Lessons from market cycles – Chapter 1

My association with the Indian capital markets started in the early 1990s. There were 29 recognized stock exchanges in the country, most having a set of exclusive listed companies, besides companies with listing on multiple stock exchanges. These stock exchanges were mostly run as an association of individual brokers, with no regulator overseeing their operations. There was little transparency in their operations.

During 1992-1994 establishment of SEBI as statutory regulator, abolition of capital controls; advent of computer-based stock trading and demutualized stock exchanges (NSE and OTCEI) redrew the map of the Indian capital markets.

This was the time when the economy was opening up at a rapid pace. In particular, the financial sector was witnessing substantial changes. The regulatory framework, product spectrum, market breadth, accessibility, and participants’ profiles, etc. were undergoing a metamorphosis of sorts.

As a student of the capital markets, I noted the following trends in that phase:

·         A new group of intermediaries joined the markets as broker and merchant banker. These were mostly professionals (Chartered Accounts and Company Secretaries) who were admitted as members by stock exchanges or licensed by the SEBI to operate as merchant bankers. This ended the century old stronghold of a few families on the capital market intermediation business.

·         A new set of entrepreneurs emerged (mostly ex bankers and finance professionals) to undertake the business of financing and leasing.

·         Enhanced transparency in stock market operations and assurance of a proper regulatory oversight drew millions of households to the equity investing for the first time. Stock market movements started to appear in media headlines and parliamentary discussions.

·         The share of household financial savings deployed in stocks and mutual funds increased to the highest level.

·         The number of initial public offers (IPOs) increased from 195 in FY92 to 1402 in FY96, implying more than 5 IPOs on every working day of the year.

·         A large proportion of these IPOs were of non-banking financial companies (NBFCs). Most of these companies were small, inadequately capitalized, and promoted by inexperienced entrepreneurs. Many of these companies mobilized unsecured deposits at exorbitant rates.

·         Almost every established business house in the country also incorporated an NBFC and entered the business of financing and leasing in this era.

·         A significant number of non-financial companies changed their names to sound “financial” in this phase. Finserve, Finlease, Finance & Lease were common in names of most of these companies.

·         A significant number of these IPOs were sham (accommodative entries).

The lesson was painful but crystal clear

Within a few years, a large number of these companies simply vanished, wound up, went bankrupt, or quietly changed their names again to remove the “fin” words.

Ordinary investors – many of them first-timers who were either unaware or simply greedy for high returns – lost heavily, whether they had bought the shares or parked money in those unsecured deposits.

That was my first big lesson from the markets: “when everything looks too good and too many new players rush in, caution is your best friend”. 

Is it a pause or break?

I completed my education and professional training in the early 1990s, just as India stood at the edge of profound change. The assassination of Rajiv Gandhi in 1991 had created a vacuum in the Congress party. P.V. Narasimha Rao led a fragile minority government through a perfect storm: a balance-of-payments crisis; two failed monsoons; the Gulf War spike in oil prices; double-digit inflation; a crippling fiscal deficit; the Harshad Mehta scam; and simmering insurgencies in J&K, Punjab, & the Northeast. Mandal reservations and the Ayodhya movement had polarized society; the 1992 demolition and subsequent Mumbai blasts shattered everyday calm.

In that crucible, Rao and Finance Minister Manmohan Singh launched the 1991 liberalization. Industrial licensing was slashed, the rupee was devalued by nearly 20% in two swift moves, trade was opened, foreign portfolio investment welcomed, and the foundations of modern capital markets laid. Within five years the economy was back on a higher growth path.

The 1996 election ended Congress rule and ushered in three years of political instability (Three general elections during 1996–99). Yet the reform momentum not only survived but accelerated. The United Front government deepened financial-sector and fiscal reforms. Vajpayee’s NDA (1998–2004) opened core sectors—telecom, power, roads, ports, oil & gas—to private and foreign players, launched the National Highways Development Project, announced the SEZ policy, conducted nuclear tests, and weathered sanctions and the dot-com crash. India emerged as a recognized IT powerhouse and strategic nuclear power.

The UPA years (2004–14) built on this foundation while adding a strong social dimension. Markets were opened further, NPCI was established (laying groundwork for later digital payments), and landmark rights-based legislation was enacted: RTI, MNREGA, RTE, NRHM, and the Food Security Act. Growth averaged over 8% for much of the period despite the 2008 global crisis, though a current-account scare in 2012-13 required swift RBI action.

