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. 

State of the economy

The Reserve Bank of India’s August 2026 bulletin paints a comforting picture of the Indian economy in a challenging global backdrop. As per the RBI, growth indicators, corporate earnings, credit growth and capital flows are all broadly constructive, even as tariffs, West Asia tensions and volatile crude prices keep throwing up fresh irritants from outside.

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​Here are some key points from the Bulletin that I find noteworthy.

Global economy

Growth: Global output, measured by the composite PMI, kept expanding in July and posted its strongest reading since the West Asia conflict began, with both manufacturing and services in expansion. Equity markets globally gained in August, helped by strong earnings from large technology companies, and emerging market equities bounced back from their July lows.

Geopolitics and trade: The ceasefire in West Asia turned out to be short-lived, with hostilities flaring up again in July, and traffic through the Strait of Hormuz stayed well below pre-conflict levels. On top of this, fresh US tariffs added another layer of uncertainty to global trade. That said, the Geopolitical Risk Index has been easing for four straight months now, and market volatility calmed down too, in both emerging and advanced economies.

Inflation: Inflation picked up in a few major economies as energy and commodity prices rose, keeping central banks on guard.

Monetary policy and yields: Central banks stayed divergent in their approach but remained watchful of inflation risks. In the US, the FOMC meeting and renewed geopolitical tension pushed the 10-year treasury yield to an 18-month high by mid-August, even as the dollar index fell sharply after the FOMC decision and kept weakening thereafter. Flows into emerging market equities fell further in July, though bond inflows kept overall emerging market flows positive.

Domestic economy

Despite all this noise from outside, the Indian economy kept showing strength. Domestic demand stayed buoyant – vehicle and tractor sales, petroleum consumption turning positive again after three months of decline, and a broad pickup in industrial output all point the same way. The south-west monsoon, which had a deficit in June, picked up in July, helping kharif sowing catch up closer to last year’s pace.

Growth: Industrial production had its best month in nearly two years, growing 7.3% in June, with manufacturing alone growing 7.8%, on the back of a broad-based pickup across sectors. The manufacturing PMI for July stayed in expansion at 53.5, though momentum eased a touch from earlier months; export orders, meanwhile, actually strengthened to 54.3. On the demand side, rural India led the charge – tractor and two-wheeler sales accelerated – while passenger vehicle sales in cities kept up a strong pace too. Air travel was the one soft spot, falling further as airlines trimmed capacity and fuel costs stayed elevated. Corporate India’s Q1 FY27 results back this up: revenue and profit growth improved for manufacturing and services companies, and for listed banks and financial companies too, helped partly by lower provisioning.

Labour market: The picture here was mixed. On a quarterly basis, the unemployment rate rose to 5.4% in Q1 FY27 from 5% in the previous quarter, with the increase concentrated in rural areas, even as the share of regular salaried jobs improved. But the more recent monthly data for July showed unemployment easing again, led by an improvement in rural areas – so this looks more like month-to-month noise than a clear trend.

Government finances: The Centre’s fiscal deficit was marginally higher in Q1 FY27 than a year earlier, but that came with a healthy 23.7% jump in capital expenditure, so the mix looks reasonable. States, on the other hand, ran a lower combined fiscal deficit over the same period.

Inflation: Retail (CPI) inflation ticked up marginally to 4.45% in July from 4.38% in June, led by food and beverages – meat, eggs and spices in particular ran hot, with several items posting double-digit inflation. Core inflation, however, stayed steady at 3.9%, and even the narrower measure that strips out precious metals rose only modestly, to 2.7% from 2.5%. On the wholesale side, WPI inflation eased slightly to 9.8% from 9.9%, though this looks less alarming than it sounds – it is being driven almost entirely by the fuel and power group, and even that has come off its May peak of nearly 31%. Against this backdrop, the Monetary Policy Committee kept the repo rate unchanged at 5.25% in its August review and retained its neutral stance, choosing to wait for more clarity before moving either way.

