De-rating of Indian equities – cyclical or structural? - 3

As observed in my previous two posts (see here and here), I am inclined towards the view that the derating of Indian equities, compared to its historical averages, is partially structural.

The cyclical factors like El Nino, geopolitical uncertainties, inflation & rising bond yields in developed economies, lack of domestic investment opportunities in currently popular themes like artificial intelligence, semiconductors, etc. may be responsible for the poor performance of Indian equities to some extent. Statistically speaking, reversion to the long-term averages may also be a factor in correction in the equity prices from September 2024 high.

However, a part of the derating could be structural and we may not see the benchmark indices trading at 20-22x PE ratio in the short to midterm. Sub-optimal execution; lack of growth accelerators; a weakening perception about democratic institutions; policy unpredictability; stagnant real wages clouding demand acceleration; waning demographic dividend; and poor risk appetite of private enterprise does not augur well for any material rerating of Indian equities in the short to midterm.

Let me be clear about what this does not say. It is not a call that markets will fall. It only means that I should not count on rising multiples to do the work for me. If the PE ratio stays where it is, returns will have to come from earnings growth and dividends. And if the cyclical part turns out to be bigger than I think, I will have been too cautious. I am ready to pay that price.

Investment strategy adjustments

Over the next three years, I am considering the following changes to my own investment strategy.

·         Cyclical equity as a separate asset class. Besides strategic equity, I will add cyclical equity to my standard asset allocation. To begin with, both will get equal weight. Strategic equity is the long-term core. Cyclical equity is the money I put to work only when the cycle in a sector turns in favor. Since this part will often sit in cash waiting for a trend, my actual equity exposure will frequently be lower than the headline number.

·         Lower growth, higher cost of capital. For most companies, I will moderate my terminal growth and raise my cost of capital assumptions. This brings down my fair value benchmarks. Fewer stocks will look cheap, and that is how it should be if I do not expect multiples to expand.

·         No buy and hold for direct equity. I will keep this strategy only for diversified mutual funds. With a single stock, holding through a full cycle without a view on the multiple can give back all the gains. For direct equity, I will need a clear exit point, either when the thesis plays out or when the price crosses my fair value.

·         More patience with cyclicals. This applies especially to materials, industrials and financials. Instead of staying invested all the time, I will prefer to hold cash until a definite cyclical trend emerges in a sector. Then I will take concentrated, sizeable positions. I will miss the first part of the move, and I accept that. The bigger risk is concentration, so I must size each position in a way that a wrong call is survivable.

·         Avoid consumer staples. I will stay away unless a compelling opportunity emerges, like gross undervaluation or a special situation. Staples volumes depend on the average household, whose real income has not grown much, and the stocks rarely come cheap. I will focus on aspirational consumption only, where the spending comes largely from upper-income households.

·         Avoid companies that earn most of their revenue from government contracts. When one customer is the government, the company has little say on pricing, payment timelines or policy changes. This fits poorly with my concern about policy unpredictability. It also means that my industrial exposure will be limited to companies driven by private demand.

·         Avoid public sector monopolies and oligopolies. In these companies, the interests of minority shareholders are not the first priority. Pricing, dividends and capital allocation tend to follow what the government needs at that point in time. The risk of competition emerging from the private sector is also very high in these companies.

·         Avoid services and consumption companies with unusually high gross margins that are open to policy restrictions like price controls. Very high margins invite the regulator sooner or later. Private hospitals are one example that comes to mind.

What could change my mind

I do not see these adjustments as permanent. If real wages start rising, private capex picks up, earnings growth accelerates for several quarters in a row, and policy becomes more predictable, I will have to admit that more of the de-rating was cyclical than I assumed. I will review the framework once a year, and sooner if the evidence changes. But for now, I will stay with my current assumptions.

Summary

·         A part of the de-rating is structural. Do not depend on PE expansion for returns.

·         Lower fair values mean being fussier about price. Holding cash is a decision, not a failure.

·         Hold diversified funds for the long haul. Hold direct stocks only with a clear exit plan.

·         In cyclicals, wait for the trend to show up, then size up, but keep position sizes survivable.

·         Be careful with businesses where the government is the main customer, the owner or the regulator.

 

De-rating of Indian equities – cyclical or structural? - 2

Continuing from yesterday (see here)

While it is best to leave the task of examining in detail the nature of derating of Indian equities to the experts, I would like to share a few observations which suggest that the derating might not be entirely cyclical. There could be some fundamental issues that warrant discounting of “India Story” per se, and therefore derating of Indian markets on a durable basis.

