Revisiting India’s consumption story

Over the past few years, and especially since the pandemic, a list of familiar global names has thinned out of India’s consumer landscape. Dulux Paints (AkzoNobel sold its India business to JSW Paints), MG Motor (whose Chinese parent SAIC is progressively ceding control to JSW Group), Harley-Davidson, Citibank’s and now Deutsche Bank’s retail banking franchises, Ford Motors, Metro Cash & Carry, the Disney-Star combine, and Oriflame have all either sold out, scaled down, or handed the wheel to an Indian partner. Holcim exited ACC and Ambuja Cement. And as I write this, Volkswagen is reportedly in advanced talks to give JSW Group majority control of its India operations.

Strung together like this, the list reads like a verdict: global capital is losing patience with India’s consumption story. I don’t think that verdict survives a closer look — but the list is still worth taking apart, because the reasons behind each exit tell a more interesting story than the headline count does.

Not all exits are the same

Put these names together and it may look like one trend. But actually, it is at least four different stories.

The first is genuine competitive loss in a market that has moved on. Harley-Davidson’s 2020 retreat from direct sales and the slow bleed of foreign retail banking — Citibank’s book to Axis in 2023, Deutsche Bank’s now headed to Kotak — belong here. In both cases, the economics of scale — dealer networks, branch footprints, distribution cost — favored domestic players who could out-invest and out-price the global brand. This is the closest thing to a real “local brands are winning” story, and it is real.

The second is regulatory and geopolitical, not consumption-driven at all. SAIC is diluting its stake in MG Motor primarily because Chinese capital has faced tightened scrutiny since the 2020 border standoff — not because Indian buyers have stopped wanting MG’s cars; the Windsor EV, in fact, has sold rather well. Reading MG into a consumption-story narrative is a category error.

The third is global portfolio rationalization that has little to do with India specifically. Ford’s 2021 exit was part of a worldwide restructuring that also closed plants in Brazil and elsewhere. Holcim’s sale of ACC and Ambuja was a cement conglomerate stepping back from a market it judged non-core to its European strategy — not a comment on Indian construction demand, which has stayed fairly resilient. Disney folding its India business into the Reliance-controlled JioStar venture mirrors what Disney has done to linear television everywhere as broadcast economics erode; Reliance, not the Indian consumer, is the reason Disney still has a seat at that table at all.

The fourth is a capital-and-control trade, not a retreat. Volkswagen’s reported talks with JSW are not Volkswagen leaving India — they are Volkswagen conceding, after twenty years and a stubborn sub-3 per cent market share, that it cannot fund the next EV cycle alone and needs a local partner who reads the price-sensitive Indian buyer better than Wolfsburg does.

The JSW thread

One thing this exercise turned up that I did not expect going in: JSW Group shows up on the buying side of an unusually large share of these stories — MG Motor, Dulux Paints, and now potentially Volkswagen. That is not proof of anything by itself, but it is a useful reminder that “global MNC exits India” and “India loses access to global capital and technology” are not the same sentence. In each case, an Indian conglomerate with balance-sheet strength is buying its way into precisely the categories — autos, EVs, paints — that are supposedly the casualties of a weakening consumption story. That is an odd thing to do if the underlying demand were actually disappearing.

What the FDI numbers actually say

If the consumption story were genuinely broken, I would expect the capital data to show it. It does not, at least not yet. Gross FDI inflows into India rose to roughly $39 billion in calendar 2025 per UNCTAD, DPIIT’s own FY26 numbers show a similar climb, and India’s ranking among global FDI destinations improved rather than slipped. One caveat is worth flagging honestly: UNCTAD’s tracking also shows the value of newly announced greenfield projects easing off its 2024 peak, which suggests investors are increasingly buying into existing India-scale platforms — the JSW pattern again — rather than building fresh capacity from scratch. That is a subtly different form of confidence, not necessarily a weaker one.

Where this leaves the consumption thesis

I don’t read this list of exits as evidence that India’s consumption story might be weakening. I read it as evidence that the story is maturing. The easy years, when any global brand could set up shop and ride a rising tide on its own, are behind us. What survives now is either a business with genuine India-specific scale economics, or one willing to share control and capital with a domestic partner who has already solved for the Indian price point. That is a tougher bar than it used to be — it is not the same as demand disappearing.

Investor takeaways

·         Don’t treat every foreign MNC exit as one signal. Ask why — competitive loss, geopolitics, global restructuring, or a capital/control trade each carries a different implication for India-facing businesses.

·         Watch the consolidators as closely as the businesses exiting. JSW and its peers are effectively buying discounted access to categories — autos, paints, EVs — that global capital still wants exposure to.

·         Track greenfield investment announcements, not just aggregate FDI inflows, for a cleaner read on fresh conviction versus capital simply changing hands.

·         The bifurcation thesis I have written about earlier — mass versus premium, with the middle squeezed — remains, in my view, a better explanation for these exits than a blanket loss of faith in Indian consumption.

Progress, Peril and Robustness - 2

Continuing from yesterday (see Progress, Peril and Robustness – 1)

Investment implications

A BIS report provides a clear map of where systemic risk is building, and reading it is a useful discipline before you decide how much risk to carry and where. Here is how I would prefer to incorporate the four pressure points highlighted in the BIS 2026 annual report in my investment strategy.

Not assuming the disinflation trade is safe

Markets have priced in resumption of the disinflation path that was underway before the Hormuz shock. The BIS’s own work suggests otherwise — energy shocks of this size have historically produced inflation effects that outlast the shock itself by a year or more, and the mitigating factors this time (anchored expectations, looser labour markets) are real but not guaranteed to hold if the shock persists. My own view: don’t fully unwind inflation hedges just because oil has pulled back from its peak. Real assets, select commodity exposure and inflation-linked instruments may still be relevant in a diversified book.