External sector: India’s merchandise trade deficit widened to US$ 32.0 billion in July, from US$ 27.9 billion a year ago and US$ 30.4 billion in June, mostly because of a wider gap in electronic goods; the oil deficit stayed unchanged. Both exports and imports, though, grew at a strong clip in July – a four-month high for exports – so the widening deficit isn’t really a sign of weak external demand. On tariffs, the additional 10% US levy that kicked in on July 24 largely spares India’s biggest export lines to the US – smartphones, petroleum products and pharmaceuticals – so India should come off relatively better than competing Asian exporters such as China, Vietnam and Thailand. Capital flows turned more encouraging too. Net FDI improved to US$ 1.3 billion in June from a small outflow in May, and for the whole of Q1 FY27 it came in at US$ 7.8 billion, well above last year’s US$ 4.8 billion. Foreign portfolio investors turned net buyers of Indian equities in July, breaking a four-month streak of selling, though for the year so far they remain modest net sellers overall. A big driver of external strength has been the RBI’s policy push on non-resident deposits – FCNR(B) deposits alone pulled in US$ 65.4 billion between early June and late August, after the central bank eased rules on these deposits and on external commercial borrowings back in June. All this has helped foreign exchange reserves climb to US$ 716.9 billion by mid-August, edging closer to February’s all-time high of US$ 728.5 billion, and comfortably covering India’s external financing needs.

Financial conditions: System liquidity improved through July and August, aided by government spending and central bank measures aimed at pulling in capital. Overnight money market rates softened towards the end of July and into August, and credit growth stayed strong – bank credit was up 19.3% year-on-year as on July 31, well ahead of deposit growth at 15.4%.

My takeaway

The picture that emerges is of an economy that keeps doing its job quietly while the world outside stays noisy. Growth is holding up, inflation is manageable even if food prices need watching, the currency and reserves position is comfortable, and credit is flowing. The risks – tariffs, West Asia, uneven monsoon spread and the usual global rate uncertainty – are all things to track, not reasons to worry just yet. I will be watching how the RBI’s neutral stance evolves once the festive-season data starts coming in. 

The missing philosophy

India has long worn the title of a land of philosophers, and worn it honestly. Where much of Western philosophy busied itself with metaphysics — the nature of being, the structure of reality — Indian philosophy, for the most part, stayed close to the ground. It asked a narrower, more urgent question: how does a human being get free of sorrow? Buddha, Mahavir Swami, Guru Nanak and others who worked out answers to that question have, over time, been elevated by their followers to a status close to divine — the Buddha is counted as an incarnation of Vishnu in several Hindu traditions, and popular devotion to all three has often gone further than the founders themselves ever claimed for their own teaching. Whether or not that elevation was the intent, it tells you how completely these men solved something real: people concluded nothing less than God could have done it.

What strikes me, though, is how long it has been since India produced anyone in that lineage. It has been decades since a philosopher of any real originality emerged. We have reached a point where even people who genuinely understand the old texts are scarce, while people who repackage folklore as philosophy — pulp versions of a deep tradition — get celebrated as saints and scholars. The vessel survives; what it was built to carry has mostly drained out.

The same drift, in science

I see a parallel drift in science and technology globally, and it is worth sitting with even though it is easy to overemphasize. Consumer hardware — the appliances that define daily life — has not seen a genuinely new category since roughly the 1960s. The washing machine, the fridge, the fan, the air conditioner, the telephone, the motor car, the aeroplane: all invented before then. Everything since has been refinement — smaller, faster, more integrated, more connected.

Medicine shows a similar, narrower pattern worth naming carefully. Smallpox, tuberculosis, plague and leprosy did get real answers — a vaccine, antibiotics, multidrug therapy — and those are genuine cures, not something to understate. But look at where research money and attention have gone since, and the balance has visibly tilted toward managing chronic, lifestyle-linked disease — the kind plausibly worsened by the food, air and pace of life that industrial science itself produced — rather than toward the kind of outright cure that ended smallpox. Managing a problem indefinitely is also, conveniently, a much better business model than solving it once.

One reason for this, in my view, is that science has drifted loose from philosophy and is now steered almost entirely by market economics. Profit, not human welfare, decides what gets built next. That is not a criticism of any single company or scientist — it is closer to a structural observation about incentives, and it sets up the point I actually want to make, which is about how we in investing use the word “philosophy” ourselves.

A slide, not a philosophy

Every investment manager’s sales presentation carries a slide titled “Investment Philosophy.” I went through more than fifty of these over the past couple of weeks, and noticed something: the slide is almost never about philosophy. It is a list of boundaries and methods — what the fund will do, what it would not do, what process it follows. Useful information, certainly. But philosophy, properly understood, is not a list of rules. It is a willingness to question the premise underneath the rules.

