FY26: The worst fears came true

The financial year 2025-26 started on a disruptive note with President Trump announcing a hike/imposition of tariffs on most of the USA’s imports from 9^th April 2025. During the course of the year, the Trump administrations made several changes to the tariff policy, creating an environment of heightened uncertainty amongst trading partners of the US. India was one of the worst affected countries. Though the Supreme Court of the US ruled against Trump's tariff policy in February 2026, the uncertainty still remains.

The technological advancements in the sphere of artificial intelligence and advanced computing during the year also disrupted Indian equity markets, in more than one way. The IT services sector stocks suffered valuation de-rating on clouding of growth prospects. Foreign investors accelerated the shift of their portfolio from Indian equities (due to lack of meaningful AI or Advanced computing opportunities) to the markets like South Korea and the US.

The US and Israel coalition attacked Iran on 28^th February 2026. The war escalated materially in the following weeks and still continues. This war has disrupted global supply chains. Energy supplies are impaired and prices have spiked sharply. Several countries are reporting shortages of key raw materials. Manufacturers are staring at a summer of discontent. Consumers are struggling with shortages and higher prices.

I had written in my first post of FY26, “Financial Year 2024-25 (FY25), may be recorded in the annals of history as a watershed year for global politics, geopolitics, markets and the financial system. The events that occurred during the past twelve months have opened up significant possibilities for emergence of a new global order. Although the contours of the likely new global order are yet to begin taking a shape, it appears that fight for dominance over technology; endeavor to gain fiscal strength; interventionist democracy where the state exercises intensive control over citizens; and top priority to energy security would be four key characteristics of the new order.” (see here)

The actual scenario is playing out mostly on these lines only. Also, in my CY2026 outlook post, I had mentioned the following five key risks for 2026.

·         Sharp global growth slowdown

·         Unexpected inflation resurgence

·         Fiscal slippage or policy inconsistency

·         Geopolitical escalation impacting energy or trade

·         Financial system stress from isolated credit events

It appears that four out of these five risks have already materialized in the first quarter of 2026 itself. The financial year has ended with the markets still on edge.

Key highlights of FY26

·         The equity markets in India yielded negative returns for FY26, with Nifty returns being zero for the past two years (FY25-FY26). Indian bonds and currency markets were also notably weak and yielded negative returns for the FY26. FY26 was one of the worst years for INR. Precious metals were the notable outperformers for the year. Indian equities and currency were one of the worst performers globally.

·         Although the economy remained resilient, the corporate earnings failed to meet the expectations for the second consecutive year. The earnings disappointment came despite favorable monetary conditions; good monsoon, low inflation and recovery in rural demand.

·         Indian corporates raised a record Rs1.79 trillion from IPOs during FY26. Besides, Rs510bn through qualified institutional placements. The trend of corporate deleveraging continued.

·         Negative FPI flows also dominated the headlines. FY26 was one of the few years when FPIs were overall net sellers – accounting for the primary and secondary markets for both equity and debt.

·         The balance of power, in terms of equity ownership, continued to shift from the foreign portfolio investors (FPIs) to Indian household investors (Retail). The ownership of FPIs in the listed Indian equities fell to a 14 year low of ~16%; while retail investors’ ownership in listed Indian equities increased to a two decade high of ~25%.

·         Lending rates eased 50-75bps, lower than the policy rate cut of 100bps. RBI maintained comfortable liquidity through a variety of measures. Deposit rates were also lower by 60-65bps.

·         Globally, some notable financial market events in FY26 were – (i) sharp outperformance of Asian equities, especially South Korea and Japan; (ii) sharp rise in the Japanese bond yields; (iii) the Fed pausing after cutting 75bps during the year against the consensus expectation of another 50bps cut; and (iv) Gold (+49%) and Silver (+120%) rallied hard, while bitcoin prices fell ~20%.

·         Geopolitical tension that started with the Russian invasion of Ukraine in early 2022, and escalated with Israel raiding Palestinian territories in 2023, continued to rise in 2026 with intense war between the US & Israel coalition and Iran. A swift change of regime in Venezuela was another notable geopolitical event of FY26.