What the premium rested on

The India story has always stood on three pillars: Democracy, Demography and Demand. For about two decades after 1991, the promise did hold out. Reforms came in almost every sphere. Financial market institutions were brought up to global standards. Rules on taxation, competition, capital controls, industrial licensing and infrastructure were liberalized to let private enterprise grow. Tax incentives helped IT services and merchandise exports, and the state backed physical and social infrastructure. The results showed in infrastructure, defence and space technology, digitalization of the economy, capital markets, poverty reduction, school enrolment and wider participation in democracy. Global investors liked what they saw. Money came in, and Indian equities earned a premium over their peers.

I had my doubts about the three pillars even then. In May 2017 I argued that these were as much challenges as advantages: “pseudo-socialist and quasi-feudal” political incentives lead to capital misallocation, a young population without skills is a liability, and aspirational consumption built on political promises rather than income growth is not sustainable. In June 2026 I went through each pillar again: stability of government without predictability of policy, a demographic dividend that is deferred, and demand that has stuttered. Foreign investors’ view of policy stability and enforcement has also slipped.

The premium was built on expectations, and it survived as long as something kept feeding those expectations. When the gap between promise and delivery became visible, the market began to charge for it. That is why I think part of the de-rating is a repricing of the story itself, and not just a change of mood.

What Indian companies build

Indian private enterprise grew up under scarcity, import substitution, licensing and protection, with limited access to foreign technology and capital. In that world, the winners were firms that secured scarce inputs, handled regulation well, learnt to absorb and adapt imported technology, and brought down manufacturing costs. Indian companies became very good at technology absorption, process engineering and cost control. They had little reason to invest in frontier discovery.

After 1991 this habit continued. In parts of Indian business, access to land, finance, natural resources, government contracts and regulatory permissions still counts for more than a better product. I call this rent seeking, and it is one reason why innovation is not rewarded as it should be. I am describing a pattern here, and not any particular company or group.

The R&D numbers show the pattern. Indian industry spends about 0.3% of GDP on in-house R&D, against a world average of about 1.5%. Total R&D spending in India is only 0.6 to 0.7% of GDP, and more than 60% of that is spent by the government. In 2021, the ten most successful non-financial companies had sales of about $277 billion and profits of $43 billion. Their R&D spend was less than $1 billion, which is about 0.3% of sales and 2% of profits. Their profit margins were nearly double those of counterparts in China, Japan and Germany, so it was not for want of money. The comparable companies in the US, China, Japan and Germany put 29% to 55% of their profits into R&D.

IT services is the clearest case. Despite all the tax and regulatory support over the years, the sector has leaned on labour-cost arbitrage and not on building its own technology and products. The top Indian software firms spend about 1% of turnover on R&D or less, against 10% or more for global peers. India has remained the back office for global businesses. The market is now repricing this. As AI reduces the effort needed for services work, the gains have to be shared with clients, and a company with few products of its own has little to fall back on.

Pharma has made its presence felt in global markets, but mostly as a low-cost manufacturer. The top five Indian companies spend about 6% of sales on R&D, the highest of any Indian sector, but well below the 17% to 20% spent by global leaders. Their average turnover of about $3 billion compares with $45 billion for the top twenty worldwide. Very few new chemical entities have come out of India.

Automobiles tell a similar story. The listed Indian auto companies among the world’s top 2,500 R&D spenders put 3.8% of turnover into R&D, against a world average of 4.8%. But that figure falls to just over 1% if we leave out the UK luxury subsidiary of Tata Motors. The better number comes from a business acquired abroad, and not from technology built at home.

Beyond these, Indian names are very few in the lists of premium global brands in fashion, food, automobiles, electronics or pharmaceuticals. A few new-age businesses are now building products and technology, but they are too few and too small to make a difference at the index level in the next five to ten years. It is telling that the market already pays more than 90 times earnings for some of them.

The market today pays high multiples to sectors where Indian companies are not known for innovation. Electronics manufacturing services trade at 54.6 times earnings, defence at 37 times and capital goods at 37.7 times. What investors are paying for is order books, government spending and the manufacturing opportunity, that is, scale and not originality.

So what is a fair multiple?

Now the question I started with. Does an emerging market dominated by commodities, rent-seeking private enterprises and inefficient public enterprises deserve a multiple in line with developed markets? An honest answer would not be an emphatic yes.

But the Nifty is not at a developed-market multiple today. On FY27 earnings, India trades at 18.6 times. That is below the US (20.9) and Japan (22.1), but above Germany (16.4), the UK (12.7) and the emerging markets index (11.4).

