the range rising by only 2.5% in February’26, however the middle east tensions have since led to a spike of over 15% to $83.83/bbl in March’26.

In the near term, markets await resolution of middle east crisis, CPI data trajectory as new series has started and RBI actions on adding liquidity to the market, FY27 borrowing calendar and tenor wise borrowing is also crucial. FPI flows, currency movement and trade deal related news is important to be watched. In global markets labour market data from US, inflation data and global yields direction will also be observed. 10 year Gsec closed at 6.66% on 27th February’26 4 bps lower 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 70 bps and is likely to be in a range of 65-75 bps.