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India Insights

Domestic buffers and external catalysts
18 February 2026
    Articles
    Download the full report PDF, 543KB

    Market spotlight: From tariff cloud to trade tailwind

    India’s macro narrative shifted rapidly in early February, moving from a trade-related overhang to a clearer policy-anchored outlook. The India–US trade deal has removed a substantial cloud that hung over markets, with Washington rolling back the 25 per cent penalty on Russian oil linked imports and cut the ‘reciprocal’ tariff so that the effective rate on Indian goods dropped to 18 per cent from about 50 per cent. In return, India is expected to gradually lower tariffs on US goods and deepen bilateral trade engagement, while targeting USD500 billion of imports over five years and strengthening both economic and diplomatic ties.

    The market reaction to the deal underscores how significant that cloud had become. The absence of a meaningful trade deal with the US had weighed on sentiment contributing to the largest ever annual net foreign outflow in Indian equities of USD18 billion, muted foreign participation in debt markets, and a weaker INR against USD in three years with a 4.7 per cent annual drop. Right after the deal announcement, the Nifty 50 rose as much as 5 per cent and the rupee gained around 1.4 per cent against the dollar, its strongest daily move in more than seven years, with USD/INR falling to 90.27 and investors now openly debating a break into the high 80s as foreign flows return. This contrasted with the relatively muted response to the India–EU agreement, highlighting the importance of US trade relations for near-term market confidence.

    Net foreign flows in India capital market versus INR-USD spot change year-on-year

    Net foreign flows in India capital market versus INR-USD spot change year-on-year

    Source: Bloomberg, HSBC Asset Management, January 2026.

    At the same time, the recently announced Union Budget reaffirmed a gradual consolidation path, while keeping its foot firmly on the public investment accelerator. The government capex outlay was raised to INR 12.2 trillion, focusing on infrastructure, logistics, electronics, semiconductors, containers and energy security, including nuclear, rare earths and carbon capture, reinforcing a public investment led growth strategy. This injection of public cash has boosted real GDP projections to 6.8–7.2 per cent and nominal growth at 10 per cent. These estimates are further underpinned by tax buoyancy, stable GST and INR 3.16 trillion of dividends from the RBI and state-owned financial institutions. Overall, with the tariff shock fading and fiscal policy still growth friendly, India enters 2026 with sentiment healing and a clearer macro anchor.

    Domestic buffers meet a new external catalyst

    After a period when foreign selling and tariff uncertainty dominated price action, the removal of the US tariff penalty has allowed the Indian equity market to re focus on fundamentals. Currently, three drivers anchor the equity outlook: strong domestic liquidity, stabilising earnings, and a new external catalyst from the US trade agreement.

    Domestic liquidity in the form of institutional flows and steady retail participation has produced record domestic inflows of USD86 billion, helping absorb foreign selling, cushion downside volatility and prevent disorderly drawdowns. This transition signals that India is becoming less dependent on foreign risk appetite to sustain equity performance than in previous cycles.

    Ownership trend across promoters and non-promoters in the NSE-listed universe

    Ownership trend across promoters and non-promoters in the NSE-listed universe

    Source: CMIE Prowess, NSE EPR, NSE India Ownership Tracker. Data as of January 2026.
    Note: Financial year in India runs from April to March. Thus, FY26 denotes the period April 2025 – March 2026.

    The underlying earnings picture is also more balanced than headlines suggest. Earlier downgrades have given way to stabilisation as financing costs ease and operating leverage returns in rate sensitive sectors such as financials, real estate and consumer discretionary. The Union Budget’s emphasis on consistency, capex and consolidation reinforces this, with continuity in tax policy, a deliberate sectoral push for MSMEs, textiles and ‘Semiconductors 2.0’, and a 20-year tax holiday for data centres in high tech segments. Public capex on infrastructure and logistics should support order books for industrials and construction, while semiconductor and AI related incentives open a higher value manufacturing and digital infrastructure theme.

    The trade deal adds an earnings lever that was largely absent over the past year. The US is already India’s largest export destination, with USD87 billion of exports in FY25, concentrated in textiles, gems and jewellery, marine products and other tariff sensitive categories. Lower effective tariffs should gradually support volumes and margins in these segments, particularly as India’s tariff profile converges towards that of regional peers, without sacrificing its existing surplus with the US.

    For investors, the equity story shifts from binary trade risk toward earnings normalisation supported by external relief and domestic demand, with export sectors benefiting incrementally while domestic financials and capex-linked industries continue to anchor the index. The shift towards semiconductors and AI adjacent spending should, over time, support both earnings growth and credit quality, creating a more durable backdrop for equity risk taking.

    Short-term carry amid slow consolidation

    For fixed income, the same trade-and-budget mix translates into a more nuanced configuration. While fiscal intent remains disciplined, government bond supply is heavy just as the external constraint eases. The Union Budget keeps the deficit on a slow glide path, from 4.4 per cent of GDP in FY26 to 4.3 per cent in FY27, and adheres to a debt-to-GDP reduction trajectory towards roughly 50 per cent by FY31, with FY27 projected at 55.6 per cent. The adjustment relies more on nominal growth than on deep expenditure cuts, with total spending set to grow 7.7 per cent y-o-y.

    The challenge lies squarely in borrowing. Net market borrowing for FY27 is pegged at INR 11.7 trillion, only slightly above expectations. Gross market borrowing was initially set at INR 17.2 trillion, but after the Government of India switched INR 0.75 trillion of FY27 maturities into longer bonds, gross borrowing is now closer to the market expectations of INR 16.5 trillion. This swift execution has helped calm nerves and contributed to a partial recovery in bond prices after the post-budget sell-off. The government expects small-savings funding to grow by just 4 per cent; if actual growth is higher, borrowing needs may decrease further. At the same time, bond market development measures, including incentives for municipal bonds, corporate bond index derivatives, and total return swaps, are positive steps toward greater market depth and improved hedging opportunities.

    India RBI repo rate and 10-year bond yield in 2025

    India RBI repo rate and 10-year bond yield in 2025

    Gross supply of India government bonds (INR trillion)

    Gross supply of India government bonds (INR trillion)

    Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future.

    Source: HSBC Asset Management, Bloomberg, RBI, CMIE database, India Budget documents, February 2026.
    Note: FY27 G-sec is as per Budget Estimates announced on 1-Feb. SDLs for both FY26, FY27 are estimated figures. BE: Budget estimate; RE: Revised estimate.

    With rate-cut expectations largely priced in and inflation near the lower end of recent ranges, the RBI is likely to focus on market stabilisation via open-market operations (OMOs) and liquidity tools, having already absorbed a significant share of net supply up to February FY26. Over the coming weeks, markets will look for an announcement of around INR 1 trillion of OMOs and for a continuation of a more favourable borrowing mix, with expectations of relatively less supply at the very long end.

    Against this backdrop, the US trade deal acts as a meaningful offset for both rates and FX. The trade deal improves balance-of-payments expectations and reduces currency risk premia, potentially encouraging renewed foreign interest in local bonds. In this environment, the case is for emphasising higher absolute carry over structural duration, adding tenor opportunistically on yield back ups while favouring local credit spreads, where the semiconductor and AI driven capex pivot and still supportive growth backdrop should underpin corporate fundamentals.


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