Separate the technology story from the financing story

I remain a believer in AI as a genuine productivity technology — the BIS’s own task-level studies show real efficiency gains. What worries me is not the technology; it is the financing structure around it. Circular financing arrangements — where the same dollar of capital seems to be creating revenue for multiple related entities — are exactly the kind of opacity that precedes a repricing. The practical takeaway: be diversified within your AI exposure rather than concentrated in the handful of hyperscalers and their closest financing partners, and treat any single-stock AI position as a venture-style bet, sized accordingly.

Private credit is not free lunch

The report flags that direct lending funds have quadrupled their exposure to AI and IT borrowers over five years, often with similar pricing and tenor despite growing concentration risk. Retail investors who have moved into private credit funds chasing yield should understand that liquidity terms in these vehicles can become binding constraints exactly when you need liquidity most. This is a reminder to price illiquidity properly rather than treat the extra yield as a free lunch.

Expect more volatile sovereign bond markets, not fewer

The BIS’s description of a fragile fiscal-financial nexus, where bond market liquidity can evaporate quickly, is a structural reason to expect higher volatility in developed market sovereign bonds over the coming years — not a one-off event, but a recurring feature. For fixed income allocations, this argues for staying closer to the shorter and intermediate end of the curve, and being selective about duration bets even when yields look attractive, since the BIS itself flags that governments may increasingly need central bank backstops to keep these markets functioning smoothly.

Reading the global report through a domestic lens

None of the four pressure points above originate in India, but all of them touch us, and in ways worth spelling out separately.

·         Energy dependence is our biggest transmission channel. India imports the overwhelming majority of its crude, and the BIS’s own exposure analysis places India among the emerging economies most affected by Hormuz-related disruption scenarios. A sustained oil price premium — even a modest one, well short of the panic peak — shows up quickly in our import bill, the rupee and the fiscal arithmetic. This is not a new theme for readers of this blog; it is the same fiscal-currency link I have written about before, just now driven by a fresh external trigger rather than a domestic one. (Read here and here)

·         Our macro buffers are genuinely better than in past crisis episodes, but they are buffers, not immunity. Strong bank balance sheets, healthy capital ratios and steady domestic institutional flows into equities have absorbed shocks well so far. That is a real strength. But a BIS report that flags global inflation persistence and fiscal fragility as base-case risks, not tail risks, argues for treating our own resilience as a cushion to lean on, not a reason for complacency about valuations.

·         India’s IT services sector sits directly in the AI capex cycle’s crosswinds. A continuation of the hyperscaler spending boom is a tailwind for the sector through cloud migration and AI-enabled services demand. But the BIS’s own warning about the sustainability of that capex — debt-funded, concentrated, partly circular — means a sharp AI capex slowdown, should it materialize, would hit sentiment toward Indian IT stocks even though our companies are several steps removed from the actual financing risk. Worth distinguishing between the operating exposure (mostly indirect and manageable) and the sentiment exposure (which can move faster than fundamentals).

·         The dollarization risk the BIS discusses is low for India today, given capital account management, but it is worth watching over a longer horizon as stablecoin regulation evolves globally and domestic crypto/stablecoin adoption picks up at the margins. This is more a five-year theme than a this-year theme.

·         On fixed income, the domestic story is somewhat more comfortable than the global one — our own fiscal consolidation path has been more disciplined than many advanced economies’, and RBI’s recent Financial Stability Report corroborates that domestic financial stress remains low by historical standards. But global yield volatility, if it persists, will still spill into our markets through FPI flows and benchmark repricing, so treat domestic bond market calm as conditional on the external environment staying orderly, not as a given.

To conclude: India’s relative position within this report is a source of comfort, not complacency. The buffers are real, but the report is fundamentally about a world where shocks have become more frequent and financial systems have become more interconnected in ways that are hard to see until they matter. Being well-diversified, avoiding concentrated bets on any single global narrative — AI, energy, or otherwise — and keeping some genuinely defensive assets in the mix remains the right posture, regardless of how sound our own banking system looks on paper.

There is a line from the Gita that I keep returning to in years like this one: योगस्थः कुरु कर्माणि सङ्गं त्यक्त्वा धनंजय — perform your actions established in yoga, having abandoned attachment. The BIS report, at its core, is a document about attachment: to easy financial conditions, to a single technology narrative, to the assumption that resilience shown once will hold indefinitely. The investor’s job, as always, is to keep doing the work — reading, rebalancing, staying diversified — without becoming attached to any one story about how the world must unfold.

Also Read

Progress, Peril and Robustness - 1

Progress, Peril and Robustness - 1

The Bank for International Settlements — the “central bank of central banks” — released its Annual Economic Report for 2026 in June. The report steps back from the daily noise of markets and tries to describe the plumbing of the global financial system — where the stress points are, and where the next one might come from.

I am briefly describing here what I gather from an extensive reading of the report. Tomorrow I will share my thoughts on its investment implications.

What the BIS is actually saying — In plain English

The title the BIS chose for this year’s report is itself a clue: “From resilience to robustness?”. The question mark is doing a lot of work. Their argument, stripped of jargon, is this: the world economy has shown it can absorb one shock after another without breaking. But absorbing shocks repeatedly is not the same as being structurally sound. Resilience is what you have when you are lucky and adaptable. Robustness is what you have when the foundations themselves are strong. The BIS thinks the world has had plenty of the former and not enough of the latter.