When the NDA returned in 2014 under Narendra Modi, it inherited an economy recovering but scarred by the previous slowdown. Far from avoiding major reforms, the government completed and launched several of its own: the long-awaited GST (2017) created a unified national market; the Insolvency and Bankruptcy Code (2016) cleaned up NPAs; four Labour Codes rationalized archaic laws; corporate tax rates were cut; direct benefit transfers scaled massively via the JAM trinity; and UPI revolutionized digital payments. Infrastructure spending surged, Ease of Doing Business rankings improved, and schemes emphasizes on manufacturing were reinforced under Make in India and Production-Linked Incentives banners.

Growth has not been linear though. The 2016 demonetization and GST rollout caused temporary disruption; COVID-19 delivered a sharp contraction. Yet India has remained the fastest-growing major economy in most post-pandemic years. Recent quarters have shown strong rebounds, though challenges persist: uneven job quality (especially for educated youth), volatile foreign flows, a tight fiscal position, and rising aspirations of one billion young Indians.

I still believe we are witnessing a pause in our journey of growth, not a break. The institutional scaffolding built over three decades—open markets, digital public infrastructure, a resilient banking system—remains intact.

In my view, the next three years will be decisive. How the government sequences the next wave of reforms (land, labour, agriculture marketing, and trade openness), executes with consistency, and manages fiscal discipline will determine whether India’s growth story merely pauses or regains its full stride. The momentum built since 1991 has bent but not broken. With pragmatic course-correction, the best chapters may still lie ahead.

The path to net zero

(Based on NITI Aayog's Scenarios Towards Viksit Bharat and Net Zero: Macroeconomic Implications (Vol. 2), 2026)

Why Net Zero matters for India

India is one of the fastest-growing economies in the world — but it is also one of the most vulnerable to climate change. Erratic monsoons frequently hurt farmers. Heatwaves impact millions of students and daily-wage workers. Floods disrupt millions of lives and cause severe damage to homes, farms and infrastructure. Climate change is not a future problem; it is already costing India money, jobs, and lives.

Besides, India spends a huge chunk of its money importing fossil fuel. This has a profound impact on our economy. Dependence on imported energy weakens our geopolitical strength & energy security and adversely impacts our trade balance, currency, inflation, and rates. Moving away from fossil fuels is not just good for the planet; it makes India less dependent on other countries and less exposed to price shocks.

Finally, the world is changing its trade rules. Countries like those in Europe are starting to charge extra on goods made with heavy carbon emissions. If India wants to keep selling to the world, going green is no longer a choice — it is a business necessity.

India’s strategy

India has promised the world it will reach net zero carbon emissions by 2070. That means, by then, the country will not be adding more greenhouse gases to the atmosphere than it removes. This is a big goal — and it is tied directly to India's dream of becoming a fully developed nation by 2047, what the government calls Viksit Bharat.

India’s pathway to net-zero is built on ambitious targets, such as reaching 500 GW of renewable energy capacity by 2030, meeting 50% of its energy needs from renewables, and reducing emission intensity of GDP by 45% over 2005 levels by 2030.

India is progressing well on the committed path. Today, half of India's electricity-generating capacity comes from clean sources like solar and wind. Government spending on infrastructure has tripled over the last decade. Programmes like PM-KUSUM (solar panels for farmers) and FAME (support for electric vehicles) are pushing the green agenda into everyday life.

What the shift will feel like

Short term (up to 2030): Costs before the gains

India’s net-zero targets, however, is challenging, especially since its per capita emissions are significantly lower than the global average. Despite this, India faces the pressing task of meeting the energy needs of a growing economy while reducing its carbon footprint.

In the short term, transitioning to a low-carbon economy will require massive investments in renewable energy, energy-efficient infrastructure, and clean technologies. The investment gap for this transition is estimated to be substantial—around USD 2.25 trillion more than the business-as-usual scenario. This will pose challenges, as public and private sectors must find ways to mobilize capital without straining India’s fiscal health.

The government will need to step in with subsidies, cash support, and strong social safety nets so that the burden does not fall on those who can least afford it. Coal workers and others in fossil fuel jobs will also need help retraining for new roles in the clean economy.

Medium term (2030–2050): Green jobs and a leaner import bill

By mid-century, the benefits may start showing up. Manufacturing — driven by solar panels, batteries, and clean tech — grows significantly, creating more jobs for skilled workers. India's oil import bill, which currently eats up about 4% of GDP, shrinks dramatically as the country relies less on imported fuel. That means more money stays in India, the trade deficit narrows, and the economy becomes more stable. If the world helps fund India's transition through international climate finance, the gains come sooner and the costs on ordinary people stay lower.

India’s GDP is projected to remain resilient during this period, with growth rates largely unaffected by the transition, driven by increasing investment in clean technologies and infrastructure.

