On a medium-term basis, we have a positive view, and the US-India deal has removed the key headwind of 2026, embarking more growth opportunity than estimated.
Indian equities are charting a volatile yet resilient path, balancing robust domestic fundamentals against a cocktail of global uncertainties. Last week (Union Budget week), markets traded in a cautiously constructive tone, initially weighed down by tariff concerns and mixed corporate earnings but buoyed by optimism over the India-EU trade agreement. However, profit booking intensified in the metals and IT sectors amid FII outflows, rupee depreciation, and a firmer dollar, as investors braced for the Union Budget and awaited clarity on the incoming Fed Chair.
The 2026 Union Budget sought to harmonize growth through capital expenditure and tax reform to develop future demand and stability by balancing fiscal and proficient total expenditure. The budget did support tariff-hit traditional sectors like textiles, aquaculture, leather and MSMEs while also identifying emerging areas, including data centres, semiconductors, biopharma, rare earths, and manufacturing, as key growth drivers through targeted incentives. Markets reacted negatively in a knee-jerk fashion, primarily triggered by the hike in Securities Transaction Tax (STT) on F&O, which we do not view as a long-term concern for equities. Otherwise, some post budget cautiousness was triggered due to limited outlays due to a slowdown in total receipts given tax reforms, high borrowing plans, and the absence of any short-term triggers amid trade wars and geopolitics-fuelled global correction. That said, pre-budget expectations were already low given the emphasis on fiscal discipline and tax reforms. Overall, the budget outcome is largely in line with expectations, with the post-budget decline amplified by STT-related disappointment and global issues.
Markets witnessed sharp swings through the week, driven by a confluence of post-budget recovery, evolving US–Iran tensions, and developments around the US–India trade agreement. A strong rally was triggered by the reduction in tariffs from 50% to 18%, alongside a strengthening rupee, which buoyed export-oriented sectors such as textiles, gems and jewellery, pharmaceuticals, and aquaculture segments that also benefited from supportive budget measures. Mid-week, markets entered a phase of consolidation and profit-taking amid global technology sector sell-offs and renewed flare-ups in US–Iran tensions. Globally, Fed policy pivots, and geopolitical flashpoints loom large. A potential inflation hawk as Fed Chair could tighten conditions, could be mixed for EMs.
IT sector sell-offs under the AI shadow weigh on the market by the weekend. “Is the sentiment working over the substance?” is the question wavering in the investor’s mind. Currently investors fear that AI based new automation tools, by new firms like Anthropic, could disrupt the growth pattern of original big tech and traditional outsourcing companies of India. The cost and time of developing new apps are dropping drastically. Such disruptive development is happening at a time when the global market is already under the stress of the AI bubble (being the only theme working in the world over the last 2-3yrs), high total AI capex requirements and moderation in actual cashflow generation than estimated.
A fallout in Wall Street tech companies will have a cascading effect on Indian IT players. The sector is already facing pressure from muted revenue and profitability growth, as US IT spending remains subdued and increasingly skewed toward AI-related capital expenditure rather than traditional services, which is Indian players bread and butter. While Indian IT firms are actively reskilling their workforce to adapt to evolving AI-driven requirements, the tangible benefits of these efforts are expected to materialise over the longer term. The valuation of the Indian IT sector is getting attractive, nearing the 10yr average valuation, however, near-term performance may remain constrained by subdued earnings visibility and concerns over the potential impact of AI on traditional service models. From a long-term investor’s perspective, selective accumulation during dips is a welcome strategy as the strength
and quality of Indian players are well qualified. And it is too early to conclude that a new app will destroy the IT services outlook, which itself is going to adopt new AI and apps to provide IT services in the future.
The Monetary Policy Committee decision was broadly in line with expectations, maintaining the status quo on interest rates while reiterating a constructive growth outlook. RBI upgrades GDP and inflation estimate for the next three quarters. However, markets had anticipated a mildly dovish undertone, which failed to materialise as the RBI retained its neutral stance, resulting in an uptick in India’s 10-year bond yields.
In the near-term the market is expected to trade with a mixed bias with an eye on US-Iran development over the weekend, Wall Street AI based selloffs, post US-India deal sharp jump-up consolidation and below par Q3 results. On a medium-term basis, we have a positive view, and the US-India deal has removed the key headwind of 2026, embarking more growth opportunity than estimated.
First published in Mint