Two of the most crowded trades in Indian markets today are precision engineering and defence manufacturing. Analysts and fund managers are underwriting multiple decades of uninterrupted growth for both, and pricing companies as if that growth is close to guaranteed. What I have not come across, in any of the research I have read on either theme, is even a footnote asking whether the underlying technology, product, or need could itself fade. It is not an unreasonable question. A decade from now, a meaningful share of conflict could be waged in cyberspace rather than on physical terrain, which would make a slice of conventional hardware less central than the market currently prices it to be. Fibre and composite parts are already displacing metal in engineering applications that used to be metal by default — metal injection moulding is one example — and that substitution has room to run further. I raise this as a live possibility to be underwritten against, not as a forecast; the point is that the possibility is being priced at zero.

What philosophy should actually do

To my mind, an investment philosophy worth the name has to do three uncomfortable things. First, it must question the growth and existence assumptions baked into a valuation — not just accept the multi-decade growth story a management team or a sell-side note hands you, but ask what has to remain true for that story to hold. Second, it has to be honest about the assumptions and limitations of the investor putting up the capital — most of us are not equipped to independently verify a decade-out technology thesis, and a philosophy that pretends otherwise is not being honest. Third, and perhaps most important, it has to hold the fund manager to the commitment actually made to the investor, rather than to the commitment implied by a glossy slide.

None of this is an argument against precision engineering or defence as businesses, and it isn’t a comment on any specific company or fund — plenty of these businesses will keep growing for good reasons. It is an argument for treating “philosophy” as a genuine discipline of doubt rather than a marketing slide, in the same way India once treated it as a genuine discipline for getting free of sorrow. We have let the word survive while quietly hollowing out what it was supposed to do. That, more than any single stock or sector, is the gap worth noticing.

Ideas are valuable, execution is critical — Except when neither works

For any enterprise to succeed, ideation and execution have to work together. Execution has nothing to execute if there’s no idea behind it. And an idea, however brilliant, stays a thought on paper unless it’s carried through well. Still, since the idea comes first, the person who conceives it usually earns the higher valuation. Investors have known this for as long as there have been start-ups to fund.

The same logic applies to governance. Good government, in my view, rests on exactly two legs:

·         Conceiving and instituting policies that deliver equitable, sustainable, accelerated growth.

·         Executing those policies through structured programs, efficient delivery, and honest, timely course-correction.

Judge any government on these two counts, and only these two.

On execution, I’d give the incumbent government a reasonably good score. It has carried forward policies inherited from its predecessor — food security, direct benefit transfer, financial inclusion, FDI in retail, infrastructure push, defence procurement reform, privatization, the manufacturing thrust — and executed them competently. It built out delivery rails — digital payments, GST, the 14th Finance Commission’s recommendations — for ideas that were formulated in the UPA’s last years. And it squeezed real value out of a couple of foundational bets, particularly Aadhaar and digital payments. That execution muscle is a big reason the economy came through Covid and the global slowdown as well as it did, and why UPI is now a genuine export success and road-building runs at a pace India hasn’t seen before.

Ideation is a different story. In twelve-plus years, the list of genuinely new policy ideas is short. Where the government has innovated, the results have been mixed at best — demonetization being the obvious example: a big idea, thin preparation, questionable payoff.

I would put the newly enacted Prevention of Insults to National Honour (Amendment) Act, 2026 in the same bucket. It isn’t going to achieve much of anything constructive, and it carries real potential to disturb public order, hand police another discretionary lever, and generate avoidable litigation and harassment.

The backstory

Bankim Chandra Chattopadhyay wrote Vande Mataram; it appeared in Bangadarshan in 1875 and was incorporated into his novel Anandamath in 1882. The Congress sang it at its sessions from 1896 onward. On 24 January 1950, the Constituent Assembly adopted the first stanza of Tagore’s Jana Gana Mana as the National Anthem. Article 51A of the Constitution makes “respecting” the anthem a fundamental duty, and Parliament backed that with teeth via the Prevention of Insults to National Honour Act, 1971, which criminalized disrespect to the Flag, the Constitution and the Anthem.