Long run (2050–2070): A stronger, self-reliant India

By 2070, the picture looks very different — and much brighter. India’s economy will have fully transitioned to a low-carbon structure, with green industries driving much of the growth. The shift towards a capital-intensive economy will be evident, as investment in infrastructure, clean energy, and technology development will continue to grow. This shift is expected to increase manufacturing output in clean-tech sectors, significantly improving economic resilience.

India's fuel import bill drops from 4% of GDP today to just 0.2%. The economy is cleaner, more competitive, and far less exposed to global oil price swings. Wages in the clean energy and manufacturing sectors rise. And India becomes a more attractive destination for global investment because it plays by the new, greener rules of the global economy. Growth holds firm — the USD 30 trillion economy target remains in reach.

The Bottom Line

India’s commitment to achieving net-zero emissions by 2070 is a critical step towards a sustainable future. The country faces significant challenges in balancing economic growth with climate action, but it also has a unique opportunity to lead the way in green technologies and low-carbon development. The socio-economic impacts of pursuing a net-zero pathway will be profound, affecting sectors ranging from energy to industry, agriculture, and transportation.

Going net zero does not mean India has to slow down. It means India has to grow smarter. The costs are real in the short run, especially for vulnerable households — and the government must not ignore them. But the long-term picture is one of energy independence, more jobs in new industries, a cleaner environment, and a stronger economy. India has pulled off big reforms before — think GST, UPI, and Aadhaar. The green transition is the next big one. And if done right, it will be worth it. 

Investors’ dilemma - 2

In my post yesterday (see here) I mentioned that most of the sectors popular with small investors (…and also fund managers) are witnessing growth challenges. Though a majority of market analysts are expecting an earnings recovery from FY27 that should further accelerate in FY28, after two years of stagnation, uncertainties still persist with regard to (a) the resumption of a sustained uptrend in the Indian equities; and (b) likely leadership in the expected up move. Regardless, it is a good idea to prepare the ground and sow the seed well in advance.

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 In my view, resumption of the up move in the Indian equities may be led by a combination of domestic factors like easy liquidity, stable rates, improvement in rural income and higher urban household cash surplus, stable macro environment, acceleration in earnings growth, etc.; and improved external environment, e.g., settlement of trade issues with major trading partners, easing geopolitical concerns, improvement in trade balance, and reversal of investment flows, etc.

Therefore, in my view, the investors’ positioning ought to be based on domestic growth drivers which are adequately supported by a favorable global environment. I have shortlisted the following areas for finding future leaders.

a)    Industrial companies with market and technology leadership, strong brand equity and access to global markets. Product companies rather than services companies are more preferable. Select companies with substantial operating leverage.

b)    Technology companies (product and services) that may benefit from fiscal incentives.

c)     Consumer companies both in staple and discretionary space which may benefit from higher disposable income, stable global economy, favorable tariffs, and stable prices. In particular, healthcare companies (product and services) are more preferred.

d)    Local units of global corporations that may see larger participation through more investment, hike in stake or transfer of manufacturing operations for regional exports, as the tariffs lower.

e)     Financials will inevitably participate in any bull market. Better asset quality, better yielding bond portfolio, higher credit demand, geographical spread due to deeper financial inclusion efforts, and improved capital adequacy recapitalization are some of the factors that support financials. Focus on large banks and NBFCs.

f)      Stable prices is one of my core investment premises. I would therefore avoid pure commodity plays. However, there are several companies that are transforming from a pure commodity company to a (value added) product company. Such companies offer interesting investment opportunities.

g)     I shall be size agnostic in selection of companies. In fact, the growth could be much higher in several small and midcap companies that have a technology edge.

 

Investors’ dilemma

Over the last couple of years, more and more analysts have started questioning India’s economic growth. Many reports now point out that some of the strongest areas of India's economy, like private consumption and services exports, are starting to face serious challenges.

As a small investor, the biggest concern that stands out for me is the cycle we seem stuck in: poor wage growth leads to low savings, which in turn lowers investments, reduces income, cuts consumption, and hampers overall growth. Breaking this cycle is not going to be easy, and it feels like the government is also finding it challenging to break this cycle.

Indian equity markets have also been underperforming compared to global markets. And within Indian equities, some sectors that were once considered safe bets have been struggling, while others are showing signs of slowing down. Here’s what I am noticing:

The Consumption Sector: This sector, which I have always believed to be one of the safest, has yielded a return of less than 5% CAGR over the past three years (including dividends). That’s a lot slower than I would have expected, especially with the Indian market’s population size and increasing spending power.