With a forward RoE of about 14.7% and a large services sector, I do not think India deserves a pure commodity multiple of 8 to 10 times. But I doubt investors will be willing to pay 20 to 22 times again, either. The Nifty at 17.2 times earnings already sits between the two, closer to the upper end. That means part of the adjustment may already have happened.

Where this leaves us

To this extent, I would say the de-rating of Indian equities is partially structural. The premium was paid for a story, and the story has not been delivered in full: companies that build and invent, policies that stay predictable, incomes that grow for the many and not just a few. What I cannot say yet is how much of the adjustment is behind us. For that we need to look at the temporary factors, at the difference between the index and the broader market, and at the possibility that this is mean reversion after very generous few years.

…to continue tomorrow

Also read

India’s fading premium

What’s bothering Indian equity markets

India’s private capex: reading beyond the headline

Democracy, Demography and Demand

New 3Ds - disappointment, dismay and disillusion

 

 

De-rating of Indian equities – cyclical or structural?

One of the most popular arguments for investing in Indian equities is the fall in PE multiple of benchmark indices relative to (i) its historical averages and (ii) global emerging markets. Motilal Oswal Financial Services, estimates that currently, Nifty is trading at ~18% discount to its long-term average price-to-earnings ratio and 12% discount to its long-term average price to book ratio. The MSCI India Index is trading at a 35% premium to the MSCI EM Index, materially below its historical average premium of 72%.

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​While the fact of de-rating of Indian equities in recent years is indisputable, the nature of this derating is a topic of debate, in my view. It needs to be examined whether this derating of valuation is cyclical and therefore offers a good opportunity to increase exposure to the Indian equities; or is it structural; in which case it would also be worth examining whether there is scope for further derating, and therefore investors may look for curtailing their exposure to the Indian equities in their standard asset allocation matrices.

This examination would involve finding answers, inter alia, to the following questions:

(a)   What factors led to the Indian markets trading historically at a premium valuation compared to the global peers? Are these factors still prevalent and support the argument for a premium valuation for the Indian equities?

(b)   Is the derating of Indian equities purely due to temporary reasons like geopolitical uncertainties, inflation, rising global bond yields, currency depreciation, lack of domestic investment opportunities in currently popular themes like artificial intelligence, semiconductors, etc.?

(c)    Are there any reasons to believe that the current phase in the global economic, political, geopolitical and development cycle has weakened the argument for a long term “India Story” on a durable basis?

(d)   Is the derating for the “India Story” per se; only for the benchmark indices as several mid and small cap stocks trade at elevated valuations; or listed equities, or all of these?

(e)   Could this derating be merely a “mean reversion”?

…to continue tomorrow

Take it or leave it

The Indian equity markets continue to notably underperform its global peers, despite assurances of a resilient economy and decent corporate performance. Experts have attributed the underperformance to incessant selling by the foreign investors and geopolitical uncertainties. Both are valid reasons. But I do not think these explain the full picture.

Foreign selling is an effect, not a cause

Foreign portfolio investors (FPIs) have been net sellers in four out of the past five years. Obviously, they are not selling for fun. Something seems to have changed in how they see the risk and the return from India. The selling, therefore, tells us “what” is happening, not “why”.

Part of the “why” is global. Treasury bonds in the developed economies are yielding highest in over two decades, providing global investors a safer option to invest. The rupee is flirting with 96 to the dollar, which cuts dollar returns even when the Nifty stays flat. Neither of these is India-specific. They hit every emerging market.

Geopolitics is affecting India mostly through oil and other raw materials. Expensive crude, chemicals, metals, etc. means higher imported inflation and a weaker rupee. That is a real cost, but the economy is absorbing it. The RBI’s own estimate for FY27 growth stands at 7.1%, after the oil shock and the weaker rupee are already in the numbers. Domestic institutions are also buying, so net flows (FPI plus DII) remain positive. A market that falls under these conditions is telling us that the risk premium foreign investors are willing to pay for India has changed.

The one cause that is in our own hands

I think, among other things, policy and legal uncertainty is one of the reasons global investors are staying away. I have highlighted this before (see here). The government itself acknowledged it in an Economic Survey (see here). Over the past decade, India has seen more than one sudden shock. The retrospective tax of 2012 was repealed only in 2021, after costly arbitration losses. The higher surcharge on FPIs in the 2019 Budget was rolled back within weeks. Each was corrected in the end. But the correction came after the damage, and that pattern is what erodes the trust between government and enterprise.

Two recent instances are noteworthy in this context.