That same day, Constituent Assembly President Rajendra Prasad made a statement — not a resolution, not a constitutional provision, just a statement — that Vande Mataram’s first two stanzas be honoured equally with the Anthem, with wording changes left for later. The later stanzas, invoking Durga and Lakshmi, were dropped from that honour, partly on the reasoning that overt religious imagery sat awkwardly with a plural republic. The Constitution itself, worth noting, doesn’t mention a “National Song” at all — the status rests entirely on Prasad’s 1950 remarks.

It’s a genuinely unusual arrangement. No other country runs a separate anthem and song; a few, like Denmark and New Zealand, have two anthems of equal standing, which is a different thing altogether.

What the law actually does

What the 2026 Act does is narrower than the noise around it suggests. It doesn’t touch the Constitution — it’s an ordinary statute — and it doesn’t itself declare the full six-stanza composition the official National Song. All it does is extend the 1971 Act’s existing anthem protection (up to three years’ imprisonment for intentionally preventing its singing or disrupting an assembly singing it) to Vande Mataram, citing Prasad’s 1950 statement as its rationale.

Where I think the trouble starts is in how it’s being sold. The government and its supporters have been framing this as conferring National Song status on all six stanzas — when what actually has that status, per Prasad’s own words, is the first two. That framing may not survive judicial scrutiny, but it hands police the discretion to act against citizens who are doing nothing more than honoring the version the Constituent Assembly actually blessed.

The legal exposure

There’s a genuine constitutional exposure here too. The Supreme Court’s Bijoe Emmanuel ruling on the Anthem established that no one can be compelled to sing a national symbol against conscience — only stopped from disrupting others who choose to. A penal provision built around Vande Mataram invites the same challenge on Article 25 religious-freedom grounds. And any attempt to stretch the song’s status toward something constitutionally binding runs into the Basic Structure doctrine from Kesavananda Bharati vs State of Kerala — Parliament can’t amend around secularism, one of the Constitution’s basic features, through the back door.

The groundwork that was never laid

Then there’s the sheer absence of preparation. Unlike the Anthem, which has a government-notified tune, tempo and duration, Vande Mataram has never had an official musical setting — Tagore’s own 1896 tune, Hemant Kumar’s from the film Anandamath, A. R. Rahman’s version, and others have coexisted freely for decades. Nothing in this law fixes that. Which means a constable on the ground, not any statute, effectively decides whether a given rendition counts as respectful — a recipe for selective, motivated enforcement against whoever happens to be inconvenient that day.

And one more data point worth sitting with: per the 2011 Census (language data released only in 2018), just 24,821 people in the then population north of 1.2 billion listed Sanskrit as their mother tongue — the least-spoken of India’s 22 scheduled languages. Only Himachal Pradesh and Uttarakhand give it second-official-language status. None of that bears directly on the law’s validity, but it’s a reminder of how thin the on-the-ground constituency is for turning a freedom-movement anthem into a criminal-law flashpoint.

There’s a sequencing problem too, and it’s the clearest tell that this was written on the back foot rather than thought through in advance. Back in February 2026, the Home Ministry had already directed that all six stanzas be sung at official events and school assemblies — using the word “may” not “shall” and attaching no penalty. When that directive was challenged, the Supreme Court in March declined to intervene precisely because it was voluntary and toothless. The 2026 Act reads like the fix for that gap — except it still doesn’t define “intentionally prevents” or “causes disturbance”, so the ambiguity the Court flagged hasn’t been resolved, only criminalized. That’s not ideation. That’s patching a loophole after the fact and calling it policy.

The bottom line

None of this required rushed legislating. The Constituent Assembly’s own words already drew the line — first two stanzas, equal honor, details to follow. A government with a genuine appetite for ideation would have used the space “details to follow” left open: notify a tune, define “disrespect”, settle the six-stanza question through consensus rather than executive push. Instead, what we have is a law that recycles a 76-year-old ambiguity, dresses it up as settled history, and leaves the actual grey areas — much like demonetization before it — to be sorted out later, in public, the hard way.

Good execution can carry a government a long way. It can’t make up for an idea nobody thought through.

Cash, Patience and the Apocalypse Trade

I’m watching one date on the calendar more closely than anything else right now: August 27–29, when Fed Chair Kevin Warsh delivers his first Jackson Hole address since taking over from Jerome Powell in May. A slight hint of hawkishness there could force a serious rethink for a lot of investors who, in my view, are still positioned for continuity — an accommodative Fed and an unbroken AI/data-center trade. It’s worth remembering that Warsh has already made a point of withholding forward guidance and that his committee has flagged the possibility of a hike, not a cut, to counter the inflation spike coming out of the West Asia conflict. That is not the backdrop a market priced for calm usually gets.

