January 2026 Market Commentary
Equity
January was a negative month for Indian equities, with the Nifty 50 down 3.1% during the month. Banks, Metals and Technology were the top gainers whereas the key laggards were Consumer goods and Real estate. Rising global geopolitical tensions after the events in Venezuela, Greenland and Iran led to a correction during the month. Markets recovered partially, towards the end of the month, after US President Donald Trump’s comments at Davos that a “framework of a future deal” had been agreed over Greenland and his decision to withdraw tariff threats on Europe eased fears of a trans-Atlantic trade war. He also hinted at progress towards an India-US trade agreement. India-EU FTA was signed marking a major milestone to boost economic ties, reduce tariffs on over 96% of EU goods, and increase trade in services, covering a market of 2 billion people.
FIIs sold net equities worth USD 4 billion in the month amid currency depreciation and have cumulatively sold net equity worth USD 9.7 billion in financial year 2026. Revival in earnings remains key for FII flows to turn positive and trade deal along with a growth-focused Budget would be key drivers. Domestic institution inflows were strong at USD 9.7 bn in January 2026 and USD 76 bn during the financial year. In the near term, equity markets will be guided by the Union Budget 2026 and progress on the India-US FTA. There are modest expectations from the Union Budget, with limited fiscal room for high-impact immediate measures, though continuity is expected in the fiscal approach of past five years. The Finance Minister is expected to balance the imperatives of staying on the fiscal consolidation path with sustaining growth dynamics, while also seeking to fortify India’s business architecture against prevailing geopolitical headwinds.
Indian equity markets appear in a favorable space with multiple market-supportive, growth-positive building blocks already in place. In CY25, India had to endure a constant flow of disproportionate and punitive US trade measures, which were instrumental in catalyzing a ~USD19b in FII outflows. However, the government and the RBI have been active in mitigating external headwinds and have adopted several stimulative fiscal, monetary, and reform measures to unshackle domestic growth impulses. Further, India and the European Union (EU) finally announced their years-in-the-making, multi-layered free trade agreement (FTA), touted as a “mother of all deals”. While this opens up markets mutually for both economies from 2027 (after ratification and legal works), the full effects of the proposed deal will take a few years to fructify. In our opinion, these measures should now start to manifest in full force in 2026, and we see limited domestic risk factors thwarting this. Our portfolio broadly reflects our preference for growth visibility, structural domestic growth plays, and select global value names. We anticipate a consolidation of recovery in earnings in the rest of FY26 and FY27. Our key overweight sectors are Autos, Diversified Financials, Industrials & EMS, and Consumer Discretionary. In contrast, we are underweight on IT services (AI disruption), Oil & Gas, Metals, and Consumer Staples. We have also made several additions from a bottom-up perspective across sector and market capitalizations.
Fixed Income
From a global macro perspective, bond yields are gradually moving higher amid persistently large fiscal deficits across developed economies and as the global monetary easing cycle approaches its end. Domestically, growth conditions remain supportive. The Economic Survey estimates India’s GDP growth at 7.4% in FY26 and projects FY27 growth in the range of 6.8–7.2%. Healthy rabi crop prospects, a supportive RBI policy stance and GST rationalisation are expected to bolster private consumption. Investment momentum should remain resilient, underpinned by high capacity utilisation, strong credit growth and the government’s sustained focus on capital expenditure.
On inflation, headline CPI rose to 1.3% YoY in December 2025 from 0.7% in November, largely reflecting a waning deflationary impact from food prices and elevated precious metal prices. Core inflation edged up to 4.6% from 4.3%, while super-core inflation (excluding gold, silver and fuel) eased to 2.35%. Looking ahead, food price pressures are expected to remain contained due to healthy kharif output, adequate buffer stocks and favourable rabi sowing. Core inflation is likely to stay range-bound, keeping the CPI outlook ahead benign and close to target.
We do not anticipate further changes in the policy repo rate. Recent INR stability should aid liquidity conditions, reinforcing a more measured and stable policy stance. However, elevated gross market borrowings—₹17.2 trillion for the Centre and ~₹13 trillion for states in FY27—have set a floor for bond yields. In the absence of strong structural demand drivers, interest rates are likely to rise gradually over the coming year, even as global developments warrant close monitoring.