Tiger Global: the ruling and the repair

In January this year, the Supreme Court ruled that Tiger Global must pay capital gains tax in India on its 2018 sale of Flipkart shares to Walmart. The court found that Tiger Global’s Mauritius entities acted as simple conduits for tax avoidance rather than active local businesses. The court emphasized that a Tax Residency Certificate (TRC) issued by Mauritius no longer automatically guarantees tax treaty relief. Tax authorities can look past paperwork to see where real control and business decisions happen. The judgement said India’s General Anti-Avoidance Rules (GAAR) can override older treaty benefits if an arrangement lacks commercial substance, even for older investments.

To be fair, I would not defend a structure with no commercial substance. The court was enforcing an existing anti-avoidance law, not inventing a new one. The real difficulty is for investors who believed that investments made before April 2017 were protected, which is what the 2016 treaty protocol seemed to promise.

On March 31, 2026, the CBDT amended the GAAR rules so that income from the transfer of investments made before April 1, 2017 stays outside GAAR. That is a welcome step. But the issue may not be closed yet. The “substance over form” reasoning and treaty-level anti-abuse clauses are still available to the tax department, and it is not clear that the relief reaches Tiger Global itself. Shock first, patch later, some doubt left over. That is a worrying pattern for investors.

Prima facie, this mostly concerns private equity and venture capital investors, not the FPIs selling listed shares. But long-term capital talks to each other. What one set of investors learns about exit risk soon becomes part of how everyone prices India.

Hospitals: a risk building, not yet a shock

The healthcare sector in India has attracted substantial foreign capital in the past decade. Foreign investors now hold material stake in most of the corporate hospital chains in India. Recently, the Supreme Court of India criticized corporate hospitals for overcharging patients and suggested that they should be operating as service providers rather than attempting to maximize profit. The government is yet to clarify its stand on the issue, creating significant uncertainty for foreign investors who have invested heavily in Indian hospitals.

If a margin cap is actually imposed, it will come with little notice and no transition. Investors have seen that film before.

What I make of it

The message from these episodes seems to be that India is no haven for those looking for tax arbitrage or policy loopholes. The call reads as “either play by the rules or leave”. That is a fair position for any country, provided the rules are clear and known before the money goes in. Investors can live with strict rules. What they cannot price is a rule that gets interpreted or redrawn after they have invested. For now, foreign money’s verdict seems to be to trim exposure.

Investor takeaways

·         FPI selling is not a verdict on India’s growth. The growth is decent. But do not dismiss it either; markets sometimes see risks before the data does.

·         Watch the follow-through, not the headline. The final government stance on hospital pricing, and how the tax department applies the GAAR amendment in pending cases, will tell us more than any media headline.

·         Treat price-regulation risk in listed hospital chains as a real input to valuation, not as noise.

·         Stay selective on FPI-dependent segments until there is more clarity. Domestic flows are a cushion, not a substitute.

·         Do not assume that a patch for one problem means the pattern has ended. Look at how quickly and how clearly the next one is handled.

RBI follows the herd

The Monetary Policy Committee of the Reserve Bank of India, in their meeting held during 5-7 October, 2026, unanimously decided to hike the policy rates by 25bps, in line with the market consensus. Accordingly, the policy repo rate is hiked from 5.25% to 5.50%; the standing deposit facility (SDF) rate stands adjusted at 5.25% and the marginal standing facility (MSF) rate and the Bank Rate at 5.75%. The MPC also decided to change the stance to “calibrated tightening” from “neutral”, by a 4-2 majority vote. This is the first rate hike by RBI since February 2023.

Explaining the policy decision backdrop, the Monetary Policy Report (October 2026), emphasized-

“Going forward, India’s macroeconomic outlook remains resilient supported by domestic demand and strengthening investment, despite persistent global uncertainties. The outlook remains vulnerable to geopolitical developments, volatility in global energy markets and weather-related uncertainties. Weak monsoons coupled with strong El Niño, protracted geopolitical tensions, rising international commodity prices, additional frictions in global trade and tightening of global financial conditions could adversely impact the growth outlook. Persistent supply-side pressures in food and volatile global energy prices pose risks to the domestic inflation outlook, particularly through second-round effects amid strong growth impulses. The interplay of these factors will shape the evolving growth–inflation dynamics, with the balance of risks depending on developments in global growth, crude oil prices, exchange-rate movements, and domestic food supplies.”

As I mentioned in my yesterday’s post (see here), the decision to hike and change of stance to calibrated tightening was well anticipated and analyzed by the market participants. There is not much to comment on that. Nonetheless, I find the following two points worth highlighting:

1.    The RBI has hiked its real GDP growth estimates for FY27 from 6.7% to 7.1% to underscores the strength of economic activity despite significant headwinds. This can also be interpreted to mean that the RBI does not see the latest rate hikes as restrictive.