One data point that sums up how one-sided this positioning has become: the most recent round of large-fund portfolio disclosures showed a decisive pivot deeper into AI infrastructure — data-center operators, cloud capex plays, and chip-adjacent names — even as some of last cycle’s semiconductor favorites were being sold down. When funds of that size are still adding to a single theme this late in the cycle, it tells me positioning risk, not conviction, is doing a lot of the buying.

Zoom out, and the bond market is telling a simpler story: something has to give. Either asset prices crash and deflation sets in, or a large, coordinated QE program gets launched to buy bonds back down. It’s worth remembering that as recently as five years ago, close to $18 trillion of developed-market long-dated government debt traded at a negative yield. We have travelled a very long way from that world.

​The 30-year US Treasury yield touched 5.31% this month — its highest level since June 2003. Japan’s 30-year is at a historical high of its own. A huge cohort of fund managers across the US, Europe, and Japan have simply never operated in a 4.0–5.5% long-yield world, and by my base case, they will not like what the history books tell them about what happens next. Savers, endowments, pension funds, and insurers are all searching for a light at the end of the tunnel. The argument that high inflation lowers the real cost of that debt offers savers little comfort — though fiscal policymakers will certainly take what relief they can get. Financing the fiscal profligacy unleashed since Covid was always going to get harder from here; it is now becoming a genuine strain.

The global financial crisis was met by a coordinated G-20 response that helped prevent a repeat of 1929. I don’t see that same coordination available today. The current state of US relations with the rest of the G-20 is not exactly fertile ground for a joint monetary-and-fiscal rescue, should markets freeze up again.

The optimist’s scenario

By my read, a genuinely benign outcome from here would require all five of the following — and that’s a demanding list:

·         an immediate cessation of hostilities in West Asia, with a full US withdrawal from the Strait of Hormuz and a resulting fall in energy prices;

·         an end to the recurring tariff uncertainty out of the US, freeing up global trade;

·         a meaningful, coordinated bond-buying program (QE) from the Fed, ECB, and BoJ together to bring yields down;

·         a negotiated settlement between Russia and Ukraine, easing the tension in Europe; and

·         an orderly, controlled unwind of the overheated AI/data-center trade.

My base case

A more realistic outcome, in my view, looks like this:

·         a material correction in asset prices, led by a disorderly unwind in the AI/data-center trade, followed by a fragmented (not coordinated) QE response once the damage is done;

·         continued stalemate in both West Asia and Ukraine; and

·         elevated energy prices — Brent averaging around $85/bbl — for at least the next couple of quarters, before demand destruction and alternative shipping routes ease the supply constraint. That figure isn’t a contrarian call on my part; it’s roughly where the EIA’s own outlook already sits, which only adds to my conviction here.

Notice the sequencing in my base case: I’m not expecting central banks to ease into live, war-driven inflation out of choice. I expect them to be forced into it — a crisis-triggered QE that follows a disorderly correction, not one that pre-empts it. That’s an important distinction, because it means the path to easier money likely runs through a genuine drawdown first, not around one.

How to navigate through this

A disorderly correction in US/global AI names would hit Indian equities too. My preference into this kind of setup remains a larger allocation to cash and short-duration debt.

My best trade for the next six months is unglamorous: hold cash, be patient, and go all-in only when the sharp correction actually arrives and the world around you looks and feels like the apocalypse.

The price tag not to be ignored

Over the past week I sat with a stack of very different headlines side by side - a proposed cash payout to women in Uttar Pradesh, an old World Bank note on how Indian states balance their books, a parliamentary panel’s numbers on school dropouts, and a district-level count of doctors in Bihar and UP. Read separately, they are four unrelated stories. Read together, they are one story – sustainability of growth.

A season of generosity

Uttar Pradesh’s government is reportedly weighing a cash payout of up to Rs 50,000 for women in the state, timed just ahead of the 2027 assembly election. The principal opposition, the Samajwadi Party, has countered with a promise of Rs 40,000. This is not an isolated UP story. Over the past three years, the number of states running large unconditional cash transfer schemes for women has gone from two to twelve, and by my reading of the available data, these twelve states will together spend around Rs 1.68 lakh crore on such schemes in 2025-26 alone - roughly 6% of their combined revenue expenditure. Add farmer and youth-linked transfers, and some estimates for women-focused transfers alone run closer to Rs 2 lakh crore across fourteen states.

