Market Update
Nifty 50 returns picked up in July with 2.2% MoM returns despite the reignition of geopolitical uncertainties temporarily spiking crude prices to US$100/bbl before retreating to ~US$84/bbl by the end of the month. Broader market performance was relatively weaker with midcap returns of +1.8%, while small caps outperformed with +2.5% returns MoM. By sector, recovery was led by IT, Real Estate, and Autos, which partially offset some broad-based weakness in Industrials and Utilities. Market returns were supported by net inflows from both FIIs (+USD2.3bn) and DIIs (+USD3.7bn).
Following the moderation seen in 2025, systemic credit growth has rebounded to 18% YoY in Jul’26 (a two-year high), auto volumes are at their strongest levels since the 2022-23 peak, GST collections have consistently remained above Rs 2 trillion, and IIP growth has accelerated to a two-year high. Together, these indicators reinforce our confidence in a strengthening macroeconomic environment. High-teens aggregate earning growth in the 1Q results season for NSE 500(Ex-OMC) is at multi-year highs and significantly higher than estimates. Higher growth and deft management have compensated the impact of raw material inflation and supply chain bottlenecks caused by the West Asia crisis. On the rural front, sowing data points to minimal impact of El-Nino as monsoon deficit has reduced to 12% of long period average.
Amid heightened global volatility, the Indian market has been trading in a tight range for the past 22 months. Although India underperformed global peers in CY26YTD, equities have rebounded from the Mar'26-May'26 lows, clocking gains for the second consecutive month. While the Mid- and Small-cap indices have scaled fresh all-time highs, the Nifty-50 remains ~5% below its Sep'24 peak, largely due to FIIs' sustained underweight position in Indian index heavyweights and the drawdown in the technology sector. Since the Sep'24 market peak, FIIs have remained persistent net sellers, with cumulative outflows of USD57b, including ~USD27b in CY26YTD. While improving macro fundamentals, robust corporate earnings growth, moderating valuations, and easing energy price volatility strengthen India's investment case, the sustainability of FII inflows will remain a key monitorable amid lingering geopolitical uncertainties, a moderation in the AI-led global equity rally, and persistent volatility in global bond yields.
Fixed Income
The RBI MPC in its August 2026 meeting, kept the repo rate unchanged at 5.25%, while retaining its stance at ‘Neutral’. FY27 inflation is projected at 5.0%, 10 bps lower than the earlier estimate of 5.1%. It is expected to remain above 5% for nine consecutive months, starting from October 2026. At the same time, the growth outlook has strengthened, with Q1 FY27 growth revised upward by 40 bps and Q1 FY28 growth projected at a robust 7.3%.
The evolving growth-inflation mix increasingly supports the case for eventual monetary tightening. At current rates, Real policy rates will be negative between October 2026 and June 2027, while domestic growth outlook expected to be resilient. The global monetary backdrop is also becoming less accommodative, with several developed-market central banks either hiking rates or maintaining a tightening bias.
However, the RBI’s communication indicates that the threshold for initiating a rate hike remains high. The RBI continues to view the inflation increase predominantly as supply-driven, led by food and fuel, with limited evidence of broader generalisation. In RBI’s projections, Core inflation is expected to moderate after peaking in Q3, with its FY27 projection revised down to 4.3% in Aug’26 policy from 4.7% earlier. Governor in his speech, emphasised on core inflation and core inflation excluding precious metals, which remained relatively contained at ~3.7% and ~2.5%, respectively, in June’26. Uncertainties around the monsoon, El Niño, geopolitics and global trade policy have also been cited for maintaining a neutral stance.
Our base case is for the RBI to commence a gradual rate-hike cycle from December 2026, with cumulative tightening of 50–75 bps in both India and the US. A meaningful part of this risk is already reflected in short-end valuations, more for Quality PSUs. In our view, Surplus liquidity should support the front end, while crude prices, high SDL supply, elevated global yields and US rate expectations may constrain the long end.