Stock markets – Worst year since FY20

The Benchmark Nifty50 ended FY26 at 22336.40, 5.1% lower yoy; making two return zero for Nifty. NSE Midcap 100 managed to end the year with marginal gains (+1.9%); while NSE Small cap 100 index (-5.5%) fell in tandem with Nifty. The overall market capitalization of the NSE was marginally higher (+0.1%) at Rs411.25 trillion; however, in USD terms the market capitalization was lower by 10% at US$4.34trn at end of FY26 vs US$4.8trn a year ago.

·         The popular investment themes of FY25 (Defense, clean energy, roads, railways, etc.) underperformed in FY26.

·         PSU Banks, Metals, Healthcare, Auto, and Energy were the top performing sectors. Realty, IT Services, FMCG, Private Banks, and Services were the notable underperformers.

·         International equity funds and Gold ETFs and Silver ETFs, delivered strong performance, sharply outperforming the equity markets

·         Most mutual funds managed to outperform Nifty 50 by a decent margin.

·         Nifty 50 valuations are now closer to long term averages with one year forward PER at ~20x, Price to Book at ~3.7x, Market Cap to GDP at 119%, and the spread between Bond yield and Earning yield has narrowed in recent months.

·         Long-term (5yr rolling CAGR) Nifty returns collapsed to 8.7% at the end of FY26, lowest since FY20.

Earnings growth – continues to lose momentum

Nifty EPS growth disappointed in FY26 also, after recording almost no growth in FY25. FY27e earning growth is also likely to be in mid-single digits. The earnings in the five years FY22-FY26e have grown at 15% CAGR.

FPIs secondary market flows negative for unprecedented third consecutive year

Though the overall institutional flows in the secondary markets remained positive consistently, persistent FPI outflows are becoming a cause of worry. In FY26 FPIs were net sellers in the secondary market to the tune of Rs 2.5 trn, while DII net bought Rs8.5trn, resulting in a record net institutional inflow of Rs5.98trn. FPIs have been net sellers in the Indian secondary market for three consecutive years (FY24-FY26) now, resulting in a net 3 year outflow of Rs6.2trn.

Debt and currency – distinctly weak

INR was one of the worst global currencies in the world, losing 8.4% against USD, 13.3% against GBP, 17.7% against EUR and 7.5% against JPY. The yield curve lifted higher and steepened sharply. The benchmark yields ended higher at 6.96%) vs 6.58% at end of FY25) despite monetary easing. Lending and deposit rates were lower.

Commodities – A buoyant year

The year FY26 was a buoyant year for commodities. Precious metals, energy, soft commodities and industrial metals ended mostly higher for the year. USD weakness, tariff war and geopolitical conflicts impacted the supply chains and cost curves. The commodity prices were thus higher despite a marked slowdown in Chinese and European economies. Silver (+120%), Gold (+49%), WTI Crude (+43%), Aluminum (+37%), Copper (+27%), Wheat (+14%) were some notable gainers. Sugar (-20%) was a notable loser.

·         Gold and Silver prices have shown a declining trend in the last couple of months.

·         Soft commodity prices are mostly back to pre-Ukraine war levels or even lower.

·         Natural Gas prices are at 2021 levels, despite sharp rise in crude oil prices and supply disruptions.

Cryptos – A bad year

FY26 was a bad year for cryptocurrencies. Bitcoin, the largest and most popular cryptocurrency, ended the year with over 20% loss, while several smaller cryptocurrencies ended much lower. Cryptocurrencies however continued to gain wider acceptance from governments, regulators, financial institutions, market participants, and investors. More and more governments are now inclined to view crypto as a legitimate asset.

Economic Growth – a widespread slowdown

Both the engines of global growth in the post Global Financial Crisis (GFC) era, viz., China and India, are now experiencing some fatigue. Though the Indian economy continues to show resilience, the geopolitical conditions are indicating a widespread slowdown. With large European economies like Germany, France and UK barely growing, Japan and Latin American economies slowing and the US economy also showing distinct signs of an impending slowdown in 2025, the global economic growth has certainly entered a slow lane in FY26.