A year that came in two acts

Act one was surprisingly good news. Global trade absorbed the 2025 US tariff shock far better than anyone expected. Effective tariff rates settled near 10%, well below the 25%+ initially announced, and firms simply rerouted trade, ate margins, or front-loaded shipments. At the same time, a wave of AI-linked capital expenditure — data centers, chips, power infrastructure — became its own growth engine, particularly in the US, with spillovers across Asia’s export economies.

Act two was a reality check. In late February 2026, the conflict in Iran led to an unprecedented closure of the Strait of Hormuz — the corridor through which a huge share of the world’s oil and gas flows. Roughly 13% of global crude supply was cut off, a bigger shock than the 1970s oil crisis. Oil spiked over 60% in weeks. Inflation, which had been cooling nicely, jumped back up. Asia, being the most dependent region on Gulf energy, took the biggest hit.

Pressure points to closely watch for

·         Inflation is making a comeback. Fertilizer and plastics prices are up 30–50% on the back of the energy shock, and these costs are still working their way through supply chains. The BIS’s own modelling shows large energy shocks have disproportionately larger effects on inflation than small ones — this is not a linear story.

·         The AI investment boom is running hotter than its cash flows justify. The five largest hyperscalers are set to spend over a trillion dollars on AI capex through 2026, increasingly funded by debt rather than free cash flow. The BIS draws an explicit parallel with canal mania, railway mania, and the dotcom bust — genuine technological breakthroughs that still attracted more capital than commercial returns could justify.

·         Financial vulnerabilities are the amplifier, not the trigger. Equity valuations are stretched, risk premia have compressed to levels last seen before the pandemic, and a growing share of AI financing is “circular” — hyperscalers investing in AI labs that then commit to buying the hyperscalers’ chips and compute. The BIS flags this web of related-party financing as opaque and hard to unwind cleanly if sentiment turns.

·         Fiscal space has quietly disappeared. Public debt in advanced economies is near post-war highs. Cyclically adjusted primary deficits have nearly doubled since 2022 compared with the two prior decades. And critically, the arithmetic has flipped: bond yields now exceed nominal GDP growth in many countries, which means governments can no longer simply grow their way out of debt — they need actual primary surpluses.

A new and less familiar risk: the fiscal-financial nexus

Chapter II of the report is, to my mind, the most important part. The BIS describes a “new fiscal-financial stability nexus”: as governments issue more debt, non-bank financial intermediaries — especially leveraged hedge funds running basis trades — have stepped in to absorb a growing share of it. These funds rely on short-term repo financing that can vanish overnight. The old worry was banks holding too much government debt. The new worry is that market liquidity for government bonds can look ample for months and then disappear in days, forcing yields up sharply with very little warning. The BIS is candid that central banks may increasingly be pulled into acting as backstops for sovereign bond markets themselves, not just banks — a role that blurs the line between fiscal and monetary policy in ways that make both harder to manage.

And a quieter chapter on the future of money

Chapter III looks at stablecoins and digital money. The BIS’s verdict is measured but skeptical: today’s stablecoins fall short of what money needs to be — they don’t always hold value at par, the infrastructure is fragmented across blockchains, and the absence of proper know-your-customer checks on many wallets is a financial integrity problem. Where stablecoins matter more for the rest of us is the dollarization risk they pose to countries with weaker macro fundamentals — if households in such economies start preferring dollar-pegged stablecoins over their own currency, it chips away at monetary sovereignty. The BIS’s preferred solution is not to ban innovation but to bring tokenization into the existing two-tier system — commercial bank money plus central bank money — through projects like Project Agóra.

The moot point, in the BIS’s own framing, is whether the world can convert this year’s resilience into lasting robustness — by rebuilding fiscal space, keeping inflation credibility intact, and extending prudential discipline to the parts of finance that now sit outside the banking perimeter — before the next shock arrives. On their own assessment, the jury is still out.

…to continue tomorrow

 

India’s External Debt: The Post-Covid Slippage Investors Can’t Ignore

 The Reserve Bank of India put out its quarterly external debt release on 29th June 2026, and as usual, the headline number got a polite nod and nothing more: India’s external debt stood at US$ 762.8 billion at the end of March 2026, up US$ 26.3 billion over the year, taking the debt-to-GDP ratio to 20.8% from 19.8%. On the surface, unremarkable. But when we look at the internals, the story that emerges is less reassuring than the headline suggests. The external sector isn’t in danger, but it has quietly become more fragile since the post-Covid recovery years, and that fragility matters for how we think about the rupee and India’s external financing risk over the next few years.

A manageable ratio, a weakening structure

The debt-to-GDP ratio at 20.8% remains comfortably in what economists would call manageable territory, and it isn’t wildly different from the 21.1% recorded in 2021, the last full year still shadowed by the pandemic.

However, the foreign exchange reserve cover for total external debt has fallen from 100.6% in 2021 to 90.6% in 2026. The share of short-term debt (original maturity) in total external debt has risen from 17.6% to 19.6%, and short-term debt as a proportion of forex reserves has climbed from 17.5% to 21.6%. Each of these is a small move in isolation. Together, they describe a debt profile that is shorter in tenor and less well cushioned by reserves than it was three years ago.

The debt service ratio is the one metric that needs a more careful read, because a straight 2021-to-2026 comparison is flattering — it fell from 8.2% to 5.8%. But 2021 was still a Covid-distorted year with depressed current receipts inflating the ratio. Using the post-pandemic trough of 5.2% in 2022 as the fairer base, the ratio actually climbed for three straight years, peaking at 6.7% in 2024, before easing back to 5.8% in 2026. That is not a story of steady deterioration, but it is not a story of steady improvement either — it is a debt service burden that has been more volatile and, on trend since the 2022 low, higher than the immediate post-pandemic years.​

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None of this is a crisis signal. But it is a genuine, multi-year softening in India’s external debt buffers since the immediate post-Covid years — exactly the kind of quiet deterioration that headline ratios are designed to hide.

