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.

Quality over quantity

There has been a lot of noise lately about the reliability of India’s national accounting data. Questions are being raised about the base year, the deflators, the informal-sector estimates, etc. This is not a new fight, either: the 2015 base-year revision and the “back-series” controversy that followed it are still cited by both sides whenever the subject comes up.

I do not think this debate is baseless. When a country changes its base year and its estimation method at the same time, the honest question — is the new series really comparable to the old one — is a fair one to ask, and India has not fully answered it.

In my view, a measurement method, even an imperfect one, will give you a broadly correct sense of direction if its bias stays consistent over time. A ruler that is slightly off, used the same way every single time, still tells you whether something is growing or shrinking. The real damage is done when the ruler itself keeps changing — different base years, revised methodologies, quietly redrawn definitions.

Which is exactly why I do not want to rest everything on one number, however it is calculated. I would rather ask a broader question: is India’s growth actually good growth? Not whether it is 6% or 7% in a given quarter, but whether it is the kind of growth that leaves the country stronger, fairer, and more resilient a decade from now. I call this my “sustainability” test.

What I mean by “sustainable” growth

In my view, economic growth earns the label “sustainable” if it, among other things:

·         Improves the quality of human life — general living conditions, health outcomes, self-esteem, crime rates, education standards, and accessibility.

·         Promotes equality, especially of opportunity and access.

·         Preserves and improves the climate rather than mortgaging it.

·         Is fiscally prudent, as reflected in the fiscal deficit, the primary deficit, and the tax-to-GDP ratio.

·         Uses capital efficiently, as measured by the incremental capital output ratio (ICOR).

·         Generates employment elasticity broadly in step with the growth of the workforce — a criterion I apply specifically because India remains a labour-surplus economy; the same low elasticity in a labour-scarce, ageing economy would mean something altogether different.

·         Rests on strong public institutions — particularly the judiciary and law enforcement.

·         Is financed sustainably from outside — a current account and external-debt position that does not depend on ever-larger foreign borrowing or a steady drawdown of reserves to keep the growth engine running.

These are not the variables that dominate a GDP print, and that is precisely the point. A country can post a healthy growth number while quietly running down its institutions, its climate, its external buffers, or its social fabric. None of that shows up in a quarterly release. It shows up ten or twenty years later, usually at the worst possible time.

To be clear, this is not an exercise in preferring “qualitative” judgement over “quantitative” data — that would be a false choice, since education standards, crime rates, capital efficiency and fiscal deficits are all measured with numbers too, and each of those numbers has its own well-known quality problems. What I am really doing is trading one politically salient statistic for a basket of harder-to-manipulate ones. It is much easier to manage the optics of a single GDP print than it is to simultaneously flatter eight independent indicators that rarely move together.

Why I judge India against its own past, not against other countries

I deliberately do not run this test on a relative basis — India versus China, India versus Vietnam, India versus the OECD average. Every country carries its own socio-economic baggage: its history, its demography, its institutional starting point. Judging India by a Scandinavian yardstick, or by a Southeast Asian one, tells you more about the yardstick than about India.

To be explicit about what I am doing instead: my benchmark is India’s own trajectory over time — is each of these factors improving, stagnant, or worsening relative to where India itself stood ten and twenty years ago. That is a narrower, more honest comparison than a snapshot verdict, and it is also harder to fudge, because it forces me to actually show the trend rather than assert a label. That is the exercise I intend to carry out, factor by factor, in my subsequent posts.

India’s actual record on the sustainability test

Prima facie, measured this way, India’s growth story is mixed. There is no category where I can honestly say we have an excellent track record.

On basic education standards, on climate, on equality of opportunity, and on crime, the record has been weak — not because there has been no effort, but because the gap between intent and outcome remains wide. On health, capital efficiency, employment elasticity, and fiscal prudence, the picture is closer to average: neither a source of pride nor a cause for alarm, but a reminder that there is real work still to be done.

This is not a pessimistic conclusion. It is simply an honest one. Growth that is directionally positive but structurally uneven is still growth — but it is fragile growth, and fragile growth deserves a more careful reading than a single headline GDP figure, however it is computed, can offer.

 

Higher for Longer – investment strategy guardrails

I closed my last post promising to come back with what the “higher for longer” regime means for portfolios (see here). Before I get there, it is worth pausing on where the RBI itself stands in this story, because India’s hand is not quite the same as the one the Fed, the BoJ or the ECB are holding.