The IT Services Sector: IT services sector has been a leader for over two decades. But the Nifty IT index has dropped by ~22% in the last year, and with concerns about the future of legacy IT services companies, it’s making me rethink my exposure to this sector.

The Power Sector: This sector seemed like it was on the rise with its focus on manufacturing, data centers, and rural electrification. While there is still long-term potential, there’s now an oversupply in the short term. If demand doesn’t catch up soon, it’s likely that the stocks of power producers will underperform.

The Real Estate Sector: Real estate has been performing really well, with the Nifty Realty index showing a solid 27% annual return over the past three years. But I am hearing that we might have already seen the peak in this cycle. Even though the weight of real estate companies in the stock market is relatively small, a downturn in the sector could impact household investors, especially since many of them are heavily invested in physical real estate.

The Financial Services Sector: This sector is the largest in India’s equity market, but things aren’t looking great for household balance sheets. Savings are down, and debt is up. Comparing India’s household debt with the developed countries’ levels is inappropriate due to various factors (like lower wages, higher unemployment, and poverty). The fact remains that many households are struggling to stay afloat. The latest bank credit data shows that while credit growth is picking up, deposit growth is lagging behind. This makes me nervous about the widening credit-deposit gap, which could lead to a systemic risk in the financial sector.

The real challenge for small investors right now is deciding how to structure our portfolios. How can we make sure we’re getting good returns without overexposing ourselves to momentum assets like crypto, gold, and silver, or putting too much in global markets that may be outperforming India but come with their own set of risks?

So, what should a small Investor do?

…to continue tomorrow (suggestions are welcome)

RBI surveys find overall stability in the economy

The latest round of the professional forecasters’ surveys shows that there is overall stability in the economy. The economic growth is expected to remain strong in FY27, despite a higher base of FY26, with both investments and consumption rates expected to improve marginally yoy. Current account is expected to remain stable. Prices are expected to stay stable. Industries have reported some improvement in capacity utilization, and new orders in the recent quarters. Banks expect the loan demand to improve and lending terms & conditions to stay easy in FY27. Rural consumers have shown improvement in confidence, though urban consumers are slightly less confident about FY27 spending.

The following are the key highlights of the latest Forward Looking Survey (FLS) of RBI.

Macroeconomic indicators

·         Real gross domestic product (GDP) is expected to grow by 7.5 per cent in 2025-26 and by 6.8 per cent in 2026-27.

·         Real private final consumption expenditure (PFCE) is expected to grow at 7.4% in FY26 and 7.1% in FY27.

·         Real gross fixed capital formation (GFCF) is expected to grow at 7.4% in FY26 and 7.2% in FY27.

·         Annual headline inflation, based on CPI-Combined, is expected at 2% during FY26 and at 4% during FY27.

·         Core inflation (CPI inflation, excluding food and beverages, pan, tobacco and intoxicants, and fuel and light), is expected at 4% during Q4FY26 and thereafter it is projected to gradually moderate to 4.2% by Q3FY27.

·         Merchandise exports and imports are projected to grow by 1.3% and 6%, respectively, during FY26 and by 3.3% and 5.9%, respectively, during FY27, in US dollar terms.

·         Current account deficit (CAD) is expected at 1% (of GDP at current market prices) for both FY26 and FY27.

Manufacturing sector

·         Manufacturers’ optimism on demand conditions improved for Q3FY26 as compared to the previous quarter, as reflected in their assessment on production, order books and capacity utilization.

·         Responding firms reported higher pressure from raw material costs and wage bill. Manufacturers’ sentiments turned pessimistic with regard to growth in selling prices and profit margins.

·         Manufacturers outlook for Q4FY26 remains positive, albeit with some moderation, reflecting a weaker outlook on production, order books, capacity utilization and exports.

·         Demand conditions are expected to improve during H1FY27. Manufacturers expect input cost pressures to persist, but they also anticipate better pricing power in terms of higher growth in selling prices.

·         At the aggregate level, capacity utilization (CU) in the manufacturing sector increased marginally to 74.3% in Q2FY26 from 74.1% in the previous quarter. However, the seasonally adjusted CU (CU-SA) declined by 100bps from the previous quarter and stood at 74.8% in Q2FY26.

·         Manufacturers reported higher growth in new orders during Q2FY26 on a sequential (qo-q) basis. On an annual (y-o-y) basis, the growth continued to remain stable.

·         As a ratio to sales, the finished goods inventory (FGI) remained stable while the raw material inventory (RMI) declined during Q2FY26.

Credit growth

·         Bankers assessed higher loan demand from most of the sectors of the economy during Q3FY26 as compared to the previous quarter. Majority of the responding bankers indicated easier loan terms and conditions.