Who is doing the borrowing — and what it says about domestic savings

The more interesting story sits in the borrowers’ profile. Government external debt has risen from US$ 133.3 billion at end-March 2023 to US$ 167.5 billion at end-March 2026 — an increase of roughly 25% in three years. That is a meaningful acceleration in sovereign external borrowing, even though it remains a modest 4.6% of GDP.

Deposit-taking corporations — India’s banks, effectively the country’s lenders — have grown their external debt from US$ 163.4 billion to US$ 202.1 billion over the same period, a rise of roughly 23.7%. I read this as a signal worth sitting with: when banks lean more heavily on external borrowing, it is often because domestic deposit and savings mobilization isn’t keeping pace with credit demand. FCNR(B) inflows and forex swap windows, which I’ve written about in recent months, are part of the same story — the banking system reaching outward because the domestic liability side isn’t growing fast enough on its own.

Non-financial corporations, by contrast, have grown their external debt far more modestly — from US$ 242.5 billion to US$ 277.9 billion, an increase of about 14.6%. Corporate India has been comparatively restrained in tapping external debt markets even as government and bank borrowing has run well ahead of it.​

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The composition matters as much as the aggregate. A rising share of government and bank borrowing, growing faster than corporate borrowing, is consistent with a fiscal and financial system leaning more on external capital to plug gaps that domestic savings once filled comfortably. That ties directly into the fiscal-deficit-and-currency thesis I laid out in my recent post on rupee depreciation: subsidy and transfer liabilities pushing the government toward more external financing, even as it stays a small share of GDP.

The one-year wall: US$ 327 billion coming due

This is the number that should get more attention than it does. On a residual maturity basis — that is, counting all debt obligations falling due over the next twelve months, regardless of original tenor — India has US$ 326.9 billion of external debt maturing within one year. That works out to 42.9% of total external debt, and 47.3% of foreign exchange reserves.​

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Read that last figure again: nearly half of India’s forex reserves would be required to cover just the debt coming due in the next twelve months.

This is where the debt story connects directly to the currency story. A large share of this near-term debt will need to be rolled over rather than repaid outright — that’s normal in any economy with an active external debt market. But rollover risk is precisely the channel through which global risk-off episodes, a sudden Fed repricing, or a fresh leg of the West Asia crisis I’ve been tracking, could translate into real pressure on the rupee. When $327 billion needs refinancing within a year and reserve cover has thinned from 100.6% of total debt to 90.6% since 2021, the margin for error on the currency has narrowed, even if nobody is calling it a crisis today.

Investor takeaways

·         India’s external debt-to-GDP ratio remains manageable at 20.8%, but this headline number masks a genuine post-Covid weakening in reserve cover and debt tenor — don’t let the stable ratio lull you into complacency.

·         The debt service ratio’s apparent improvement since 2021 is partly a base effect; on trend since the 2022 low, the near-term repayment burden has actually risen before easing slightly in 2026.

·         Government and bank external borrowing are growing markedly faster (c.25% and c.24%) than corporate external borrowing (c.15%) since 2023 — a pattern consistent with slower domestic savings and deposit growth funding the gap through external channels.

·         US$ 327 billion of external debt — 43% of the total, 47% of forex reserves — falls due within a year. This is the single most important number in the release for anyone positioning for currency and rate risk over the coming twelve months.

·         None of this points to a solvency crisis. It does argue for staying selective on rupee-sensitive and import-dependent sectors, and for treating any near-term INR stability as a rollover-financing outcome rather than a structural improvement.

 

Stress-tested India!

The Reserve Bank of India (RBI) recently released the half-yearly Financial Stability Report (FSR) for June 2026. The report has come in the middle of a live geopolitical shock, therefore requires closer scrutiny. The broad message from the RBI is reassuring - the Indian financial system remains sound, even as the world around it gets noisier.

The RBI has framed the report against two forces reshaping the global economy and financial system — growing geopolitical fragmentation, and the technological disruption unleashed by artificial intelligence. The global economy, RBI notes, has stayed resilient so far, helped in part by optimism around AI-driven productivity gains. But the near-term outlook remains clouded given how quickly the environment keeps shifting.

The RBI captures the balancing act well: despite repeated shocks, the global financial system has shown notable resilience, with markets settling down after an initial bout of volatility triggered by the West Asia conflict. But global financial stability risks, the report cautions, remain elevated — lingering supply-chain uncertainty could still tighten financial conditions and reignite inflation, while high public debt, bond market fragilities, stretched asset valuations and the growing footprint of leveraged non-bank financial intermediaries (NBFIs) could all amplify the next shock.

On India, the tone is more reassuring. Domestic financial stability risks remain contained despite the global turbulence, the RBI says, underpinned by a strong banking system, healthy capital and liquidity buffers, and steady credit growth. India’s macroeconomic fundamentals, it adds, are stronger than those of many peers — and stronger than in previous crisis episodes — which gives the economy real buffers to absorb external shocks.

Some of the key highlights of the June 2026 FSR are listed below:

Global scenario

·         Markets held up, but the risk list hasn’t shrunk. The global financial system has demonstrated resilience through successive shocks, with markets turning more sanguine after the initial jolt from the West Asia conflict — helped by a smaller-than-feared rise in oil futures, strong corporate earnings and the AI-driven investment boom. Even so, elevated public debt, bond-market fragilities, stretched valuations and the expanding role of NBFIs remain live vulnerabilities.