The repo rate has sat at 5.25% through four straight policy reviews. Going into the October 5-7 meeting, the conversation among economists has shifted from “will the RBI hold” to “how much will it raise.” A hawkish pause is no longer the base case doing the rounds; a 25-50bps move in October, with more to follow in December, is. By the time this cycle is done, my own sense is the repo rate ends up a good 50-75bps above where it sits today.

Curiously, short-term money market rates are still trading below that 5.25% mark, not above it. That is the FCNR(B) window talking – the RBI’s special swap facility pulled in close to $133bn of NRI deposits by the time it shut at the end of August, and together with external commercial borrowings and overseas foreign currency borrowings, total inflows under the facility had crossed $143bn by mid-September. That is a lot of rupee liquidity sloshing around the banking system, and the RBI has been mopping it up through fairly aggressive open market bond sales rather than touching the policy rate itself. Even so, the benchmark 10-year G-sec yield has stayed above 7% for weeks now, and the curve remains steep at the long end – the market’s way of saying it does not fully believe the short-end calm will last.

On the inflation side, August CPI came in at 4.82%, up from 4.45% in July, and food prices are doing most of the damage. The southwest monsoon is closing out with a deficit of around 15%, and forecasters now see the El Nino in the Pacific strengthening further as we head into winter, which puts a question mark over the rabi season and, by extension, over food inflation through the next two quarters. A rupee that keeps flirting with the 96-to-the-dollar mark is not helping either – whatever pass-through shows up in energy and other imported inputs adds to that same pressure. Food and energy together, then, not a demand story, look set to be the swing factor for inflation over the next six months.

Growth, meanwhile, refuses to cooperate with the doom-mongers. The RBI’s own FY27 estimate has been revised up twice this year to 6.7%, and a clutch of private forecasters now sit closer to 7%. With growth this resilient, there is little reason for the MPC to look past the inflation print in its trade-off, and every reason to expect it will keep leaning towards price stability rather than growth support.

So, what should the investment strategy stance be under these circumstances? In my view, investors should –

•      Not build a base case around imminent rate cuts, in India or anywhere else; price discovery for equities and bonds should assume the current cost of capital persists into 2027.

•      Treat AI-linked disinflation as a slow-moving, narrow effect, not a macro offset to energy-driven inflation.

•      Watch the RBI’s non-rate toolkit as closely as the repo rate itself; between the $143bn of FCNR(B)/ECB/OFCB inflows, OMO sales and swap operations, it is currently doing more of the work than the headline number suggests.

•      Size allocations to alternatives such as gold and crypto around the structural, diversification-driven demand from central banks, rather than around the cyclical, rate-driven leg, which has already started to fade.

•      Favor balance sheets and business models that can absorb a higher cost of capital for longer, rather than ones underwritten on the assumption that cheap money and a fresh round of quantitative easing would be back before too long.

The broader lesson is one the Gita states more elegantly than any market commentary can – yogasthah kuru karmani, act with steadiness, without being swayed by outcomes that keep shifting day by day. The rate cycle will turn again eventually. Portfolios built on patience will be in better shape to meet that turn than those built on guessing when it arrives.

 

Thought for the day

“Bigamy is having one wife too many. Monogamy is the same.”

—Oscar Wilde (Irish Poet, 1854-1900)

Word for the day

Enormity (n)

Outrageous or heinous character; atrociousness

Its payout time

I have long believed that free, democratic societies built on free-market economics move through three broad phases — empowerment, enablement, and engagement. This framework explains something pure economics often misses: why some perfectly sound reforms land smoothly, while others — involving far smaller sums of money — set off disproportionate outrage. The current noise over the Merchant Discount Rate (MDR) on UPI payments is, to my mind, a textbook example of a society well into its engagement phase being asked to do something that phase inevitably demands, and not entirely enjoying it.

Three phases of freedom

Empowerment comes first. People are given the constitutional and legal rights to build the social and economic order of their choosing. The political structure that follows is mostly downstream of that economic choice, and for societies opting for a free, capitalist economy, parliamentary democracy has proven the most durable vehicle. The move from aristocracy or oligarchy to full parliamentary democracy is rarely smooth, if only because a newly enfranchised electorate is not always equipped, through education or experience, to identify the wisest rulers or the wisest policies on the first attempt.