·         Bankers’ outlook on overall loan demand improved for Q4FY26, mainly driven by manufacturing, infrastructure, services, and retail/personal loans sectors.

·         Responding bankers continue to expect increased loan demand and easier loan terms and conditions from all major sectors till Q2FY27.

Services sector

·         Service sector firms’ assessment on overall business situation and their turnover during Q3FY26 remained positive though tempered a bit from that in the previous quarter.

·         Firms assessed moderation regarding pressures from input costs and salary outgo during Q3FY26. Sentiments on growth in selling prices and profit margins moderated but remained positive.

·         Pressure emanating from input costs is likely to rise during Q4FY26; however, pressure stemming from finance costs is expected to ease. Services firms expect selling prices to increase; profit margin is likely to remain positive during Q4FY26.

·         Services companies expect improvement in the overall business situation, turnover and employment in 1HFY27. Input cost pressures are likely to persist for services firms; with sequential rise in selling prices.

Infrastructure sector

·         Infrastructure companies reported positive assessment of overall business situation and their turnover, though their sentiments moderated vis-à-vis the previous quarter.

·         Infrastructure firms gauged higher pressures stemming from input costs, salary outgo and cost of finance and lower growth in selling prices and profit margins as compared to the previous quarter.

·         Responding firms expect sequential improvement in demand conditions till Q2FY27. Input cost pressures are likely to persist in the near term and growth in selling prices are expected to remain at an elevated level.

Consumer confidence

·         Rural consumers continue to show improvement in one-year-ahead outlook, though respondents’ perception on prices and inflation worsened in the latest survey round.

·         Urban consumers are however less confident about the one-year-ahead outlook, owing mainly to lower expectations on general economic conditions, income and price level compared to the previous round.

Let the water find its own path

A real estate developer takes 25% of the basic selling price of an apartment from prospective buyers, even when construction hasn't even started. The buyers, many times, borrow this money from banks paying 8-9% p.a. interest. The developer starts construction with the money received from the buyers, and keeps asking for more payments as construction progresses. The developer takes the full price of the apartment before possession is handed over to the buyer. Developers in India, on an average, usually earn a gross profit margin of 25-30%. This implies the buyers are borrowing money to fund the builder's profits. And this is an illustration of an ethical developer who is complying with all rules and regulations and ensuring timely delivery.

A commission agent (Adhati) in a vegetable mandi goes to villages at the time of sowing, gives some advance to the farmers, so that when the crop is brought for sale in the mandi, the farmer uses his services for selling. The advance is interest-free and unsecured and is usually adjusted from the sale proceeds. If the crop fails, there is high probability that the farmer will not be able to return the advance money. This is usual practice in most mandis.

There are several manufacturers, enjoying a dominant position in the market, who work on a negative working capital basis. They insist that their customers pay much in advance to ensure timely supply of goods. Companies like Asian Paints, Maruti Suzuki, and several FMCG giants have perfected this model—collecting from customers before paying suppliers, essentially running their operations on other people's money.

Most lawyers insist on their clients paying in advance before they appear in courts. Their remuneration is usually independent of the outcome of the court proceedings. In many cases, lawyers charge even when the court hearing doesn't take place.

E-commerce platforms take 15-30% commission from sellers but offer 30-60 day payment cycles, effectively using sellers' money to fund their operations. Meanwhile, customers pay upfront, giving these platforms a comfortable float to manage.

These are some examples of "trade deals" in the normal course of business between two parties, where one party enjoys a clear advantage over the other. The party with stronger bargaining power—whether it's capital, market access, or legal expertise—dictates terms. The other party accepts because the alternative is worse: no apartment, no market access, no legal representation.

The Water Flows Where It Must

Bilateral international trade deals are no different. Two countries negotiate the terms of their mutual trade, considering their economic and strategic strengths and weaknesses. The primary objective behind every such deal is usually to benefit from one's strengths and minimize one's weaknesses. Any deal that doesn't benefit both parties (though not necessarily to the same extent) is unsustainable and may fall apart in due course.

The US has technological superiority, capital markets, and consumer spending power. India has a young workforce, growing middle class, competitive manufacturing in select sectors, and a massive services export capability. Both countries have something the other needs. The question isn't whether trade will happen—it will, because water finds its path. The question is on what terms.

As some wise person once said, "trade is like flowing water. It finds its path and flows to fill the space available."

The India-US Trade Deal: Beyond the Noise

Disregarding all the conspiracy theories and political rhetoric with regard to the proposed India-US bilateral trade deal, I believe that Indian-US bilateral trade shall grow and benefit both countries. It is undeniable that it may benefit one country more than the other. It is also possible that the deal is less beneficial (or even harmful) for some businesses and consumers but benefits a larger number of businesses and consumers.