None of this makes any single scheme wrong on its own terms. Direct transfers can be an efficient, leakage-resistant way to put money in the hands of households that need it, and I don’t doubt many families are genuinely better off for it. My concern, as an investor rather than as a commentator on any party’s politics, is arithmetic, not intent.

Where the money is going

A quick snapshot of what's on the table this election cycle

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Six of the twelve states running these schemes are already sitting on a revenue deficit in 2025-26. Strip out the cash transfer spending, and several of them - Karnataka and Madhya Pradesh among them - would show a revenue surplus instead. That gap is not academic. A revenue deficit means a state is borrowing to fund its day-to-day running costs, not its future.

The capex we’re quietly deferring

Zoom out to the national picture and the aggregate numbers still look reasonably disciplined - states’ combined gross fiscal deficit is budgeted at about 3.3% of GDP for 2025-26, broadly where it has held for two years, and outstanding state debt has actually eased slightly as a share of GDP. On the surface, fiscal prudence looks intact.

But the composition worries me more than the headline number. Over the past decade, a large share of the adjustment states have made to hit their deficit targets has come from squeezing capital spending - roads, power, water, hospitals, schools - rather than from trimming recurrent, non-development costs or from mobilizing more revenue. Capital investment has repeatedly acted as the shock absorber whenever a state needed to tighten its belt, in richer and poorer states alike. There are genuine signs of recent improvement - the ratio of revenue spending to capital outlay across states has come down from roughly 6.2 in 2015-16 to about 5.0 last year, which is progress. My worry is that this progress is fragile, and a fresh wave of poll-driven transfer commitments is exactly the kind of pressure that reverses it, because cash transfers are far easier to cut from next year’s capex line than from a promise already made to millions of women voters.

The children and the doctors we don’t have

While states debate the next round of transfers, the human capital numbers tell their own story. A parliamentary panel has just flagged that nearly 73% of Indian students drop out before completing higher secondary school. The number of schools shrinks at almost every stage as children get older - from about 9.1 lakh primary schools down to under 91,000 at the higher secondary level - and enrolment falls in step, from 6.18 crore children in primary classes to just 1.64 crore by the time they reach classes 11 and 12.

Forestation targets, a proxy for longer-horizon public investment discipline, have seen only about a fifth of the decade’s goal met.

Healthcare tells a similar story. India ranks 145th out of 194 countries on WHO health parameters, and the shortfall is starkest exactly where the new cash schemes are being rolled out. Against a WHO benchmark of one doctor per 1,000 people, rural India averages one per roughly 11,000; Bihar is close to one per 28,000, and Uttar Pradesh near one per 20,000. By one estimate, India needs another 6 lakh doctors, 20 lakh nurses and 2 lakh dental surgeons just to close the existing gap - a gap Gujarat’s own recent numbers put in sharp relief, with close to 80,000 new cancer cases and over 43,000 deaths from the disease in a single year.

I don’t read any of this as an argument against welfare spending as a category. I read it as evidence that the current mix of state spending is tilted toward transfers that buy loyalty “this election cycle”, at the expense of the schools, hospitals and roads that would have built durable growth over the next one.

Who actually pays for this

The other half of this equation is who is funding it. Personal income tax has now overtaken corporate tax as India’s single largest source of direct tax revenue, with net direct tax collections crossing roughly Rs 24 lakh crore in 2025-26. That burden sits overwhelmingly on the organized, salaried middle class - a narrow base of taxpayers now effectively out-contributing corporate India, while agricultural income of any size remains untaxed and a large informal economy stays largely outside the net. The compliant formal sector - salaried professionals and organized businesses - carries a growing share of the state’s obligations, including the welfare commitments being made on its behalf without much reference to its own capacity to keep paying.

My takeaway for investment strategy

This is not an immediate crisis - state balance sheets remain broadly sustainable and debt ratios are not alarming today. But sustainability is a medium-term question, not a one-year one, and the direction of travel worries me more than the current level. A political economy that finances consumption ahead of capacity, and funds it by leaning harder on a narrow, already-stretched taxpayer base, is not a formula for the kind of broad-based, decade-long growth story that equity markets like to price in.

