Moneycontrol Pro Panorama | A good economy in a bad market

economy

Dear Reader,

2026 hasn’t been an auspicious start for India’s markets. Benchmark indices have declined, bond yields continue to refuse to acknowledge a benign interest rate cycle and the exchange rate has brought much pain. All this has happened while both monetary and fiscal policies have been in near perfect harmony. Indeed, fiscal consolidation and an accommodative monetary policy is the perfect setting for equities to gain, but it hasn’t worked that way.

Foreign investors have already pulled out $3 billion from domestic markets in the first three weeks of this year and the Indian rupee has hit fresh lows with a disturbing promise of continuing to do so. Bond yields in the most tracked benchmark 10-year segment are up 10 basis points (a basis point is one hundredth of a percentage point) and traders are waiting for two significant events: the Union Budget on February 1 which will be followed by the Reserve Bank of India’s monetary policy.

What has affected Indian markets is the unfriendly and increasingly uncertain global arena where trade and geopolitical relations have been upended by an increasingly acrimonious America. The fracture was ostensibly on display at the World Economic Forum in Davos this week where the spirit of dialogue was relegated to the past. We captured this way early in our January 20 piece that Davos man has changed.

Canadian President Mark Carney laid bare the fragility and the collapse of the Old World order built on rules in his speech which we covered here and here. Catch our entire Davos coverage hereto know what went down.  Davos continued to whipsaw markets and Shishir Asthana  made sense of some of it here as ‘Sell America’ began to emerge.

Even as Trump’s geopolitical upsetting continued to hold the markets hostage, quiet developments elsewhere are also giving new discomfort for us. Japanese bond yields have made it imperative to relook at the economy with a new lens. It is no longer lucrative to borrow in Japanese yen and invest elsewhere where Japan has begun to give high returns. Since US isn’t the go-to market anymore, investors must find markets where they do not get burned and unfortunately, India isn’t one of them. We explored what this means for the currency here.

In a nutshell, what happens outside our borders has begun to weigh heavily on our investors' and policymakers’ minds. At the same time, there has been a strong consensus that our economy is resilient, and our markets hold promise of high returns. India’s economic growth will be far better than most other emerging market economies in FY27, and the Budget is expected to reiterate the focus on capital expenditure which is a sure way of setting in motion a virtuous cycle of growth. Inflation is very low and augurs well for an accommodative monetary policy for some time which will translate to cheaper capital. Our consumption demand has revived and is expected to live up to its promise of being the driver of growth. These are narratives that domestic investors are taking comfort from but why aren’t they convincing foreign investors likewise?

In geopolitical circles, often the perspective that India is a good country in a bad neighbourhood is offered to explain our struggles with immediate bordering countries and the world at large. Can we say that India is a good economy in bad global markets?

Not yet. The missing piece is corporate earnings which may disappoint this time. Ananya Roy explains what the early earnings point to in her column here. Sectors such as banking, metals and downstream oil companies have reported a strong set of numbers for the third quarter, and overall revenue growth from companies has been healthy. As Roy explains, this hasn’t moved markets because cost pressures could reappear in the fourth quarter.

Investors buy only when tomorrow holds a promise to be better. For the economy too, household balance sheets have more debt than before, rural economy remains vulnerable and private capex hasn’t lived up to expectations.

All in all, India’s economy isn’t that good, and it can surely get better. The budget and the RBI policy are good opportunities to make this happen before we lay all the blame on a bad global market.

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Aparna Iyer Moneycontrol Pro