Enablement follows. People empowered on paper now need to be enabled, in practice, to walk the economic path of their choice. Social equality, economic equality and gender equality are the usual stated goals, and the tools are familiar the world over — redistribution through taxation and welfare, land-ceiling laws, restrictions on asset ownership, and affirmative action to bring the economically poor, the socially marginalized and women into government and commerce. This phase is rarely peaceful. Tension between the propertied and the dispossessed spills into social unrest, and institutions that are still too young or too weak to supervise redistribution honestly tend to generate more corruption, not less. There is also a subtler failure I have seen recur across very different countries: some of enablement’s intended beneficiaries become powerful enough, in turn, to appropriate resources meant for their peers — reproducing, under a new banner, the very inequity the phase was meant to correct.

Engagement is the pay-off. The empowered and enabled population now participates directly in building the economic institutions and free markets around it. This is usually the golden period for any society that has chosen the free-market route — a larger share of the population riding the virtuous loop of earning, consuming, saving, investing and earning again, which is what sustainably higher consumption and investment demand actually looks like from the inside.

The pattern elsewhere

This sequence is not uniquely Indian and the three phases need not run in a fixed order. South Korea and Taiwan are the clearest case of the sequence inverting rather than merely compressing: both achieved deep economic engagement — export-led manufacturing, mass industrial employment, rising incomes — for years under authoritarian rule, and only democratized, and so achieved political empowerment, in the late 1980s. Enablement and economic engagement arrived first; political empowerment followed. Post-1989 Eastern Europe shows a different risk: rapid privatization, undertaken before institutions were mature enough to supervise it, let a small circle of insiders capture state assets almost overnight, delaying the broader population’s engagement by a decade or more even as headline growth recovered. The United States offers a longer, messier version of the classic order — its constitutional empowerment dates to the 1780s, but it took roughly 190 years, until the Voting Rights Act of 1965, before that empowerment was extended in practice to all its citizens, and arguably longer still before enablement was complete. The lesson I take from all three is that empowerment, enablement and engagement are better thought of as three tracks — political, redistributive and economic — that often but do not always move in step, rather than one fixed sequence every society must climb in order.

India’s long road to engagement

India’s constitutional framework offered both a democratic polity and a free-market economy from the day the Constitution came into force, 26 January 1950. In that narrow sense, India’s empowerment was immediate and complete — faster, in fact, than the American experience above. In practice, though, I would argue meaningful empowerment was delayed by at least three decades. The Indian National Congress, which had led the freedom movement, converted itself into the ruling party, and its leadership through the 1950s, 60s and 70s remained heavily drawn from the country’s landed and professional elite. Policy through this period concentrated control over resources and enterprise with the state, leaving room for little beyond bare necessities for the ordinary citizen, and space for organized dissent was narrow — what opposition existed came mostly from communist and socialist groupings whose support base tended to be regional or sectional rather than national.

The first genuinely nationwide push for real empowerment took shape in the mid-1970s, under Jayaprakash Narayan, and the Emergency that followed only sharpened the demand once it was lifted. Momentum built through the 1980s, and enablement began in earnest a decade after the Mandal Commission submitted its report, when V.P. Singh’s government implemented its recommendations in August 1990. As with most enablement phases, India’s has been shaped as much by electoral calculation as by social or economic logic, and it has carried the familiar costs — patchy execution, leakages, and no shortage of allegations of corruption along the way.

The socialist and regional political current that Mandal unleashed gained real power through the 1990s and 2000s, at various points anchoring or propping up the federal government. It could not sustain its early energy — several of these parties settled into family- or faction-led leadership that looked, in time, uncomfortably similar to the entrenched structures they had set out to replace. But the underlying shift proved durable: Indian governance since then has grown structurally more welfare-oriented, and India’s states and local bodies now hold far more real power than they did in 1980.

On reflection, the real trigger for India’s economic engagement was 1991. The dismantling of the license-permit raj, the opening of the economy to trade and foreign capital, and the birth of a modern equity and mutual-fund culture that followed are what first let ordinary Indians participate directly in building enterprise and markets rather than simply receiving what the state chose to redistribute. That leaves a gap I should be honest about: enablement (1990, via Mandal) and the start of economic engagement (1991) arrived almost simultaneously, while political consolidation of the enablement agenda — more welfare-oriented governance, more powerful states — continued to unfold for another two decades alongside it. The two tracks ran side by side rather than one strictly following the other, which is itself a reminder that this framework describes overlapping currents more than a clean staircase.