2.    The RBI increased its inflation estimates for FY27 core inflation by 10bps to 4.4% (previously 4.3%). It also estimates that the headline CPI inflation may average 5.8% in the next three quarters (3QFY27 to 1QFY28). The RBI governor, in his statement, admitted that “there is limited evidence of demand side pressures”. He also highlighted that “As regards supply side inflation, the MPC noted that monetary policy primarily acts by curtailing second round effects (inflation expectations and firm level pricing behavior, etc.), which take time to manifest and are difficult to extract from available data….While there is some evidence of elevated inflation expectations and generalisation of inflation, there are limited signs of supply side pressures getting embedded in pricing behaviour.” In plain English, it implies that the RBI is not sure whether the latest rate hike could help in controlling inflation.

Overall, the decision to hike appears more of a preemptive move to check INR depreciation and attract flows in treasury bonds, as the central government and states get ready to make large issuance in 2HFY27. The assumption seems to be that in view of the abundant liquidity in the banking system, the transmission of this hike to borrowers may happen with considerable lag.

I would be carefully watching the transmission channels to assess the implications for my investment strategy.

 

To hike or not to hike

In a few hours from now, the Reserve Bank of India will announce the outcome of the Monetary Policy Committee (MPC) meeting held from 5 to 7 October 2026. The market consensus is a 25bps hike in the policy repo rate, from 5.25% to 5.50%. It would be the first increase since February 2023. A few analysts also expect a hike in the Cash Reserve Ratio (CRR) from the current 3%. The RBI’s stance has been “neutral” since June 2025, and it was retained in August. The talk now is that the RBI may move to “calibrated tightening”, though economists are far from united on this.

Two reasons are being given for a hike. The first is sticky inflation. CPI inflation rose to 4.82% in August, above the 4% target for the third month in a row, and wholesale inflation is close to 10%. The second is the shrinking gap between Indian and developed-market bond yields. The US Fed has started raising rates again, the rupee is close to 96 to the dollar and about 6% weaker this year, and foreign investors have been taking money out of Indian bonds.

Let me be clear about where I stand. In my 24 September post I had said that a 25-50bps move in October was now the base case, and I still expect the MPC to hike today. But what the RBI will do and what it needs to do are two different questions. On the second, I am not convinced. In my view, the reasons being given are not strong enough for the RBI to change the course of its policy.

Inflation is a supply story

Energy is dearer because of the war in West Asia and disrupted shipping. Food is dearer because the southwest monsoon is closing with a deficit of around 15%, and El Nino is strengthening. Metals and chemicals are dearer because of freight costs and production disruptions in several countries. A higher repo rate will not bring one extra barrel of crude through Hormuz, or one extra drop of rain. Core inflation, which leaves out food and fuel, was still 3.9% in July. That is not how demand-led overheating looks.

History is not encouraging either. The RBI raised rates twice in 2018 as oil climbed and the rupee slid, and the rupee kept weakening until crude prices turned in October.

The fair counter-argument is second-round effects, when supply shocks seep into wages and inflation expectations. I take that risk seriously, and it is the one reason I would not rule out more hikes later. But the core inflation numbers do not show it yet.

Borrowing costs will bite where it hurts

Indian businesses are already carrying more working capital, because inventories are higher and payment cycles are longer. A costlier loan at this stage will also find its way into prices, besides adding to financial stress.

Bond yields have also done part of the RBI’s job already. In the past one month the 2yr G-Sec yield is up 51bps, the 10yr by 25bps, the 15yr by 30bps and the 30yr by 10bps. A 25bps hike will not move these yields in the same proportion, but it will reach households. A large part of floating-rate home, auto and MSME loans is now linked to the repo rate, so EMIs will go up within a few months. Demand in these rate-sensitive segments is already softening. Housing sales in the top nine cities fell 6% in the September quarter from a year ago, though another tracker covering seven cities shows a 3% rise, so the picture is mixed. In autos, September numbers missed expectations a month after record sales in August. Bajaj Auto’s domestic sales were down 9% and M&M’s tractor sales 21%, even as M&M’s overall sales and Hyundai’s held up. With the RBI itself projecting growth of 6.7% I am not worried about a collapse. My concern is narrower. These are the segments where costlier EMIs bite first, and the festive season is a poor time to test them. Why add to their burden when the inflation we are fighting does not come from these sectors?