For portfolio positioning, I continue to prefer businesses and sectors with pricing power and limited dependence on state fiscal transfers to sustain demand - I’d be cautious of consumption plays whose growth story leans heavily on scheme-driven cash rather than organic income growth. I also continue to doubt a case for holding long-duration debt, given that state finances, like the broader macro picture I have written about before, look calmer on the surface than they may prove to be underneath. 

The balloon could pop faster than the market expects

A few weeks ago, I wrote about a group of people standing in a dark room, each holding a pin, none of them knowing whose hand would find the balloon first. I think I can now name one of the pins. It is called a rate hike.

This is not a small, one-line risk. It sits at the intersection of everything I have been tracking this month: India’s stickier-than-expected inflation, America’s own hawkish undertone, a US political calendar that could remove the last source of pressure on the Fed to go easy, and an AI investment cycle that has been priced for perfection. Put these together, and I think the probability of a rate-hike-triggered correction is higher than most portfolios are prepared for — even though I continue to believe that the longer-run destination for global monetary policy is easier money, not tighter.

Inflation is not cooling the way we hoped

India: a stall, not a reversal

July’s CPI print came in at 4.45% year-on-year, above where most estimates had it pegged, and above June’s 4.38%. Food inflation is running hot at 5.5%, durable food inflation has climbed to 5.1%, and even core inflation — stripping out food and fuel — is holding near 3.9%, with the ‘super-core’ reading (core excluding gold and silver) creeping up to 2.5%. None of these numbers is alarming in isolation. Together, they tell me the disinflation trend of the past year has stalled, not reversed, but stalled at a level still uncomfortably close to the upper end of the RBI’s comfort zone.

My own base case is FY27 CPI inflation averaging around 5%, with a genuine risk of topping 5.5% if the monsoon turns uneven in its closing weeks or crude prices find a bid again. On that math, it would not be unreasonable to expect ~50bps of cumulative tightening in 2HFY27 — a meaningful shift from a market that has spent most of this year debating rate cuts, not hikes.

The US: a hawkish Fed the market isn’t pricing in

The view that the Federal Reserve may hike interest rates by 50-75bps points before this year is out is strengthening gradually, against a Fed Funds futures market that is currently pricing in barely 25 basis points of hikes. That is a large gap between what I think is coming and what the market has actually priced in — and gaps of that size tend to close abruptly, not gradually, once the data forces the market to catch up.

In my view, successful policy needs many conditions to align at once — growth, inflation, credibility, fiscal discipline — while failure can come from any single one going wrong. Right now, resilient growth and sticky inflation are both arguing against the rate cuts the market has been hoping for, which is why my own reading of US rates and the dollar stays firmly on the hawkish side for the next two to three quarters, not the dovish one.

The political overlay nobody wants to say out loud

If the Republicans lose ground in this year’s US midterm elections, the Trump administration effectively becomes a lame-duck presidency for its remaining term. A weakened White House has historically had less leverage — political or otherwise — to lean on the Federal Reserve to keep money cheap. Whatever informal pressure exists today to ease policy in an election-conscious environment would diminish sharply once the electoral calculus behind such pressure disappears.

That matters because a Fed chair with a hawkish reputation, freed from midterm-related political pressure, has every incentive to hold the line on rates for longer than the market currently expects — partly on principle, partly to protect their own legacy. The direction of travel over the medium term may still be lower rates, for reasons I laid out a few weeks ago, but the road between here and there could run through more tightening first, not less.

Why a hike could pop the AI balloon faster than anyone expects

This is where the rate-hike story stops being an isolated macro debate and starts becoming a market-structure problem. Ruchir Sharma and Michael Burry, among others, have separately warned that if US rates move higher from here, the unwind of AI-linked positioning could be sharper and faster than currently priced. I think the underlying numbers explain why that warning has teeth. The RIC report by BoFA strategist digs deeper:

●    Capex without proof of productivity. AI capital expenditure is sitting at record highs relative to sales, while economy-wide productivity growth is running at just about 2.2% — barely above the roughly 2% average this economy has managed since 1987. By my own read, AI’s actual contribution to that number is only about 0.1 percentage point a year, a fraction of what the dot-com capex cycle delivered relative to its own spending. That is a very large bet resting on a very thin evidence base.