2014 marked broadening and deepening of the engagement phase— and, again whatever else one makes of the government’s record, that period has combined continued affirmative action for the underprivileged with a decisive widening of the direct-tax base and of market participation. Personal income tax collections now exceed corporate tax collections; private enterprise, including a wave of new-age companies in defence, space, medical research and manufacturing, is doing real work alongside the state; indirect-tax participation has widened; and household savings are flowing into financial markets at a scale that makes retail investors, for the first time, a meaningful source of growth capital. The 1990s built the plumbing; the last decade is where the volume running through it has become large enough to matter for the aggregate economy.

Engagement, though, meets resistance every step of the way. Privatization proposals are met with cries of cronyism. Every effort to raise the tax-to-GDP ratio runs into pushback. Direct contribution from citizens who have drawn on public infrastructure and subsidies for two generations is too often read as an imposition rather than a fair ask. That is not, historically, how the economics of development actually works — somebody has always had to pay for the plumbing, literal or digital.

Reading the UPI-Fee in this light

The row over the Merchant Discount Rate on UPI belongs squarely in this bucket. From 15 October, the National Payments Corporation of India will apply a 0.4% MDR on person-to-merchant UPI payments above ₹2,000 — a charge that sits with the merchant, not the customer, and merchants are explicitly barred from passing on to the price a customer pays. Peer-to-peer transfers stay free at any size, as do merchant payments under ₹2,000. Small merchants receiving up to ₹1 lakh a month through a UPI QR code are exempt altogether, and essential services — railways, fuel, telecom, insurance — get a flat, low fee rather than a percentage cut. By NPCI’s own reckoning, barely 4% of merchant transactions will be touched at all. What this buys is a modest, dedicated revenue stream to fund the servers, fraud detection and cybersecurity that a network clearing close to ₹30 lakh crore a month genuinely needs, instead of leaning indefinitely on the exchequer to keep something running that has never actually been free to operate.

This, to me, is engagement working as intended, not oppression dressed up as reform. The people being asked to contribute are precisely the ones who have gained the most from a public digital rail built at public expense — merchants who no longer pay card-network swipe margins, and the platforms layered on top of UPI. If UPI is to remain the backbone of Indian retail commerce for another decade, someone has to fund the upkeep, and it need not be the taxpayer carrying that alone.

What it means for investors

Payment companies — issuing banks, acquiring banks and payment aggregators — gain access to a real, durable UPI revenue pool for the first time since MDR on UPI and RuPay debit was zeroed out in 2020; watch for read-through to listed payments and fintech names.

Small and informal merchants are shielded by design, so there is no near-term disruption risk to the grassroots digital-payments adoption that underwrites the broader financial-inclusion and formalization theme.

The cost-sharing template used here — protect the retail base, charge the commercial layer — is a plausible model for monetizing other public digital rails (ONDC, the Account Aggregator framework, OCEN), and worth tracking for any portfolio exposure to platforms built on India’s digital public infrastructure.

The broader signal — a rising share of direct taxes, deepening retail participation in markets, and now direct monetization of public payment infrastructure — is consistent with my longer-running thesis that India’s financialization is structural, not cyclical, and continues to favor domestic financial intermediaries over time.

I keep returning, at moments like this, to the idea at the heart of the Bhagavad Gita’s discussion of yajna — that any system, cosmic or economic, is sustained only by what its participants are willing to put back into it, not merely by what they draw out. A nation that wants its digital public goods to last will eventually have to fund them the way it funds everything else that lasts: through contribution, not entitlement. That, more than any single percentage point of MDR, is the real story here.

 

Higher for Longer

Last week the US Federal Reserve (the Fed) did what the market had already priced in – it raised the federal funds rate by 25 basis points, its first hike since 2023, and left the door open for at least one more move before the year is out. Two days later the Bank of Japan (BoJ) followed with its own 25bps increase, taking its policy rate to 1.25%, the second hike of the year, and the highest level Japan has seen since 1995. Earlier in the month, the European Central Bank (ECB) had already lifted its deposit rate by 25 basis points to 2.50%, its second increase this year. Add to this list the central banks of Australia, New Zealand, South Korea, South Africa, Norway and Denmark, all of whom have raised rates in the past three months, and a pattern is hard to miss. The developed world’s four-year experiment with rate cuts has stalled, and in several places, reversed.