The yield gap is the better argument, but still not enough

Of the two reasons for a hike, this is the stronger one, because it is about the rupee and capital flows. But look at the size of the moves involved. The Fed has gone from 3.50-3.75% to 3.75-4%, and the US 10-year yield has crossed 5%. A 25bps hike by the RBI does very little to a gap that is being pulled open by moves of that size elsewhere. Foreign flows into our bonds are following global yields, not 25bps of repo rate. Besides, the RBI has already pulled in large inflows through the FCNR(B) window, eased the norms for external commercial borrowings and stepped into the currency market. These tools are aimed straight at the rupee, and I would rather see the RBI lean on them.

I accept that there is a cost on the other side too. The market is expecting a hike, and a surprise hold would unsettle the rupee and bond yields for a few days. To me that is a smaller price than raising the policy rate for reasons it cannot address.

What the RBI can do instead

The real anomaly right now is the excess liquidity due to FCNR(B) mobilization. Short-term money market rates are still trading below the repo rate. The RBI has been absorbing this through bond sales and swaps, and more of the same would bring overnight rates up towards 5.25%. Let us not pretend that this is not tightening, because it is. But it is a more precise kind of tightening, it does not announce a new rate cycle, and it can be reversed easily. Among the tools, I would prefer open market sales and swaps over a CRR hike. CRR is a blunt instrument, and a hike would take back relief that banks got only last year.

The sharp rise in personal loans is the part of credit that needs cooling. Bank credit is growing at about 19% against deposit growth of about 15%. Targeted steps, such as higher risk weights on unsecured loans as the RBI did in late 2023, will do this better than a rate hike that every borrower in the country has to pay for.

Investor takeaway

·         Look beyond the repo rate today. A 25bps hike is largely priced in. The stance, the guidance for December and any liquidity measures will tell you more.

·         Watch the RBI’s liquidity operations as closely as the headline rate. Overnight rates moving up towards 5.50% is tightening, whatever the repo rate does.

·         Expect rate-sensitive segments – real estate, autos, NBFCs and companies with heavy external borrowings – to feel the higher funding costs first.

·         Do not assume that one hike ends the story, and do not build a base case around rate cuts. A higher cost of capital for longer remains my working assumption.

·         If the RBI holds, expect the rupee and bond yields to react first. Treat that as a short-term reaction, not a change in the larger direction.

A closing thought

The Bhagavad Gita (6.17) says that yoga removes sorrow for the one who is measured in eating, in recreation, in action, and in sleep and waking:

युक्ताहारविहारस्य युक्तचेष्टस्य कर्मसु । युक्तस्वप्नावबोधस्य योगो भवति दुःखहा ॥

The word to notice is yukta – measured, fitting. Central banking asks for the same quality: choose the dose that fits the ailment, neither more nor less. A hike may well come today. My only point is that the ailment here is mostly one that a rate hike cannot treat, and the RBI has finer instruments for the rest.

India’s private capex: reading beyond the headline

Every few months someone announces that India’s private capex cycle has finally arrived. The RBI’s September Bulletin gives us fresh data to test that claim. My reading is that the picture is good, but not as good as the headline suggests, and not as bad as a quick look at the pipeline numbers can make it seem.

The good part first

In FY26, banks and financial institutions sanctioned loans to 1,032 private projects with a total project cost of Rs4.35trn. A year ago, it was 907 projects worth Rs3.68trn, an increase of about 18%. This is the highest figure in the RBI series, which goes back to FY14. If we add capex funded through ECBs and equity issues, private corporates showed investment intentions of Rs5.6trn across 1,839 projects, against Rs5.0trn across 1,581 projects in FY25. ​

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The quality looks decent too. About 89% of the project cost is for greenfield projects, which means new capacity and not just replacement, though this share is in line with earlier years. Corporate and bank balance sheets are in good shape. Term loans grew 15.4% in June 2026 against 8.3% a year ago, and gross fixed capital formation grew 20.4% at current prices in April-June 2026. There is nothing here to be gloomy about.

But a sanction is not spending

Three things make me cautious before calling this a broad-based capex boom.

First, sanction and spending are different things. The Rs4.35trn is project cost, and banks and FIs financed only about 55% of it. The money will be spent over three or four years, and the RBI itself says these are ex-ante plans which can change. Actual capex in FY26 grew only about 10%, and the sanctions were around 3% of outstanding bank credit to industry. The RBI’s own model says a 1% rise in envisaged investment adds about 0.33% to private capital formation in the long run. It is a useful signal, but not a very strong one.

Second, concentration. Power has held close to 40% of sanctions for two years running. Roads and bridges, which took a quarter of all sanctions in FY24, fell below 9% in FY25 and stayed there. Construction has picked up, while chemicals slipped back after a good FY25.