Consider the facts: India-US bilateral trade stands at over $190 billion annually. The US is India's largest trading partner. Indian IT services, pharmaceuticals, textiles, and engineering goods find significant markets in the US. American technology, defense equipment, energy products, and aircraft find ready buyers in India. This trade exists not because of government benevolence but because it makes economic sense for businesses on both sides.

There is not sufficient evidence available to indicate that any of the previous BTAs has adversely affected the Indian economy overall. It is possible that some smaller businesses and farmers might have been impacted negatively, but that is mostly a problem of adaptability and government support, not the trade deal per se.

India's FTA with ASEAN, signed in 2009, was criticized for flooding the Indian market with cheap imports. Yet, India's trade with ASEAN has grown from $55 billion in 2010 to over $130 billion in 2023. Indian pharmaceutical exports to ASEAN have grown significantly. Yes, some sectors faced pressure, but others thrived.

Similarly, concerns about American agricultural products, particularly dairy, flooding Indian markets ignore ground realities. India is the world's largest milk producer with production costs that are globally competitive. The real challenge isn't American competition but our own supply chain inefficiencies, lack of processing infrastructure, and fragmented farm holdings.

Winners and Losers: The Uncomfortable Truth

I see the proposed BTAs with the US, the EU, and the UK as a growth stimulus for competitive Indian businesses, professionals, and farmers. The marginal and small farmers and micro and small businesses may need government support (financial, technical, and protective) for adapting to the new market dynamics.

Let's be clear: some sectors will face headwinds. Small-scale dairy farmers without processing capabilities, low-tech manufacturers competing on cost alone, and businesses dependent on protectionist policies will struggle. But that's not an argument against trade—it's an argument for better transition support.

Conversely, Indian IT professionals, pharmaceutical manufacturers, automotive component makers, textile exporters, and agricultural producers with scale will likely benefit. The question for policymakers isn't whether to sign the deal, but how to support those who'll face transition costs.

Just as the real estate buyer accepts unfavorable payment terms because the alternative is no apartment, India will negotiate from a position of relative strength in services and select manufacturing, while accepting pressure in agriculture and traditional manufacturing. The US will push for market access in agriculture and technology, while accommodating India's strengths in services and generics.

The Path Forward

Trade agreements don't create prosperity—they channel it. Like water flowing downhill, trade will happen where economic logic dictates. The agreement merely defines the riverbed.

The real work begins after the deal is signed: skilling workers for new opportunities, supporting businesses through transition, upgrading infrastructure, and ensuring that the gains from trade are broadly distributed, not concentrated in a few hands.

Will address this topic again once more details are available about the India-US bilateral trade deal. Until then, remember: the water will find its path. Our job is to ensure it irrigates the fields, not just fills someone else's well.

Making sense of randomness

Global markets have felt wildly unpredictable for months now, particularly since January 2025, when Donald J. Trump assumed the U.S. presidency for a second time. His return to the White House appears to have added fresh layers of uncertainty to a world already reeling from multiple crisis points—ongoing conflicts in Eastern Europe and the Middle East, economic stagnation across Western Europe, Asia and Latin America, and intensifying climate challenges. As a result, market movements today often feel so erratic that making credible forecasts about future trajectories has become nearly impossible.

It’s no wonder that forecasts for commodities, equities, cryptocurrencies, currencies and bonds are so scattered that many sound like wishful thinking rather than grounded analysis. This resembles a room full of blind men trying to understand the universe by touching whatever object lies closest to them—a method with a painfully low probability of success.

Recently, diverse events like political developments in Japan and Korea, nomination of the next Chairman of the US Federal Reserve, civil unrest in Iran, declassification of Epstein files, coup in Venezuela, ceasefire in Gaza, and speculations about some rift in GCC, etc. have had material impact on the prices of precious metals, energy, base metals, currencies, equities, and bonds.

What makes this moment even more precarious is the apparent weaponization of the U.S. dollar. The United States has increasingly used its economic might to pressure geopolitical rivals (such as Russia, Iran and Venezuela) and strategic competitors like China. Meanwhile, China’s dominance in rare earth minerals further complicates global supply chains and economic leverage. In response, several central banks have accelerated efforts to reduce their holdings of U.S. dollars, increasing gold reserves and exploring alternative settlement mechanisms for cross-border trade. This trend is reshaping the global financial architecture in real time—adding new volatility vectors for investors to navigate

On top of geopolitics and macroeconomic policy, the breathtaking pace of technological evolution—particularly in artificial intelligence, renewable energy, and supply chain digitization—is another major factor influencing markets. These developments not only create new winners and losers across sectors but also introduce uncertainty about future earnings, labor markets, productivity, and long-term economic growth dynamics..