·         Asset valuations look stretched, and AI stocks are a concentration risk. A sharp correction in global equities — particularly if triggered by a reassessment of AI-related earnings and valuations — could spill over into domestic markets. Debt financing by AI-linked companies has also been rising, a theme the FSR flags for the first time this cycle.

·         NBFIs keep growing in size and interconnectedness. The report flags the systemic importance of non-bank financial intermediaries and their deepening linkages with the banking sector as an area warranting close monitoring.

·         Cyber risk has a new face — AI. In a dedicated survey of 33 scheduled commercial banks and 10 upper-layer NBFCs, AI-enabled cyberattacks emerged as the single most significant risk expected over the next twelve months — ahead of ransomware, phishing and third-party or supply-chain risk. Even institutions confident about their overall cyber preparedness flagged the speed, scale and sophistication that AI brings to the threat.

Domestic economy

·         Growth headwinds from the conflict are receding, but not gone. With the signing of an interim peace deal, some pressure has eased, though the Indian economy and financial system remain exposed to geopolitical tensions and associated shocks. The Monetary Policy Committee (MPC) has projected growth of 6.6% for 2026-27, while flagging that elevated oil and commodity prices, along with weaker global growth, remain downside risks.

·         Inflation has crept up. Headline inflation rose from 3.5% in April 2026 to 3.9% in May 2026 on the back of oil pass-through. A combination of the conflict-driven supply shock and a projected weak monsoon due to El Niño could push inflation toward the upper end of the tolerance band in Q3:2026-27 — the MPC has already revised its inflation projection for 2026-27 upward, from 4.6% to 5.1%.

·         The balance of risks has actually turned more favorable. This is credited to the interim peace deal in West Asia along with recent Government and RBI measures aimed at strengthening capital inflows — even as some impact from India’s dependence on imported energy remains unavoidable.

·         Capital flows have come under pressure. Net FDI flows turned muted amid rising global uncertainty, and net international investment position dynamics reflect the broader retreat in capital allocated to emerging markets during the conflict period.

Indian equity markets

·         Indian equities underperformed EM peers, then corrected further. Trailing its emerging-market peers for over a year, the domestic equity market fell further amid concerns about India’s exposure to the oil-price shock and a resulting softening in corporate earnings growth. India’s earnings-growth differential over EM peers has now dropped below its long-term average.

·         FPIs sold at a scale not seen in over two decades. FPI equity outflows of US$ 30.7 billion in 2026 exceeded the prior record of US$ 18.9 billion set in 2025 — the highest outflow observed in the past two-and-a-half decades. FPI ownership of Indian equities has fallen to a two-decade low, and for the first time is now below that of domestic institutional investors (DIIs).

·         Domestic investors were the shock absorbers. Despite the sharp correction, the 5-day worst-drawdown in Nifty 50 during this episode was the mildest across comparable crisis periods studied by the RBI, thanks in large part to rising support from mutual funds, insurers and pension funds.

·         The Nifty 50 rally of the last two years has partly unwound. A returns-decomposition exercise (Gordon Growth Dividend Discount Model) shows that between September 2024 and June 2026, a rising equity risk premium — reflecting heightened investor risk aversion — has eaten into the gains that were earlier driven by risk-premium compression. The correction has, at least, brought valuations closer to their historical average, even though Indian equities continue to trade at a premium to EM peers.

Financial system stress in India

·         The stress indicator ticked up, but stayed low by historical standards. The Financial System Stress Indicator (FSSI) rose during the conflict period, but the level of stress in the domestic financial system remains relatively low compared to previous crisis episodes.

·         Banks are in their best shape in decades. Scheduled commercial banks (SCBs) remained resilient, with the gross non-performing assets (GNPA) ratio falling to a multi-decadal low of 1.8% in March 2026 and the net NPA (NNPA) ratio at 0.4%. Return on assets (RoA) stood at 1.3% and return on equity (RoE) at 12.6%, while the capital to risk-weighted assets ratio (CRAR) and common equity tier 1 (CET1) ratio stood at 17.7% and 15.3% respectively — both comfortably above regulatory minimums. Credit growth accelerated to 14.5% y-o-y and deposit growth to 11.5% y-o-y during 2025-26.

·         Stress tests say the buffers can take a hit. Macro stress test results indicate that the banking system remains well-positioned to absorb potential shocks, with aggregate capital ratios projected to stay comfortably above regulatory thresholds even under hypothetical adverse scenarios.

·         NBFCs and other intermediaries also pass the test. Non-banking financial companies (NBFCs) remained financially sound, supported by strong capitalization, healthy profitability and improving asset quality. Stress tests of mutual funds, clearing corporations and the insurance sector similarly point to continued resilience, even as rising interconnectedness across entities and sectors is flagged as a channel that merits close surveillance.

The moot point in FSR is whether India’s buffers — strong bank balance sheets and resilient domestic flows — are enough to keep absorbing repeated external shocks without the strain showing up in the real economy. On the RBI’s own assessment, so far, they have.

Is India staring at 2013, all over again?

History does not repeat itself but it often rhymes. Anyone who lived through the 2011-2013 period in India, and is watching the country in 2026, will find the rhyme hard to ignore. The characters have changed, the specific allegations are different, but the underlying script — a government fatigued by its own longevity, an economy under external stress, and a restless youth looking for a new savior — feels strikingly familiar.

The Making of 2014

India came out of the Global Financial Crisis of 2008-2010 in far better shape than most of its global peers. But the relief was short-lived. The years 2011 to 2013 turned out to be among the most turbulent in India’s recent economic and political history.