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The size of tickets tells the same story. The 112 projects above Rs1,000 crore made up about 68% of the total cost, while 597 projects below Rs100 crore, more than half the count, made up just 5%. Six states took 67% of the money, led by Maharashtra (20.2%) and Gujarat (17.9%). A lasting capex cycle needs the middle of the pyramid to move too, across manufacturing, logistics and services, because that is where jobs and the multiplier come from. The data does not show that yet.

Third, the credit story. A good part of the recent pick-up in corporate credit looks like working capital. Companies have been drawing down credit lines to stock inventories and hold liquidity because of the West Asia uncertainty. That is not capex, and it can reverse as quickly as it came.

How to read the pipeline

The most interesting part is the phasing of capex, that is, how much of the sanctioned money is expected to be spent in which year. Here one needs some care. Capex planned across all channels is Rs4.73trn for FY26 and Rs3.24trn for FY27. It is tempting to say that the pipeline has shrunk by 31%. That is not a fair comparison. The FY26 figure includes projects sanctioned during FY26 itself, while the FY27 figure cannot include projects that will be sanctioned during FY27, because they do not exist yet. To compare like with like, we should remove the same-year sanctions from FY26 and compare pipeline with pipeline.​

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On this basis the FY27 pipeline is about a quarter higher than the comparable FY26 pipeline. The RBI puts it at Rs3.2trn against Rs2.6trn. Bank-funded capex is up 15% and ECB-linked capex has almost doubled. The soft spot is equity. Capex funded through IPOs, follow-ons and rights issues is down 18%, and the capex envisaged from IPO money fell to Rs238.09bn in FY26 from Rs322.95bn in FY25. It is a small channel, about 3% of the FY27 pipeline, but it is where market mood shows first.

What about the Rs1.51trn shown for the period beyond FY27? It looks thin, but it is a bucket for all years after FY27, and it is naturally small today because the sanctions of FY27, FY28 and later have not happened. Even the FY26 sanctions have 22% of their cost parked beyond FY27. I would not read a slowdown into that number.

So where is the real risk? By my rough arithmetic, bank and FI projects spend about 35% of their cost in the year of sanction. The FY27 bank-funded capex already visible is Rs2.26trn. If FY27 sanctions stay flat at Rs4.35trn, bank-funded capex in FY27 would come to about Rs3.8trn, roughly 8% above FY26’s Rs3.52trn. For it to merely stay flat, sanctions would need to fall by nearly a fifth, to around Rs3.6trn. So, the engine is not stuttering. The risk is a sharp fall in fresh sanctions, or delays in executing projects that are already sanctioned. That is what I will be watching.

What I will watch

·         Fresh sanctions. Around Rs3.6trn is the level below which FY27 bank-funded capex starts to slip. Anything lower will need explaining.

·         Breadth. Whether manufacturing, construction, chemicals and roads add to power, or power remains the whole story.

·         Credit mix. Term loans for projects versus working capital lines. The first builds capacity, the second only builds inventory.

·         The equity route. A recovery in IPO-funded capex would be a good sign of business confidence.

·         Execution. These are plans on paper. Delays and cancellations will show up only with a lag.

For investors: in my view, the order books linked to power and infrastructure have the best visibility today. I would not pay for a broad-based private capex boom until fresh sanctions confirm it. As for banks, near-term corporate loan growth is more about working capital than capex, so I would not build a thesis on it alone.

 

Reading the street signs

Last week gave us plenty of theatre. President Trump mused about renaming the Strait of Hormuz “Trump Strait” and rebranding Artificial Intelligence as “Super Intelligence.” Both suggestions say more about the man than about markets. But strip away the theatre and six genuine developments took place this past week that belong in every investor’s diary.

Oil: more of it is flowing, but from a war, not a truce

Crude movement through the Strait of Hormuz picked up sharply through September –several times over the trickle seen in August – as Saudi Arabia found ways to route more barrels through, and around, the contested waterway. This has happened even though Iran’s effective closure of the strait, in place since the US-Israel strikes of late February, has not been lifted. At the UN General Assembly last week, Iran offered, through Qatari mediation, a seven-day plan to reopen the strait and resume nuclear talks, in exchange for an end to the US naval blockade and a measure of sanctions relief. President Trump rejected it outright. Crude has cooled from its worst levels of the year but remains well above where it started 2026. My own base case: barring a fresh escalation, a sharp spike from here looks unlikely, but so does any quick return to calm.