Nifty 50 returns picked up in July with 2.2% MoM returns despite the reignition of geopolitical uncertainties temporarily spiking crude prices to US$100/bbl before retreating to ~US$84/bbl by the end of the month. Broader market performance was relatively weaker with midcap returns of +1.8%, while small caps outperformed with +2.5% returns MoM. By sector, recovery was led by IT, Real Estate, and Autos, which partially offset some broad-based weakness in Industrials and Utilities. Market returns were supported by net inflows from both FIIs (+USD2.3bn) and DIIs (+USD3.7bn).
Following the moderation seen in 2025, systemic credit growth has rebounded to 18% YoY in Jul’26 (a two-year high), auto volumes are at their strongest levels since the 2022-23 peak, GST collections have consistently remained above Rs 2 trillion, and IIP growth has accelerated to a two-year high. Together, these indicators reinforce our confidence in a strengthening macroeconomic environment. High-teens aggregate earning growth in the 1Q results season for NSE 500(Ex-OMC) is at multi-year highs and significantly higher than estimates. Higher growth and deft management have compensated the impact of raw material inflation and supply chain bottlenecks caused by the West Asia crisis. On the rural front, sowing data points to minimal impact of El-Nino as monsoon deficit has reduced to 12% of long period average.
Amid heightened global volatility, the Indian market has been trading in a tight range for the past 22 months. Although India underperformed global peers in CY26YTD, equities have rebounded from the Mar'26-May'26 lows, clocking gains for the second consecutive month. While the Mid- and Small-cap indices have scaled fresh all-time highs, the Nifty-50 remains ~5% below its Sep'24 peak, largely due to FIIs' sustained underweight position in Indian index heavyweights and the drawdown in the technology sector. Since the Sep'24 market peak, FIIs have remained persistent net sellers, with cumulative outflows of USD57b, including ~USD27b in CY26YTD. While improving macro fundamentals, robust corporate earnings growth, moderating valuations, and easing energy price volatility strengthen India's investment case, the sustainability of FII inflows will remain a key monitorable amid lingering geopolitical uncertainties, a moderation in the AI-led global equity rally, and persistent volatility in global bond yields.
Fixed Income
The RBI MPC in its August 2026 meeting, kept the repo rate unchanged at 5.25%, while retaining its stance at ‘Neutral’. FY27 inflation is projected at 5.0%, 10 bps lower than the earlier estimate of 5.1%. It is expected to remain above 5% for nine consecutive months, starting from October 2026. At the same time, the growth outlook has strengthened, with Q1 FY27 growth revised upward by 40 bps and Q1 FY28 growth projected at a robust 7.3%.
The evolving growth-inflation mix increasingly supports the case for eventual monetary tightening. At current rates, Real policy rates will be negative between October 2026 and June 2027, while domestic growth outlook expected to be resilient. The global monetary backdrop is also becoming less accommodative, with several developed-market central banks either hiking rates or maintaining a tightening bias.
However, the RBI’s communication indicates that the threshold for initiating a rate hike remains high. The RBI continues to view the inflation increase predominantly as supply-driven, led by food and fuel, with limited evidence of broader generalisation. In RBI’s projections, Core inflation is expected to moderate after peaking in Q3, with its FY27 projection revised down to 4.3% in Aug’26 policy from 4.7% earlier. Governor in his speech, emphasised on core inflation and core inflation excluding precious metals, which remained relatively contained at ~3.7% and ~2.5%, respectively, in June’26. Uncertainties around the monsoon, El Niño, geopolitics and global trade policy have also been cited for maintaining a neutral stance.
Our base case is for the RBI to commence a gradual rate-hike cycle from December 2026, with cumulative tightening of 50–75 bps in both India and the US. A meaningful part of this risk is already reflected in short-end valuations, more for Quality PSUs. In our view, Surplus liquidity should support the front end, while crude prices, high SDL supply, elevated global yields and US rate expectations may constrain the long end.
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