The government of the day was under siege from a string of scam allegations — coal mine allocations, 2G spectrum, and Commonwealth Games spending were the most prominent among them. Charges of misgovernance and corruption piled up. The Supreme Court’s description of the CBI as a “caged parrot” of the government became a defining image of that period, capturing how deeply institutional credibility had eroded.

On the economic front, the taper tantrum in the West triggered a full-blown current account crisis in India. The government was simultaneously accused of policy paralysis, with key infrastructure projects stuck and important economic reforms deferred indefinitely.

The youth of the country, disillusioned with the establishment, took to the streets. An avowedly ‘idealist’ new party emerged out of that discontent and swept to power in Delhi. Even the allies within the ruling UPA coalition began quietly distancing themselves from the Congress party at its center.

Sensing the opportunity, the BJP in 2013 named Gujarat’s Chief Minister, Narendra Modi, as its prime ministerial candidate — projecting him as the leader who would rescue the country from the mess and carry it to new heights. In 2014, the regime changed.

Twelve Years Later, 2026

Fast forward to today, and the parallels are hard to miss.

India has just come through a war with Pakistan in 2025 and a major crisis in West Asia, emerging from both with relatively limited economic damage — not unlike how it navigated the Global Financial Crisis a decade and a half earlier.

But once again, the government is fending off a string of allegations — misappropriation of temple funds, repeated examination paper leaks, a lack of transparency around the use of the PM CARES Fund, poor quality of public infrastructure construction, and a controversial ethanol-blending policy. A Bombay High Court judge has strongly criticized the government and the Mumbai Police for suppressing dissent — an echo, however faint, of the institutional friction of 2013.

An ‘idealist’ party has captured power in Tamil Nadu. In Delhi, the youth is protesting again, this time under the banner of an unorganized, loosely structured group calling itself the Cockroach Janta Party. And on the economic side, the country has just been through a balance of payments scare, with the RBI and the government having to take strong, visible measures to arrest the decline of the rupee.

None of this means 2026 is a photocopy of 2013. The specific issues differ, the political actors are not identical, and the economy today is structurally stronger in several respects. But the pattern of a long-serving government facing corruption charges, an external account under stress, and a young population looking for a new political alternative is a pattern investors would do well to recognize.

Three questions to watch over the next year

With key state assembly elections scheduled for 2027, the next twelve months will be an important test. Investors should watch closely for three things:

·         Will the government turn more populist ahead of the 2027 state elections, at the cost of fiscal correction?

·         Will India witness a repeat of policy paralysis, where key economic and other reforms are once again deferred?

·         Will the government lean on tax concessions to pacify an agitated middle class, financing this by cutting back on capital expenditure?

If these fears materialize, financial markets are unlikely to take it kindly. A slippage on fiscal discipline, a pause in reforms, and a shift away from capex-led growth toward consumption sops would be read by markets as a repeat of exactly the mistakes that cost the previous regime its mandate. Valuations, already under pressure, would have little cushion left to absorb such a shift.

An investor’s takeaway

For investors, the lesson from 2013 is not that history guarantees a particular election outcome in 2029. It is that markets punish drift — drift on fiscal discipline, drift on reforms, drift on institutional credibility — well before the ballot box does. Portfolios built on the assumption that the current growth and capex cycle will simply continue uninterrupted may need to build in some room for disappointment over the next year. Quality businesses with strong balance sheets, and sectors less dependent on continued government capex or populist largesse, are better placed to absorb this uncertainty than those that are not.

Twelve years is long enough for a country to forget its own history, and short enough for that history to return wearing a slightly different costume. Whether 2026 turns out to be 2013 in disguise is a question only the next twelve months can answer. Until then, watch the fiscal arithmetic, watch the reform calendar, and watch the streets — they have a way of telling the story before the results do. 

Choose your economic model

In the post-World War II era, two forces have driven economic development more than any other: real estate and exports. Together, they have transported most economies from underdeveloped to middle-income status over eight decades. Technology and productivity gains have played a critical but largely supporting role — improving export competitiveness and raising household affordability for property ownership.

Improvements in social outcomes — inclusiveness, sustainability, equity, and quality of life — have typically followed economic development with a lag, sometimes by decades. It is therefore reasonable to assess any country’s economic model against these two pillars: how well it has built exports, and how well it has developed real estate.

India’s experience on both counts is instructive — and incomplete.

Exports: A story that stalled

As India opened up its economy in 1991, exports began to rise noticeably. Growth then accelerated sharply from around 2004. Much of that momentum can be traced to the structural reforms of the NDA government under Atal Bihari Vajpayee (1998–2004) — aggressive privatization of core sectors, rapid build-out of industrial and trade infrastructure, and the development of engineering and technology capabilities, partly driven by the necessity of surviving international sanctions after the 1998 nuclear tests. Those compulsions produced competencies that later translated into genuine export strength in engineering, technology, and pharmaceuticals.

But after the Global Financial Crisis of 2008–09, the story changed. Exports stagnated. More telling, India’s exports as a share of GDP peaked around 2013–14 at roughly 25% and have been declining since. A sharp post-Covid recovery briefly arrested that trend, but the past three years suggest a resumption of the downward drift.

 

(These figures include merchandise exports, services exports, royalties, and technical fees.)

The structural issues are well known: weak manufacturing competitiveness, logistics gaps, a modest share of global value chains, and a services export base that is deep but narrow. None of these are easy to fix. But the data makes clear that post-GFC India has not been able to sustain the export-led momentum that most successful Asian economies relied upon.

Real Estate: Underdeveloped and under pressure

Granular data on real estate’s direct contribution to India’s GDP is not readily available. The broader category of “Financial Services, Real Estate and Professional Services” under the services classification shows that this group’s share of GDP rose from around 15% in the early 1990s to approximately 22–24% today — a significant structural shift.