Bond yields: the quiet crisis

Government bond yields and mortgage rates across the US, Japan and other developed markets have climbed to levels not seen in years – in some cases the highest since the run-up to the 2008 financial crisis. This is not a one-country story. Insurers, banks, pension funds and endowments are all sitting on massive mark-to-market losses, borrowers everywhere face costlier debt, and governments that are already fiscally stretched will find it harder to service what they owe. I see this as the single biggest known risk hanging over every asset class today, precisely because it isn’t dramatic enough to dominate headlines the way oil or tariffs do.

NIFTY50’s seventh straight weekly fall

The index declined for seven consecutive weeks. Going by data stretching back to the early 1990s (on a back-computed basis, since the index itself was launched only in 1996), a losing streak of this length has occurred only six times before – through the Harshad Mehta-era turmoil of 1992-93, the dotcom bust of 2001, the global financial crisis of 2008, and the Covid crash of 2020-21. That makes the current one the seventh such instance in over three decades. What makes it unusual is the company it is keeping. The economy is growing, corporate profits are healthy, the banking system is sound, liquidity is ample, and net institutional flows – DII plus FII combined – remain positive. Political stability is not in question. Every prior instance was a market reacting to a genuine crisis. This one is reacting to almost everything except one.

Xi and Trump find a truce of convenience

The two presidents used Xi’s state visit to Washington to sidestep the issues that have poisoned the relationship – Taiwan, Iran, Ukraine, each other’s domestic politics – and instead announced an eight-point consensus, including a $30 billion reciprocal tariff-reduction arrangement, a new dialogue on AI, and a bilateral trade and investment council. It is a marked climbdown from a decade of American strategy built around containing China’s rise, of which the Quad was the clearest expression. Whether this turns out to be a genuine reset or a tactical pause, markets should not ignore the signal it sends.

India plays its own hand

Sensing the shift in Washington’s posture toward Beijing, India is showing that it, too, can afford patience. Commerce Minister Piyush Goyal has said plainly that the India-US bilateral trade agreement is substantially done, but that India will sign only once Washington offers preferential tariff terms relative to India’s competitors in the US market – not simply at a deadline convenient to the US. External Affairs Minister Jaishankar’s engagements at this week’s UN General Assembly carried the same undertone: India intends to protect its room to manoeuvre rather than lock itself into a one-sided embrace.

The Russian-oil stick

Under the Russia and Iran sanctions law that President Trump signed this month, he now holds the legal authority to impose tariffs of up to 100% on the largest buyers of Russian oil and gas. China and India top that list, and neither has blinked; both have effectively said they will continue buying. Whether this authority is ever actually exercised, or simply kept in the holster as leverage in wider negotiations, is itself worth watching closely. For now, the domestic inflation trajectory and rising yields may keep Trump restrained from any tariff hike that can fuel inflation further.

Joining the dots

None of these six threads runs in isolation. Read together, they describe a world where several of the certainties of the last decade – American command over global energy chokepoints, a China contained by an alliance of the willing, an India firmly anchored to Washington, and government bonds as the reliably “safe” end of a portfolio – are all being tested at the same time. For an Indian investor, the transmission channels that matter most are three: crude prices, which feed straight into the fiscal deficit and the rupee; global bond yields, which set the cost of capital for every leveraged balance sheet, ours included; and the India-US-China triangle, which shapes flows, tariffs and market access for our exporters. None of the three points to disaster. All three point to a longer, choppier road than the one we grew used to in the easy-money years.

Investor takeaways

·         Don’t read the seven-week fall as a crisis signal by itself – the underlying economy has not sent one. But don’t dismiss it either; markets sometimes see risks before the data does.

·         Watch global bond yields as closely as domestic ones. A sustained rise in US and Japanese yields is a bigger threat to Indian equity valuations than most local news flow.

·         Resist the urge to make large bets on the Trump-Xi thaw holding. Positioning for a détente that later collapses can be costly; watching and waiting is a legitimate strategy here.

·         Track the terms of the India-US trade deal, not its timing. A delay that produces better terms is preferable to a rushed signing on worse ones.

·         Treat the threat of 100% tariffs on Russian-oil buyers as a tail risk to price in gradually, not a certainty to react to today.

A closing thought

The Lord guided Arjuna, योगस्थः कुरु कर्माणि सङ्गं त्यक्त्वा धनञ्जय – established in yoga, perform your actions, having abandoned attachment, Dhananjaya. The market is asking investors to do much the same: keep working the process – reading the data, rebalancing where it is warranted, staying invested where conviction holds – without growing attached to any single headline, however loudly it may be dressed up to seem.