India’s economy may be firing on multiple cylinders but it’s also running hot on borrowed time. In Aequitas Investment Managers' latest newsletter, Siddhartha Bhaiya highlighted that India’s fiscal and external balances are flashing early caution signs, even as public and private capex remain robust.
The warning comes amid a sharp slide in the rupee, widening fiscal and trade deficits, and early signs of cooling credit growth. The rupee hit a record low of Rs 88.81 to the dollar in October, making it Asia’s worst-performing currency of 2025. The RBI’s short dollar book rose by $6 billion to $59.4 billion, signalling stepped-up intervention to stabilise the exchange rate.
At the same time, India’s trade deficit ballooned to $32 billion, its widest in 13 months, despite a 6.7 percent rise in exports — as imports surged 16.7 percent, driven by a 107 percent jump in gold and a 139 percent spike in silver shipments.
Capex accelerates, but the fiscal math weakens
The Aequitas report highlights that while government-led capex remains a key growth pillar — capital expenditure jumped 40 percent year-on-year in H1 FY26 to Rs 5.8 lakh crore — the fiscal deficit has already reached Rs 5.7 lakh crore, or 36.5 percent of the full-year target, up sharply from 29.4 percent a year ago.
The firm sees this as a structural contradiction: India is spending like an emerging power but funding like a developed one. Bhaiya sums it up bluntly: “Capex is commendable, but fiscal arithmetic can’t be wished away. The math has to eventually meet the momentum.”
Cooling credit, mixed growth signals
Adding to the caution, bank credit growth to industry eased to 7.3 percent in September, compared with 8.9 percent a year earlier, while NBFC and personal-loan growth also moderated. Industrial production slowed to a three-month low of 4 percent in September — the slowest pace in five years for H1.
Meanwhile, unemployment ticked up to 5.2 percent, led by rural distress, and power consumption fell 6 percent year-on-year in October due to unseasonal rains and lower demand.
Bhaiya observed that valuations remain well ahead of fundamentals, saying Aequitas’ unusually high cash levels reflect not fear, but discipline: “Holding 80% cash isn’t difficult at this point — it might be the easiest thing to do when valuations look stretched. We’d rather protect investor capital than chase euphoria."
Diversifying beyond India: Gold, defensives, and global rotation
Even as Aequitas turns cautious domestically, the firm is quietly rotating capital toward global assets. Over the past year, it has added gold ETFs to its PMS portfolios and expanded exposure to select international markets where valuations appear more reasonable.
“Our decision to invest internationally and in gold proved to be a mindful hedge against India-specific valuation and currency risk,” Bhaiya said. “We continue to find better comfort in defensive sectors in Europe, non-tech plays in the US, and consumption recovery in China.”
The fund’s gold allocation has also been vindicated by the global trend: central banks increased gold buying by 28 percent quarter-on-quarter in Q3 2025, with India’s own gold reserves rising by $31 billion during FY25 to $108 billion.
Markets running hot on fewer legs
Equity markets, meanwhile, are running on narrower leadership. Though India’s BSE market capitalisation stood at Rs 467 lakh crore in early November, much of the momentum has been driven by a handful of large caps.
“Regardless of market corrections, our approach remains bottom-up,” Bhaiya said. “We focus on businesses with valuation comfort and earnings visibility, not on market sentiment.”
The firm continues to prefer energy, capital goods, and cement, which delivered healthy growth in Q2FY26, while remaining cautious on overheated midcap themes.
Siddharth Bhaiya's overall view is one of cautious realism. The macro indicators — strong capex, buoyant tax receipts, festive demand, and corporate expansion — remain impressive. But they coexist with rising external stress, a weakening currency, and rich valuations.
In Bhaiya’s words, “Ambition has to be matched by arithmetic. The discipline to wait is also a form of conviction.”
Aequitas captures the paradox of India’s current market cycle: the economy looks unstoppable, but the balance sheet is starting to feel the strain.
For now, the firm prefers patience over participation — a reminder that in markets, restraint can sometimes be the most aggressive strategy of all.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