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Much of that gain likely reflects financial services rather than real estate itself. A May 2026 KPMG report estimated real estate’s direct contribution to India’s GDP at approximately 7.3%. By comparison, most Asian economies see real estate contributing 13–15% of GDP — a gap that reflects how far India’s urbanization and housing development still have to go.

The enabling conditions for a strong real estate cycle have been present to varying degrees. Since 1991, average lending rates have fallen sharply — from nearly 19% at their 1992 peak to around 9% today — driven by sustained fiscal consolidation, better inflation management, and structural improvements in the current account. Lower rates, combined with rising employment, improving real wages, better connectivity, and expanded urban access, supported a strong real estate growth cycle through the 2000s and early 2010s.

That cycle has since lost momentum. Inflation has proved sticky, the current account remains structurally vulnerable, and real wage growth in the formal economy has slowed. Interest rates, while well below their historical highs, have stopped falling. Without a resumption of the structural improvements that drove the last cycle, the tailwinds for real estate are weaker than they were.​

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 The central question

This brings us to the harder question. If both pillars of the conventional post-war growth model — exports and real estate — are underperforming, what does India do?

One option is to double down: fix the structural constraints on exports, accelerate urbanization, and build the financial depth needed to sustain a larger real estate cycle. This is the well-tested Asian playbook.

The other option is harder to define but not trivial to dismiss. As I argued in a 2014 post on this blog (see Utopia: The Economic Solution), the Gandhian model — grounded in decentralization, labor-intensive production, self-reliance, and the primacy of the individual over capital — has attracted serious academic attention and is not without practical merit. The question is whether India has already travelled too far down the urbanization and integration path to reverse course, or whether elements of that framework can be selectively incorporated into a hybrid model.

Borrowing blindly from western models will not work in the Indian context. India’s economic model needs to reckon with a class structure, an employment challenge, and a rural civilizational inheritance that standard industrialization narratives do not address well. At the same time, a pure retreat to pre-industrial self-sufficiency is not a realistic option for a country of 1.4 billion people with legitimate aspirations.

The answer is likely somewhere in the middle — a model that aggressively rebuilds export competitiveness and develops real estate as a genuine engine of growth, while orienting its social architecture around decentralization, broad-based employment, and sustainability rather than pure GDP maximization.

The policy choice ahead

The data from the three charts above does not make a comfortable reading. Exports as a share of GDP have been falling for over a decade. Real estate is significantly undersized relative to India’s peers. Lending rates, while structurally lower than in the past, are not falling anymore. These are not cyclical problems. They are structural.

Policymakers cannot afford to wait for the globally tested model to reassert itself on its own. A deliberate choice needs to be made — either recommit to the conventional model with genuine policy urgency, or develop a credible alternative suited to India’s specific conditions. Muddling through, which has been the default, is not a strategy.

What that alternative looks like is a conversation India has not yet had at the level of seriousness it deserves.

Also read – Utopia: The economic Solution

 

FCNR(B) – What does this domino effect mean for banks

(Continuing from yesterday…see here)

The implications of a successful FCNR(B) campaign for the banking sector are far-reaching.

First, and most directly, FCNR(B) deposits will not attract CRR or SLR requirements on the incremental amounts. This is not a new concession — the same dispensation applied in 2013 — but it means that every dollar raised through this route translates almost entirely into deployable liquidity. A $40 billion inflow, at a spot rate of approximately Rs 93-95 per dollar, would inject Rs 3.7-3.8 lakh crore into the system. This is a very large number. For context, the entire banking system’s liquidity deficit through most of early 2025 was in the range of Rs 1.5-2 lakh crore.

Second, the scheme addresses the CD ratio problem in a way that domestic deposit mobilization efforts cannot quickly replicate. NRI deposits are not cannibalizing domestic savings — they represent an external infusion. Banks that succeed in raising substantial FCNR(B) deposits could see their CD ratios ease meaningfully, reducing the pressure to offer higher domestic deposit rates and thereby protecting net interest margins.

Third, as one analyst report aptly noted, successful mobilization “should have a sobering effect on loan pricing and other market-based yields across commercial papers, certificates of deposit, and government securities, helping in true transmission.” Put simply, additional liquidity should reduce the cost of credit across the economy — something that rate cuts alone have struggled to deliver in a tight liquidity environment.

Fourth, the scheme provides a measure of protection against wholesale deposit instability. When a bank can replace jumpy institutional deposits with longer-tenor (three to five year) NRI money, the structural fragility of its liability side reduces meaningfully.

The BoP dimension: Managing the external account

The FCNR(B) scheme is as much an external account management tool as it is a banking sector liquidity measure. India’s balance of payments position is at risk of marked deterioration. The current account deficit could widen on account of sustained elevated crude oil prices and widening trade deficit with major partners. Simultaneously, Foreign Portfolio Investment (FPI) flows into Indian equities turned volatile and net negative through significant portions of FY26, as global investors rotated away to developed markets and other emerging markets.

The rupee, consequently, bore the brunt. Having crossed 90 against the dollar in early 2026 and continuing to slide toward 94-95 in subsequent months, the currency’s weakness threatened to become self-reinforcing through imported inflation, higher oil import bills, and corporate balance sheet pressures for those with unhedged foreign currency liabilities.

The RBI has been intervening, but at a cost. Since February 2026 alone, over $38 billion of foreign exchange reserves were deployed to cushion rupee depreciation — drawing down reserves from their peak of $728.49 billion. At $681-682 billion, reserves remain substantial (covering approximately 11 months of merchandise imports, per the RBI Governor), but the rate of attrition is a concern.

