Outlook for the Month of September’26

Economy Review

The key events in the month were –

1. Domestic Factors –

a) GDP – Real GDP growth outpaced expectations to 7.8% in Q1FY27 largely driven by exports (12% yoy) and investments (11.9%), while private and government consumption were relatively slower.

b) CAD – The current account deficit (CAD) stood at $4.2bn (0.5% of GDP) in Q1FY27 as compared to $3.4bn (0.4% of GDP) in Q1FY26. A widening trade deficit was offset by robust remittances and strong services exports.

c) RBI Policy – In the August’26 MPC meet RBI keep key policy rates unchanged.

d) Forex Inflow – RBI had introduced a special USD-INR Forex Swap facility covering FCNR(B) deposits, ECB and OFCB inflows on 8^th June’26, which resulted in forex inflow of $136bn.

e) 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 north-east while rainfall was normal in central and north-west India.

2. Global Factors –

a) FOMC – The FOMC kept the Federal Funds rate unchanged, however expectation of rate hike in September’26 has gone up to nearly 70% post hawkish remarks by FED Chair at Jackson Hole.

b) AI Stocks – Global AI stocks saw a sharp drawdown amid margin unwinding, even as US tech giants re-affirmed/increased their capex guidance.

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

b) Crude Oil – Brent crude oil prices continue to remain elevated at above $95/bbl.

Domestic Macro Economic Data

Inflation – India’s CPI inflation came in at 4.5% in July’26 Vs 4.4% in June’26 driven by food and fuel inflation. India’s WPI inflation continues to remain elevated at 9.8% in July’26.

Outlook for Equities
Indian equity markets corrected 1.2% in the month of August’26 as surging crude oil prices and rising geopolitical tensions weighed on sentiments. Mid-cap and Small-cap indices outperformed the large-cap index and were up 2.1% and 3.1% respectively.

Brent crude oil prices continue to remain elevated at above $95/bbl. Monsoon activity remains weak with deficit of about 13%. Real GDP growth outpaced expectations to 7.8% in Q1FY27 largely driven by exports and investments. CAD stood at $4.2bn (0.5% of GDP) in Q1FY27 as compared to $3.4bn (0.4% of GDP) in Q1FY26. FIIs bought $2.4bn worth of Indian equities whereas DIIs bought $6.1bn of equities during the month of August’26.

Indian markets stand at an ideal inflexion point, heavily insulated by robust domestic growth. The recent corporate earnings season clearly demonstrated economic resilience, showcasing solid topline growth and healthy profitability as companies successfully navigated global margin pressures. Backed by strong economic indicators and corporate commentaries, Indian corporate earnings are well-positioned to deliver a 13-15% CAGR from FY26-28. Despite a heavy supply of IPOs and block deals, it is getting absorbed by domestic liquidity and FII’s zeal for investments in niche, new-age Indian businesses. Nifty is currently trading at ~17x FY28e P/E. 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
The RBI MPC in August’26 unanimously decided to retain the policy repo rate at 5.25% while maintaining the stance at “neutral”. Governor mentioned in the post policy conference call that policy rate is at the right juncture now with current stance being neither hawkish nor dovish. It was more of a benign policy. However, the August MPC minutes reflected a hawkish undertone, with members expressing concerns regarding the normalization of inflation from benign levels and real interest rate levels. Most MPC members have become more partial to a rate hike cycle than those remaining on a pause, even though the policy action continues to be neutral for now.

FCNR (B), OFCB and ECB inflows under RBI’s FX swap facility crossed $136bn aiding currency and forex reserves. Durable liquidity surplus improved to around Rs8.1 tn as of 15th August’26. Banking system liquidity surplus shot up for the fortnight ending 31st August due to liquidity from the RBI’s concessional FX swap window and month-end government spending, partly offset by CRR product build-up and FX intervention. RBI continues to conduct VRRR auctions to manage overnight rates near the Repo rate given the excess banking system liquidity. On the monsoon front till 28th August, cumulative rainfall was 13% below long-term average. Basin-wise reservoir levels are in deficit.

Q1FY27 growth was resilient despite West Asia crisis. Real GDP growth outpaced expectations to 7.8% largely driven by exports and investments, while private and government consumption was relatively slower. Real GVA growth at 8.2% was led by services and industry, while growth in agriculture and allied sectors was muted. July IIP growth moderated, at 6.7%, growth was led by capital goods, consumer durables and intermediate goods. July CPI inflation increased marginally to 4.45% YoY. Food inflation was driven by meat and fish, eggs, spices, oils and fats and fruits. Core inflation was at 3.9% YoY. WPI inflation for July was at 9.8% YoY driven by fuel and power inflation was at 20% YoY. India’s goods trade deficit widened to $32 bn in July while services trade surplus at $17 bn moderated marginally.

In the global markets, UST10Y yields oscillated from lows of 4.62% to around 4.80% currently due to hawkish comments from the Fed Chair Warsh in the Jackson Hole Symposium that raised market expectations of a rate hike in September towards 70%, and oil prices rising above $95/bbl due to re-escalation in hostilities in West Asia, raising inflationary expectations. In Europe, strong economic activity data along with higher inflation prints and expectations of rate hikes by the ECB have pushed German 10Y bond yields up to 3.38%, levels not seen since the last 15-years. Japanese 10Y bond yields are trading near three-decade high of around 3% as the BoJ is slated to hike rates this month.

In the near term, market will watch for impact of FCNR (B) and related inflows on currency as well as yields, inflation data in India as well as US, labour data outcome in the US in the run up to the FOMC mid-September, RBI MPC in early October, developments in monsoon in India in its final month and Government borrowing calendar for second half. 10-year Gsec closed at 6.95% on 31st August’26, higher by 11 bps during the month. 10-year Gsec yield in the near term is likely to be in a range of 6.80%-7.10%. Spread of 10-year Gsec with corporate bond is near 70 bps and is likely to be in a range of 65-75 bps.