Some of the best-performing equity markets over the past year seem to defy economic fundamentals. For instance:

·         South Korea’s KOSPI has surged strongly,

·         Japan’s Nikkei has likewise posted impressive gains, and

·         Brazil’s market has also shown remarkable strength

Yet economic growth forecasts for these countries remain muted and demographics are deteriorating. Even markets like Pakistan’s have climbed despite chronic economic headwinds and weak GDP growth prospects. These divergences highlight a growing disconnect between market exuberance and underlying economic reality.

In this environment, traditional approaches to asset allocation—balancing debt, equity, precious metals, cash and alternative assets—feel inadequate. Diversification strategies across regions, sectors and currencies are no longer guarantees of risk reduction. Correlations between asset classes can shift quickly and unexpectedly, leaving even sophisticated portfolios exposed to abrupt repricing.

Under such circumstances, the most rational response may not be confident prediction but humble adaptability. Recognizing that random, chaotic forces are increasingly influencing markets might help investors design strategies that are more resilient and flexible—ones that emphasize risk management, scenario planning, and tactical rebalancing over rigid forecasting.

Higher STT on Derivatives – Will it Curb Speculation

In the Union Budget for FY27, presented on February 1, the finance minister announced a significant hike in Securities Transaction Tax (STT) on futures and options (F&O) trades on recognized stock exchanges. Specifically, the STT on options was increased from 0.10% to 0.15%, and on futures from 0.02% to 0.05%. As per the Minister and senior officials, this move aims to curb excessive speculation in the markets and safeguard retail investors from potential losses.

While the intent appears well-meaning on the surface, a closer examination raises questions about its effectiveness and underlying rationale. In my view, this could be a case where policymakers are either overlooking key dynamics of securities markets or using a public-good narrative to justify a straightforward revenue booster. Below, I critically assess the proposal, drawing on market realities, and offer an enhanced perspective on its implications.

Understanding Derivative Trading Objectives

Derivative trading serves multiple legitimate purposes beyond mere speculation. Broadly, participants engage for one or more of the following reasons:

Hedging: Institutional investors, high-net-worth individuals (HNIs), and family offices often use derivatives to protect their portfolios against adverse price movements. This might involve taking short positions in futures or buying put options as insurance, without needing to liquidate underlying securities due to tax, legal, or regulatory constraints.

Speculation: Traders, including HNIs, brokers with proprietary books, and Alternative Investment Funds (AIFs), act on informed predictions about future events that could impact security prices. These positions—long or short—are typically backed by research, data, or experience, and they contribute to market efficiency by incorporating new information.

Arbitrage: Professional traders exploit temporary price discrepancies between spot and derivative markets through offsetting positions. This activity is crucial, as it enhances liquidity and ensures price alignment across markets.

Gambling: A smaller but vocal segment involves retail traders placing instinctive bets with little analytical basis. SEBI studies indicate that over 90% of such participants incur losses, and the volume of these trades has been rising despite the risks. It's important not to conflate these "gamblers" with genuine investors or traders, as doing so can distort regulatory approaches.

Hedgers, speculators (in the informed sense), and arbitrageurs are vital for providing depth and liquidity to both spot and derivative markets. Imposing higher costs on them to address losses among gamblers seems counterproductive—it's like penalizing all drivers for the recklessness of a few.

Critical Assessment: Accuracy and Effectiveness

The government's framing of the STT hike as a tool to "protect retail investors" assumes that speculation is inherently harmful and that higher transaction costs will deter it without collateral damage. However, this overlooks the nuanced roles outlined above. Empirical data from SEBI underscores the losses in retail F&O trading, but punishing the entire ecosystem may not address the root issue.

On the claim that higher costs won't curb gambling instincts: History shows that in aspirational societies like India's, the desire for quick wealth persists, often manifesting in gambling, smuggling, or other risky pursuits. With most traditional gambling avenues restricted or banned in India, regulated derivatives markets offer a safer, monitored alternative. Elevating STT could indeed push participants toward unregulated, opaque platforms—like illegal betting apps or offshore brokers—increasing risks rather than reducing them.

The STT hike might moderately discourage casual gambling but could disproportionately burden legitimate traders, potentially reducing overall market liquidity.

Grammar and flow in public discourse on this topic often suffer from oversimplification; for example, lumping all "speculation" as negative ignores its role in price discovery. Professionally, the budget's communication could be more transparent about revenue projections from this hike, estimated to add several thousand crores to the exchequer, rather than solely emphasizing investor protection.