The FCNR(B) inflows would replenish that buffer without requiring the RBI to buy USD in the open market. In effect, the scheme converts long-term NRI savings into a direct reserve-building exercise — a far more durable source of forex inflows than short-term portfolio capital. In 2013, the $34 billion raised through FCNR(B) was widely credited with stabilizing the rupee and turning the BoP position around. The hope is for a similar impact, though the quantum and speed of inflows will determine the ultimate efficacy.

The 2013 Comparison: What is different this time

The 2013 FCNR(B) episode under Raghuram Rajan is rightly remembered as a masterclass in crisis management. Within weeks of the announcement, market sentiment turned, the rupee stabilized, and $34 billion flowed in — far exceeding initial expectations. But 2026 is not 2013, and a few important differences merit attention.

In 2013, the episode was triggered by a single, identifiable shock — the Fed’s taper tantrum. Once the global environment stabilized and the RBI acted decisively, confidence returned quickly. The current challenge is more diffuse: a mix of geopolitical risks (the West Asia war and its oil price consequences), US tariff uncertainty, structural domestic demand softness, and a banking system that is adjusting from a period of unusually high credit growth. There is no single event to “catch.”

Additionally, while NRI depositors have always been rate-sensitive, the global interest rate environment today offers them competitive alternatives that did not exist in 2013 in the same way. US Treasury yields, for instance, remain elevated. The deposit and lending rates in countries like the US, the UAE, and Singapore are also much higher as compared to 2013. The spread offered by FCNR(B) deposits may not be compelling enough to overcome home country inertia and alternative opportunity costs.

Finally, the RBI’s hedging cost today — borne at approximately 2.9% per annum — represents a meaningful cost to the central bank’s balance sheet and, by extension, to its future surplus transfers to the government. If $40-50 billion is raised, the annual hedging cost borne by the RBI could be in the range of $1.2-1.4bn. That is not a prohibitive number given the BoP stability it purchases, but it is not insignificant either, if we consider that the annual budget of ISRO is US$1.4bn.

Another point to be noted is that in 2013 most of the incremental FCNR deposits were used to augment the reserves. Besides, other measures, e.g., reduced LSR remittance limits, were also used to limit the outflows. This time, much of the incremental deposits could just end up replenishing the FII and Net FDI outflows.

Investment Implications: What Should the Analyst Track?

For investors in Indian banking stocks, the emerging picture suggests a period of transition rather than resolution. Several themes are worth tracking.

On the positive side, if FCNR(B) inflows are substantial — say in excess of $30bn — the banking sector will be a meaningful beneficiary. System liquidity improvement will reduce reliance on expensive wholesale deposits, compress deposit costs, and allow for better NIM protection. Banks with stronger NRI relationships and international banking capabilities — notably the larger private sector banks and SBI, which has an extensive overseas network — may be better positioned to capture these flows.

The rupee stabilization effect, if it materializes, will reduce the import cost burden for the economy broadly and ease inflationary pressures, which would in turn support the RBI’s ability to maintain accommodative monetary conditions.

On the risk side, investors should remain cognizant that the FCNR(B) scheme creates a large matured liability for banks for three to five years hence. When these deposits mature — between 2029 and 2031 — the banks must return the foreign currency. If India’s external account is under stress at that point, the rollover risk could be significant. This is precisely what happened when the 2013 FCNR(B) deposits matured in 2016: the RBI had to manage a significant outflow, though it did so without incident. The lesson is that today’s relief is tomorrow’s contingent liability.

The fiscal trajectory remains a key watch item. A government that continues to miss its tax revenue targets while facing disinvestment underperformance will compete with the private sector for available savings — keeping yields higher than they otherwise would be and limiting the NIM upside from liquidity improvement. Resolution of the fiscal challenge is a necessary condition for a durable easing of banking sector stress, not a sufficient one in isolation.

FCNR(B) inflows – the likely scenario

Most large banks have announced rates for 3-year FCNR(B) deposits in excess of US$1mn in the range of 6-6.15%. Some smaller banks have even offered 7%.

The actual inflows would largely depend on the domestic credit franchise (how much of the mobilized USD it can lend/sell under LRS to the domestic borrowers) of the mobilizing banks.

The actual deal is the NRI depositor borrows from the overseas banks and deposits as FCNR(B) with an Indian branch.

The rate of lending to the depositors would depend on one-month SOFR and 3-year interest rate swap, expected credit cost provision and profit margin for the bank. Considering a 19x leverage (5% margin), the net return to the depositor could be in the range of 13-15% p.a. on the principal amount invested.

Conclusion

RBI, facing a multi-dimensional challenge — banking liquidity, currency weakness, BoP stress — has done well to use a time-tested measure. The FCNR(B) scheme could addresses all three simultaneously, while supplementing it with USD/INR swaps that ease domestic liquidity without burning down reserves. This is not panicked firefighting; it is deliberate central banking.

The banking sector will benefit, but investors should resist the temptation to extrapolate from 2013. The structural challenges that created the problem — a financializing household saving base that increasingly prefers non-bank instruments, a fiscal deficit that crowds and constrains, a growth model that generates more credit demand than the deposit base can organically support — will not dissolve with a single scheme, however well-designed.

The CD ratio will ease. The wholesale deposit overhang will moderate. Liquidity conditions will improve. But the medium-term question — how India’s banking system funds a $5 trillion economy when households are increasingly choosing the mutual fund and corporate debt over the fixed deposit — remains open. That is the question the banking sector and its regulators will have to answer over the coming decade, one policy measure at a time.

Also Read

How the Indian financial sector is navigating a perfect storm