Some random thoughts

The global macro landscape remains in flux. A strange mix of structural deflationary forces is colliding with equally powerful inflationary pressures. Technology, demographics, geopolitics, and policy responses are all pulling in different directions — making this one of the most complex investing environments in decades.

I am not competent enough to decode where the current conditions are driving us. Nonetheless, I would like to share some random thoughts with the readers and seek their views on these.

Inflation vs Deflation: The great tug of war

At the structural level, Artificial Intelligence, aging demographics, and the rapid adoption of renewable energy are profoundly deflationary for the global economy.

·         AI is driving efficiency, collapsing cost structures, and displacing traditional labor models.

·         Demographics in most major economies — from China to Europe to Japan — are suppressing consumption growth and wage pressures.

·         Renewables are gradually reducing marginal energy costs.

Yet, short-term inflationary winds continue to blow.

·         Fiscal profligacy, especially in the US and large emerging economies, ensures that governments remain the biggest spenders.

·         Deglobalization and parochial geopolitics — from tariffs to tech embargoes — are reversing decades of supply-chain efficiency.

·         Rising defense spending, both in the West and the East, adds another layer of price rigidity.

Ironically, even AI — while deflationary in the long run — is pushing up energy prices in the short run, as data centers consume unprecedented power.

The result is a macro paradox: consumer inflation may stay moderate, but asset price inflation looks inevitable.

Japanification — slow growth, aging demographics, and low yields — already grips China and the EU. In contrast, the US remains the lone outlier, buoyed by fiscal stimulus and a technology cycle.

Gold: Monetary alchemy or bubble in waiting?

Gold remains the ultimate barometer of trust in fiat systems. As the world lives with near-permanent fiscal deficits, the case for gold as a hedge against monetary debasement remains compelling.

However, a curious distortion has emerged:

The total volume of paper and digital claims on gold — ETFs, futures, tokenized products — now vastly exceeds the quantity of physical gold available. This means that, in the event of a systemic rush for redemption, the notional market could implode under its own leverage.

While dedollarization and rising central bank purchases continue to support the short to mid-term case for physical gold, the near-term structure looks speculative. A bubble in gold positions cannot be ruled out, just because of over-financialization.

Bitcoin: The digital store of value narrative

Bitcoin’s journey from fringe curiosity to mainstream asset continues. Institutional acceptance is growing; sovereigns are experimenting with it as a reserve diversifier. Banks like J. P. Morgan Chase, which termed Bitcoin “fraud’ not long ago, have now embraced it. The key driver remains distrust in fiat money and political money printing.

Yet, the coming wave of official digital currencies (CBDCs) could complicate the landscape.

Governments will likely pitch their CBDCs as “stable digital cash,” competing for legitimacy and mindshare.

If Bitcoin manages to retain its decentralization ethos and scarcity narrative, it could coexist as the digital equivalent of gold — a hedge against monetary mismanagement rather than a transactional currency.​

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Bonds: The calm before a possible storm

Central banks across major economies have begun cutting rates again, signaling confidence that inflation is under control. Markets have bought into this narrative. However, no one seems positioned for a reversal — a renewed spike in inflation due to energy, wages, or geopolitics.

If inflation re-accelerates, the bond market could face a brutal adjustment. Duration-heavy portfolios, built on the assumption of declining yields, remain vulnerable.

The irony is that sovereigns need low yields to fund ever-rising deficits — and this need might override pure inflation management. That tension will define fixed income in the years ahead.​

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Equities: Between resilience and fragility

Global equities are not in bubble territory — though certain US pockets (AI, mega-cap tech) show unmistakable signs of exuberance.

The greater risk lies in a material correction in US markets, which could reverberate globally through portfolio rebalancing and risk aversion.

However, there’s a counterweight: if developed market central banks ease more aggressively than expected, it could unleash a wave of liquidity toward emerging markets. The result might be a sharp rerating of EM equities, particularly those offering growth and currency stability.

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The Big Picture

We are living through a multi-speed world:

·         The US remains inflation-tolerant and growth-driven.