To me five things are clear from this trend –

1. Supply-side stickiness is real, and it will not resolve on its own

The inflation we are seeing today is not the demand-driven inflation of 2021-22. It is coming from the supply side – erratic weather hitting agricultural output, and energy prices kept high by the conflicts in West Asia and Ukraine, which have damaged infrastructure, disrupted shipping lanes and pushed up transportation costs. That second-round effect is now visible in user industries such as chemicals, fertilizers and metals, where input costs have simply nowhere to hide. Besides, tariff actions taken through the year in several large economies are adding a second supply shock on top of the energy one, which makes the case for stickiness even stronger than it first appears.

2. The AI deflation story is being asked to do more work than it can

It is tempting to lean on artificial intelligence as the great disinflationary force that offsets everything else. The evidence so far is much narrower than that – lower prices in IT services, and wage pressure easing for some categories of skilled labour. AI is not a one-sided deflationary force. The capital being poured into data centers, chips and the power grid to run all of this is itself adding to demand in construction, electricity and industrial metals – the same industries already feeling the energy squeeze. Netting the two effects out, I would not count on AI to meaningfully soften the inflation picture in the next year or two. If anything, the investment boom around it is currently a mild net contributor to price pressure, not a relief valve.

3. “Higher for longer” is now the working assumption, not a tail risk

Four major central banks hiking within weeks of each other, ten-year US treasury yields pushing back above 5%, and rate-setters at every one of these institutions choosing to keep their options open rather than signal a pause – this is about as clear a signal as markets get. The cost of the capital regime the world built its valuations on through 2020-24 is not coming back in a hurry.

4. Emerging markets face a harder version of this problem, but the response is not automatic

The pressure on economies like India to defend their currencies and retain capital is genuine. But it does not translate mechanically into higher policy rates. The RBI’s own conduct this year is the evidence – it has held the repo rate at 5.25% through a period when the rupee slid to record lows near 97 to the dollar, choosing instead to lean on FCNR(B) inflows, external commercial borrowing windows and direct market intervention rather than touch the policy rate. That is a rational choice: a defensive hike raises borrowing costs across the whole economy at a time when growth is already being marked down. The emerging market central banks are being forced to spend more of their other tools – reserves, swap lines, capital account measures – to buy themselves room before they are cornered into raising rates outright.

5. The gold trade

Gold touched an all-time high near $5,600 an ounce in January this year, driven by – (a) central banks diversifying out of dollar assets after the freezing of Russian reserves in 2022, and (b) a market pricing in lower yields ahead. Since then, as the rate-cutting narrative has been replaced by an actual hiking cycle, gold has already given back a meaningful part of that rally, trading closer to $4,400 in recent weeks. The “higher for longer” leg of the gold trade is not something to watch for next year – it is unwinding in real time, even as the “diversify away from the dollar” leg continues to bring in steady central bank demand and keeps a floor under prices well above where they traded before 2022.

Will share my thoughts on what it means for investment strategy later this week.

 

Shifting contours of the West Asia conflict

In the past couple of weeks, the shape of the latest conflict in West Asia has changed materially. What began in February with a US-Israel attack on Iran has widened into something closer to a regional war. Saudi Arabia is now in direct combat with Yemen’s Houthi rebels, and Iran itself is leaning more on its regional proxies than on any direct exchange with the US.

Sitting at a distance from the region, here is how I read these developments.

The US is stepping back, at a cost it is choosing not to bear again

The US is genuinely reducing its footprint in the region. It is going ahead with a complete troop withdrawal from Iraq by the end of this month, and it has been pulling back the air-defence assets stationed near Iraqi Kurdistan rather than replacing what Iranian strikes destroyed earlier this year. American bases and radar systems took real damage during the opening months of the war, and the retreat reads as much like a costly re-think forced by Iran’s missile reach as it does a deliberate strategic choice. Either way, the direction is the same: a smaller American footprint, and no urgency to rebuild the old one.

Saudi Arabia is buying insurance, but the policy has no fine print yet

Saudi Arabia’s answer has been the Mecca Joint Defence Agreement, signed in August with Turkey and Pakistan, which promises that an attack on one signatory is an attack on all — an Article 5 for the region, at least on paper. The trouble is that the pact has no joint command, no standing force, and no publicly disclosed trigger mechanism. That gap is precisely why the Houthis have felt free to keep striking Saudi oil facilities through August and September, even after the agreement was signed. Until Riyadh, Ankara and Islamabad fill in the operational detail, the alliance is more of a signal than a shield — and every GCC state now has to think seriously about its own defence, because the American umbrella is visibly folding.

