Outlook for the Month of February’26

Economy Review

The key events in the month were –

Domestic Factors –

a) FY27 Budget – FY27 fiscal deficit is projected to be 4.3% of GDP from 4.4% last year. Nominal GDP growth estimated at 10.0% yoy for FY27. FY27 net tax revenue growth at 7.2% yoy to Rs 28.7tn and total expenditure is estimated to be Rs 53.5tn, up 7.9% yoy. Capital expenditure is estimated to go up by 11.5% yoy to Rs 12.2tn.

b) Trade Deficit – India’s goods trade deficit remained broadly steady at $25 bn in December’25. Goods imports in December’25 grew 8.8% yoy, outpacing exports growth of 1.9% yoy.

c) Manufacturing PMI – India’s Manufacturing PMI came in at 55.4 in January’26 Vs 55 in December’25

d) IMF – IMF has revised India’s GDP growth forecast upward for FY26 to 7.3% from 6.6% earlier.

Global Factors –

a) India-US Trade Deal – After a long wait, India and US have agreed on a trade deal. Tariffs on India's exports into the US go down from 50% to 18%. Tariffs on US exports into India go down to 0%.

b) India-EU – India and European Union concluded a free trade agreement in January’26, expected to be implemented before end-2026.

c) Federal Reserve – The FOMC kept the key policy rates unchanged at 3.50-3.75%.

d) Precious Metals – Gold and Silver rose to an all time high of $5,417/oz and $116.7/oz respectively in January’26 but have corrected sharply post announcement of Kevin Warsh as the next Federal Reserve chair leading to dollar strengthening.

Domestic Macro Economic Data

Inflation – India’s CPI inflation inched upto 1.3% in December’25 from 0.7% in November’25 due to high core inflation. India’s WPI inflation came at 0.8% in December’25 from -0.4% for November’25 primarily due to the increase in prices of manufactured goods and minerals.

Outlook for Equities
The Indian market saw a fall in January’26 with Nifty declining 3.1% due to escalating geopolitical tensions following US military action in Venezuela, FII outflow and rupee depreciation. The mid-cap index and small-cap index declined 3.4% and 4.7% respectively.

India and US finally inked a trade deal. Tariffs on India's exports into the US go down from 50% to 18%. Tariffs on US exports into India go down to 0%. India and European Union concluded a free trade agreement in January’26, expected to be implemented before end-2026. The FY27 budget prioritizes fiscal credibility and consolidation. Policy focus shifts towards productivity-led growth through sustained public capex, manufacturing scale-up, MSME financing and modern infrastructure. The rupee has depreciated 2.4% in the month of January’26 breaching the 92 mark against the US dollar and recovered partially post the India-US trade deal.

We believe that the US-India trade deal is a key positive which can lead to reversal of FII outflows, INR recovering its lost ground, general improvement in sentiments towards Indian equities and return of confidence for FDI. Nifty is currently trading at ~19x FY27e P/E, which is lower than 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.

Outlook for Debt
Union Budget was announced on 1st February’26 and showed an in line fiscal deficit target at 4.4% of GDP in FY26 and 4.3% in FY27. Lower subsidies accounted for half of total spending compression (0.30% of GDP) in FY27. The net borrowing announced for FY27 was at Rs 11.7tn and gross borrowing of Rs 17.2tn was slightly higher than expectations of the market. The switch to be done in FY26 was Rs 1tn lower than budgeted and that is why the FY27 gross borrowing was slightly higher. The government has been conservative in its budgeting of financing through small savings Rs 3.86tn in FY27 vs Rs 3.72tn in FY26. Financing of deficit through T-bill issuance has been budgeted at Rs 1.3tn in FY27 after the government skipped this route in FY26. US-India trade deal looks positive for growth and would reduce the need of RBI OMO’s.

IIP growth in December’25 was at 7.8% with robust manufacturing, growth was led by consumer durables. December’25 CPI inflation continued on the uptrend at 1.3%, however food price inflation declined and downtick was seen in vegetables, fruits and pulses prices. Core inflation increased to 4.6%. WPI inflation for December’25 was at 0.8% YoY led by manufactured products. Goods trade deficit in December’25 remained steady at $25 bn while services trade surplus in December’25 improved marginally to $18.1 bn.

The FOMC kept the Federal Funds rate unchanged within the 3.5-3.75% range in line with market expectations of a pause, due to persistent inflation pressures along with decent economic growth and stabilizing unemployment. Kevin Warsh has been appointed as the new Fed Chair, he is widely perceived as relatively hawkish and has spoken about balance sheet size reduction of Fed. Post his appointment the rally in precious metals gave up gains and corrected sharply. Yields in Japan saw a sharp up move as 10 year Japanese Government Bonds shot up by 18 bps to 2.25% as fiscal concerns emerged. Brent prices rallied in the month by over 16% to $70/bbl as geopolitical tensions took centre stage.

In the near term, markets await RBI MPC and cues on future rate trajectory as well as OMOs, supply impact of dated securities will be watched as market awaits the FY27 borrowing calendar. Impact on liquidity as flows start to come in post trade deal and rupee movement will also be closely tracked along with CPI data. In global markets labour market data from US and global yields direction will be crucial for the month. 10 year Gsec closed at 6.70% on 30th January’26, 11 bps higher 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.