We need a balanced approach

While I appreciate the budget's shift toward pragmatism in other areas (see here), this STT measure feels like a blunt instrument. Instead of broad tax increases, the government could, for example:

·         Target education and awareness campaigns for retail investors, perhaps mandating risk disclosures or demo trading before live F&O access .

·         Differentiate taxes based on holding periods or trade volumes to spare hedgers and arbitrageurs.

·         Monitor and regulate unregulated alternatives more aggressively to prevent migration.

Ultimately, markets thrive on balance—curbing excesses without stifling innovation. If the goal is sustainable growth, rewarding long-term investing (as the budget does elsewhere with capital gains tweaks) is positive, but let's ensure short-term tools don't undermine it.

Gold and Silver – Raging rivers, stay safe

Heightened volatility in the prices of gold and silver in recent days has tempered the rampant euphoria to some extent. Silver traders, in particular, have grown more cautious following such extreme volatility, with trillions wiped from market caps in a single session.

The lingering question is whether this represents a brief pause in the ongoing bull market for precious metals, as many optimists claimed until recently, or if the party has ended, and the cows are now ready to return home.

I have long held firm views on investing in precious metals, which I have shared with readers on multiple occasions. I am pleased to reiterate and expand upon them here, incorporating recent market developments for clarity.

In my view:

•      Gold and silver remain deeply embedded in our culture, religion, and traditions. Purchases for social, cultural, religious, or traditional obligations should typically be viewed as consumption rather than investment.

Of course, in times of severe financial hardship, these assets can be liquidated for cash, functioning as a form of insurance or hedge. However, under ordinary circumstances, they fall short of qualifying as true "investments" due to their lack of intrinsic yield or productive capacity, unlike equities or bonds.

•      The latest arguments supporting gold and silver as investments often fail scrutiny. For instance, the case for soaring gold prices hinges largely on expectations of a weakening and diminishing US dollar (USD). The two main drivers cited are (i) erosion of its dominance in global trade and finance, and (ii) the US government's unsustainable debt burden, now exceeding $35 trillion.

If that be true, the USD's hegemony could fracture through de-dollarization efforts, such as those discussed in BRICS forums. Yet, if the USD loses its reserve status, a divided global landscape is unlikely to agree on a single alternative—or even a basket of fiat currencies. The uneven distribution of gold reserves across nations makes a gold-backed system improbable as a universal replacement.

Furthermore, should the USD weaken significantly, commodity pricing (including gold) might shift away from dollars toward stronger currencies like the JPY, EUR, CNY, GBP, or AUD, potentially driving sharply lower nominal prices for these assets.

Second, a depreciated USD could enhance US export competitiveness, incentivizing reshoring of manufacturing and leaving excess capacity in Asia—a scenario that proved massively disinflationary during past trade shifts, as seen in the 2010s.

Third, if the US attempts to inflate its way out of debt by devaluing the USD, funding its escalating fiscal deficits becomes precarious. Investors would shy away from depreciating US Treasuries (USTs), forcing austerity measures. Such fiscal tightening could emerge as the most potent disinflationary force of the 21st century, as evidenced by recent market reactions to hawkish Fed nominations.

In this disinflationary environment holding gold as an inflation or currency hedge loses much of its appeal, as safe-haven flows reverse during deleveraging events.

•      The rationale for silver's upward trajectory is equally unpersuasive. A core economic tenet holds that industrial commodities are predominantly price takers: demand for end products dictates raw material prices, not the reverse.

A 250% surge in silver prices—anticipating future industrial demand years ahead—defies this logic, especially when recent crashes reveal overleveraged speculation rather than fundamentals.

Moreover, economic historians recall that silver once rivaled or surpassed gold as a monetary metal for decades, with demand far exceeding today's levels. If heightened industrial use (e.g., in solar or EVs) does materialize, it wouldn't be unprecedented. Recall the repeatedly hyped "peak oil" narrative, peddled until 2009 but now obsolete due to technological advancements like shale extraction—similar innovations could temper silver's supply constraints.

•      Regarding the recent sharp upmove and subsequent collapses in gold and silver prices, I regard them as raging rivers swollen by speculative floods. Traders can choose to dive in and ride the current or wisely observe from the banks. Attempting to navigate with full control, as if in a sturdy boat, is illusory.

History shows that in nearly every precious metal bull cycle—from the 1980 silver bubble to the 2011 peak—most participants suffer losses, while only a fortunate few emerge profitable. The 2025-2026 euphoria, fueled by geopolitical hype and retail frenzy, followed by trillion-dollar wipeouts, proves this time is no different.