A regional war, not (yet) a world war

For a few weeks earlier this year, this conflict looked capable of pulling in the whole world — China and Russia lending Iran diplomatic and material cover, Turkey drawn in as a NATO member, and America’s own NATO allies under pressure to show up. That risk has receded. The BRICS summit that just wrapped up in New Delhi is as good a marker as any: the bloc’s joint declaration called for restraint in West Asia and protection of trade and energy flows, with China, Russia and Iran all at the same table making conciliatory noises.

What is left looks less like a great-power stand-off and more like an old-fashioned regional contest — Persians, Arabs, Turks, Kurds and Jews working out, the hard way, who controls the trade routes and the oil beneath them. Each of these carries a pride of lineage and ancestry that a shared religion. Yemen alone has seen tens of thousands displaced in the past month, and Saudi Arabia is reportedly readying a full-scale offensive. The conflict is narrowing in its cast of characters, not in its intensity. If the American buffer keeps thinning at this pace, I would not be surprised if we are talking about redrawn maps within a year or two — Houthi forces have already taken Perim Island and the port of Mocha, and those are real territorial changes, not symbolic ones.

Pakistan: indispensable card, weak hand

Pakistan’s position in the Mecca agreement is genuinely a case of the game not being playable without its bat and ball. Saudi Arabia brings the money, Turkey brings the hardware, and Pakistan brings manpower and its status as the only nuclear-armed country in the Muslim world — a card no amount of Gulf capital or Turkish drones can substitute for. That makes it indispensable to the alliance on that one dimension. It does not make Pakistan a strong player overall. Its own foreign exchange reserves needed a $3 billion emergency infusion from Saudi Arabia as recently as April this year to stay stable, and its economy remains structurally dependent on the same Gulf patron it is now committed to defend. And for all the shared faith, Pakistan is ethnically and historically apart from the Arab, Persian and Turkic core of the region — its seat at this table has been bought with deterrence and troops, not kinship, and that distinction tends to matter once real decisions about sacrifice have to be made rather than treaty text signed. Holding the one card that makes the alliance possible, while remaining fragile and an outsider on every other count, is not a contradiction. It is exactly the position Pakistan is in.

India’s hedge is intact — the mediator role is not yet earned

India has played this well so far, prioritizing energy security and the safety of its diaspora over taking sides in a war that does not clearly serve its interests either way. I expect that posture to hold. Where I would be more cautious is the idea that this naturally earns India a mediator’s seat at the table. India’s diplomatic capital in this conflict is real, but as a peacemaker it has not yet been tested.

What this means for the portfolio

Crude and freight remain the transmission channel into India. Watch Bab-el-Mandeb and Hormuz transit data as closely as Brent itself — a route disruption moves faster than a price chart.

A shrinking US security umbrella raises the medium-term risk premium on Gulf-exposed remittances, contracts and diaspora employment — not a near-term shock, but a slow bleed worth pricing in.

Defence and energy-security themes in India (domestic defence manufacturing, refining diversification, strategic reserves) get a structural tailwind from a world where regional powers, not the US, underwrite their own security.

Resist the “peace trade.” A narrower conflict is not a resolving one, and positioning for a quick de-escalation in oil or Gulf-linked equities has been a repeated mistake through this war.

A closing thought

Kautilya’s Arthashastra laid out the mandala theory of statecraft some 2,300 years ago: your immediate neighbor is your natural rival, and your neighbor’s neighbor is your natural friend. That is more or less the geometry Iran, Saudi Arabia, Turkey and Pakistan are redrawing in real time, ring by ring. India sits outside that immediate circle — not by accident, but by a policy choice made and held since independence — and that distance is precisely what gives it the luxury of choosing when, and whether, to step in.

 

Mr. Bond stirring the markets

Mr. Bond has been misbehaving again, and this time he means it.

Earlier this week, the yield on the US 10-year treasury note strolled past 5%. That is the highest this benchmark has traded since October 2023, and on a closing basis, the highest since 2007 — before the world had heard of Lehman Brothers. Even at the worst of that bond rout, the 10-year peaked closer to 4.3%. The last time yields genuinely lived at these levels was when George W. Bush was still in the White House.

The move has not happened in isolation. The 2-year yield, which tracks the Fed's own rate path far more closely than the 10-year does, is sitting near 4.7%, its highest since mid-2024. That leaves the 10-2 spread — the gap between long and short paper — at roughly 32-33 basis points. This number gets thrown around a lot as a recession signal, so it is worth being precise about what it says and does not say.