●    A crowded, one-way trade. Fund manager surveys consistently show semiconductors as the single most crowded trade in the market, cited by well over three-quarters of respondents, even after brief rotations toward defensives. Crowded trades unwind violently precisely because everyone is trying to exit through the same door at the same time.

●    Concentration risk in the index itself. The ten largest companies in the US market now represent more than $24 trillion, or roughly a third of the broad index. When an index is this concentrated, a reversal in mega-cap leadership does not stay contained to a sector — it drags the benchmark, and every fund benchmarked to it, down with it.

●    A discount-rate problem. AI and other long-duration growth stocks are priced on cash flows expected many years out. Higher rates mechanically shrink the present value of those distant cash flows more than they shrink the value of a bank or an energy company earning cash today. A rate hike does not just raise the cost of capital for AI companies — it re-prices the entire long-duration growth complex at once.

None of this means AI itself is a mirage. There are real, if narrow, productivity gains showing up in areas like software development, and history shows that transformative technologies — railroads, fibre-optic cable, shale — usually do create genuine value eventually, even when the first wave of capital that funds them is destroyed along the way. The risk is not that AI fails as a technology. The risk is that AI-linked equity valuations are pricing in a smooth, uninterrupted path to that value creation, and a rate shock is exactly the kind of event that interrupts smooth paths.

Reconciling this with my ‘more QE eventually’ view

Regular readers will remember that I have also argued the opposite-sounding case: that America’s over-levered household sector, its habit of rolling short-dated Treasury debt, and a banking system running low on reserves all point toward more monetary easing eventually — potentially a ‘super QE’ larger than 2008 or 2020. I still believe that. The two views are not actually in conflict; they describe two different points on the same timeline.

“What’s much less certain is what happens in the interval between ‘everyone knows QE is coming’ and ‘QE actually arrives.’ That gap is where currency stress, bond-market air pockets, and credit events tend to live.”

A rate hike in late 2026 or early 2027 would not contradict the eventual-easing thesis — it would be the disorderly middle chapter that forces the eventual easing to happen.

Higher rates now would be deflationary in their immediate effect: they would raise the cost of AI-related capex, slow the investment momentum that has been propping up GDP growth, and puncture the wealth effect that has kept US consumption resilient even as real household finances have deteriorated. That combination — weaker growth, a wounded wealth effect, and credit stress already visible in pockets of leveraged loans and private credit — is precisely the kind of shock that eventually forces a central bank’s hand toward emergency easing. The path there, though, could be considerably more painful.

Strategy

Indian Equity: Cut to underweight; trim froth. Nifty offers only moderate upside on my own math, and valuations are rich, so macro risk (rate hike + global AI shakeout) argues for buying dips, not chasing rallies. Reduce high-beta, high-PE, story-driven names; favor quality, cash-generative large-caps and domestic-demand plays over globally-linked cyclicals.

Global Equity: Cut exposure. Reduce concentration. Prefer diversified international and value-tilted funds over concentrated AI-themed funds.

Debt/Fixed Income: Rising rates hurt long-dated bonds first and hardest. Prefer accrual, short duration and high-quality corporate paper over long gilts.

Cash/Liquid Funds:  Overweight. Keep dry powder to redeploy if the ‘gap’ between hawkish talk and eventual policy easing turns disorderly. Liquid and ultra-short funds, not idle savings accounts.

(Note: I am not considering gold and cryptocurrencies in my strategy as my understanding of these assets is extremely poor. Each investor may consider these as per his\her understanding.)

The bottom line

The probability of a rate hike — in India, and more importantly in the US — is higher today than the market’s own pricing suggests. If that hike arrives while AI-linked valuations remain this stretched and this concentrated, the resulting correction could be faster and sharper than the consensus ‘soft landing, gentle AI cooldown’ narrative currently assumes. I do not think this changes the eventual destination — a more accommodative monetary regime once the strain becomes visible enough to force policymakers’ hands. But the road between here and there is the part investors actually have to live through, and it is worth positioning your portfolio for a bumpier middle chapter: equity that leans toward quality and away from crowded themes, debt that stays short in duration; and adequate dry powder (cash).

As always, I could be wrong about the timing, the trigger, or the severity — markets have a way of staying irrational for longer than any single argument accounts for. But positioning for a plausible, non-trivial risk is not the same as predicting it, and that distinction is the whole point of risk management.