A negative 10-2 spread has come before every US recession since the mid-1950s. That much is fair to say. But the lead time between inversion and the actual downturn has varied enormously — anywhere from under a year to well over two — so it is a warning bell, not a countdown clock. And right now, the spread is not negative. It is positive, and has been widening out from the deep inversion we lived through in 2022-24. That widening is not automatically good news either. It can mean two very different things: investors betting on strong future growth (a “bull steepening” driven by rate cuts), or investors demanding more compensation to hold long-dated paper because they are worried about deficits, debt supply, and inflation that will not go away (a “bear steepening”). What we have today looks far more like the second kind.

It is interesting to note that in 2018 10-2 spread were around 30bps, but through 2018, this spread was not widening toward this level — it was narrowing toward zero, compressing from the high-50s in early 2018 to just over 10 basis points by December, as the Fed pushed through the last hike of a long, well-telegraphed cycle. Today's setup is the opposite in an important way. The Fed had already been cutting rates through the back half of 2025, brought the funds rate down to 3.50%–3.75%, and then paused. What is rattling the market now is the real prospect — priced at somewhere near 85–90% odds going into tomorrow's meeting — that the Fed reverses course and hikes, its first increase since 2023. That would not be the tail end of a mature tightening cycle, the way 2018 was. It would be a fresh, oil-shock-driven restart, with the disruption in the Gulf and crude prices near $100 a barrel doing much of the work of keeping core inflation uncomfortably close to 3.5%, well above the Fed's target. The mechanism rhymes with 2018. The stage of the cycle does not.

Either way, the transmission into the real economy is fairly mechanical. The 30-year fixed mortgage rate has already climbed into the high-6% range, its highest in about a year, and continued pressure on the 10-year could push it further toward, and perhaps past, 7% — a slower grind than an overnight jump to 7.5–8%, but a real drag on housing activity all the same. Corporate borrowers rolling over debt face steeper coupons, which eats into margins and dampens the appetite for fresh capital expenditure. And the fiscal arithmetic gets less forgiving by the day. With the stock of US federal debt as large as it now is, every extra 25–50 basis points on the long end translates into a meaningfully larger annual interest bill, competing for the same budget as everything else Washington wants to spend on.

For Indian investors, none of this happens in a vacuum. Two channels matter most. First, when US treasuries pay close to 5% risk-free, the relative appeal of Indian equities and debt for foreign portfolio investors takes a hit — capital that might otherwise chase emerging-market returns has a much easier, safer alternative at home. Second, Indian companies that lean on external commercial borrowings to fund growth now face a higher cost of capital, since global benchmark rates set the floor on what they pay, regardless of where India's own monetary policy stands. There is a third, less discussed link too: the same conflict that is pushing up oil prices and stoking US inflation is also pushing up India's import bill and leaning on the rupee — a thread I have been following separately, and one that ties directly back into this bond story.

My own base case is that Indian markets stay under pressure as long as developed-market yields hold near these levels, and that a great deal now hinges on what the Fed actually does tonight rather than on what it has already done. A hike would confirm the market's fear that this is a genuine reacceleration in the tightening cycle. A hold, even a reluctant one, would at least buy some room.

Investor takeaways

Watch tonight’s Fed decision, not just the bond move that has already happened; the market has moved from a coin-flip to pricing a hike as the favorite, and the reaction to either outcome will matter more than today's headline yield

Rate-sensitive Indian sectors — real estate, NBFCs, and companies with meaningful external commercial borrowings — deserve closer scrutiny on funding costs in this environment

Treat the positive, widening 10-2 spread as a signal of fiscal and inflation risk, not as an all-clear on recession; a steepening curve driven by term premium is a different animal from one driven by genuine growth optimism

Stay selective on FII-dependent segments of the market until developed-market yields show signs of stabilizing.

 

Q1FY27: Earnings are better, but the easy part may be over

The June quarter has turned out better than what the market was expecting. Corporate earnings were mostly stronger, financials remained healthy, metals made a sharp comeback, and several consumer-facing businesses showed that demand has not completely disappeared. At the same time, the quarter also tells us why the earnings recovery should not be taken at face value.

A large part of the improvement came from a handful of sectors and companies. Oil marketing companies, aviation, parts of pharmaceuticals, staples and infrastructure remained weak. Commodity-linked earnings also played a disproportionately large role in the improvement. Therefore, the headline number is much better than the underlying economy may suggest.

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The most useful number is not the headline 18% growth. It is the fact that earnings beat expectations across a broad spectrum of the market. In the large-cap universe, the proportion of companies beating expectations was materially higher than in mid- and small-caps. This is important because it suggests that the recovery is not merely a small-cap phenomenon.

Where did the growth come from?

Financials remain the backbone of the earnings cycle. Bank credit growth has been strong, asset quality is benign and lower provisioning has helped profits. NBFCs have also continued to grow their loan books, particularly in secured retail, gold loans and vehicle finance. The important change is that growth is increasingly coming with better asset quality.

Metals were another major contributor. The sector moved from being a relatively small contributor to incremental earnings to one of the largest. This is good for aggregate profits, but it is also a reminder that commodity earnings are cyclical. A strong quarter does not automatically mean a durable structural improvement.

Consumer discretionary was a pleasant surprise. Paints, jewelry, quick-service restaurants and premium alcoholic beverages showed resilience. Real estate also continued to report healthy collections and profitability, even though the absence of large launches affected quarterly presales.

Technology was better than the headline commentary might suggest, but not strong enough to become an earnings leader. Revenue growth remained modest, decision-making cycles were long and deal sizes were under pressure. AI-related work, vendor consolidation, utilization and currency helped margins.

And where was the weakness?

Oil marketing companies were a major drag. Revenue was strong, but marketing losses and LPG under-recoveries hurt profitability. Aviation was another conspicuous weak spot. Pharmaceuticals delivered healthy domestic volumes, but US pricing pressure and lower contribution from key products kept profits subdued.

Infrastructure remains the weakest link in the investment story. Project awards, particularly in roads, were weak and delays in appointed dates affected execution. At the same time, elevated costs and working-capital pressure hurt margins. Capital goods had better order flows, but commodity costs, freight and execution expenses continued to prevent a clean margin recovery.

Automobiles sit somewhere in the middle. Demand is healthy, helped by affordability, exports and a favorable product mix, but commodity inflation has squeezed margins. The second half of FY27 will be important because the benefit of GST rationalization will have to be measured against a higher base.

What do the FY27 and FY28 estimates say?

The broad market consensus after the 1QFY27 earnings is remarkably similar: FY27 and FY 28 are expected to be decent years with 14-15% earnings growth for Nifty 50. The Nifty 50 EPS is estimated to be in the range of 1230-1240 for FY27e and 1415-1450 for FY28e.

There is therefore no earnings recession in sight. The more conservative sector work also points to healthy earnings growth in lenders, metals and telecom, while consumer discretionary, real estate and capital markets retain strong medium-term growth characteristics.

But there is an important qualification. One set of estimates implies that the Nifty needs about 16–17% earnings growth in the remaining nine months of FY27 to deliver the full-year forecast. That is possible, but it is not a low hurdle.​

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The catch: quality of earnings

This is where I would be slightly careful with the celebration. The earnings recovery is real, but the quality of the incremental earnings is not uniformly high.

Commodity sectors are doing a lot of the heavy lifting. Metals, non-OMC energy and some chemical businesses have benefited from favorable prices, inventory effects or a low base. These can make the aggregate Nifty number look better without necessarily telling us that the domestic economy has entered a powerful earning upcycle.

The second issue is the gap between revenue growth and profit growth. In several sectors, companies are still fighting input-cost inflation, freight costs, wage costs or weak pricing power. A good part of the improvement is therefore coming from operating efficiency, lower provisions, currency benefits or a favorable base rather than a broad-based expansion in pricing power.

The third issue is that the market already knows about the earnings recovery. The forecasts of roughly ₹1,230–1,240 Nifty EPS for FY27 and ₹1,420–1,450 for FY28 are no longer a surprise. If earnings merely meet these numbers, investors will still have to contend with the valuation they are paying for them.

What I take away from Q1

The June quarter has materially reduced the fear of an earnings slowdown. That is important. The financial sector is healthy, domestic consumption has not collapsed, metals have recovered, telecom earnings are improving and several investment-linked businesses continue to have strong order visibility.

However, I would not read the quarter as confirmation of a broad-based economic boom. Infrastructure execution is still weak. IT demand is not yet robust. Staples remain soft. Pharma has issues in the US market. And commodity-linked profits are doing more work than one would ideally like.

My reading is therefore simple. FY27 is likely to be a better earnings year than FY26. FY28 could be better still. The estimates of 14–16% earnings growth are credible, but they leave less room for disappointment than the headline Q1 numbers might suggest.

For investors, the important question is no longer whether earnings will grow. They probably will. The more difficult question is whether earnings will grow fast enough to justify the prices being paid for them.