·         China and Europe slide deeper into disinflation and demographic stagnation.

·         Emerging markets stand at the crossroads of opportunity and volatility.

·         Markets are oscillating between the two poles of fear (inflation) and faith (liquidity).

Navigating this phase will demand humility, optionality, and patience — and an acceptance that the next decade will likely reward flexibility over conviction.

A visit to the street

2025 is proving to be an interesting year for traders in the Indian stocks. The traders have faced multiple challenges in the past eight months; and had some good opportunities to make extraordinary profit. More notably—

What made traders’ life tough

·         The external environment has been volatile. Geopolitical conflicts in the Middle East had escalated materially. The war between Russia and Ukraine continued and developed a new trade/tariff angle for the Indian economy. India engaged with Pakistan in a small but intense war that could have serious long-term repercussions for regional geopolitics. These events caused sharp volatility in the market, causing exacerbated margin calls and losses to the traders.

·         The US imposed reciprocal (25%) and penal (25%) tariffs on imports of merchandise from India, making Indian exports to the US significantly uncompetitive in comparison to the traditional competitors like Vietnam, Bangladesh, Sri Lanka, Turkey, Indonesia, Ecuador, etc. This led to a sharp correction in the stocks of companies drawing material export revenues from the US.

·         Economic growth of India has been stable but no acceleration is seen. The demand (both consumption and investment) has remained subdued, impacting consumer companies that were over owned by traders and investors alike.

·         Earning momentum has stalled for the past few quarters, with earnings growing in single or low double digits. The valuations of several popular and fancied sectors and stocks have witnessed some de-rating, but still continue to be in the realm of “questionable” for a large majority of stocks.

·         While the implied volatility (VIX) has remained low, the realized volatility experienced by the traders has been elevated. Also, sector rotation has been swift and painful. Stocks from sectors like IT services, Pharma, FMCG, Realty and smallcap that were doing well couple of years ago and were over owned have noticeably underperformed YTD2025. While sectors like Auto, Metals and financial services that were under owned and performed poorly have outperformed.

What worked for the traders

International equities, precious metals and crypto assets have done exceedingly well YTD2025. Traders who had invested enthusiastically in Asian equities (especially greater China) a few years ago and were suffering losses have managed to recoup most of their losses. Crypto assets have provided phenomenal return, while gold and silver have also fared very well.

·         Internationally, the worst performing markets in the Post Covid period, especially, China, Hongkong, and Japan, have been top performing markets in the past one year. While India has been one of the most notable underperformers. In USD terms, India has yielded a negative return of ~5% in the past twelve months.

·         Precious metal and crypto assets have done exceedingly well for Indian investors and traders in the past twelve months.

Straitjacketing a crisis-2

Continuing from yesterday…(see here)

As I mentioned that the old narratives of the Smoot-Hawley Tariff Act (Tariff protection for domestic businesses), New Deal (Fiscal profligacy to stimulate economy) and Plaza Accord (fiscal and monetary manipulation by government/central banks to balance trade) do not fit the current circumstances, given the vastly different context. The efforts to fit the current U.S. President’s economic actions (and promises) related to trade, tariffs, and fiscal policy into historical molds, don’t align with today’s reality, and may be an exercise in futility.

For example, consider the following:

·         In 1930, global trade was 5% of U.S. GDP, and the world economy was already in freefall post-1929 crash. In 2025, trade is a larger share of GDP (e.g., ~25% for the U.S.), but global supply chains are far more integrated, making outright trade wars costlier and less likely. Modern trade agreements (e.g., USMCA, WTO) and digital economies add complexities that were not present in 1930.

Smoot-Hawley’s tariffs were sweeping and indiscriminate (40–60% increase across the board). Current U.S. tariff proposals (e.g., 10–30% on imports, higher on China) are targeted; negotiable; and used more as leverage rather than permanent barriers. Retaliation risks exist (e.g., EU or China tariffs), but multilateral frameworks mitigate escalation.

The 1930s lacked modern central bank tools like QE or quicker rate adjustments. In 2025, central banks globally can counteract trade shocks swiftly; unlike the gold-standard-constrained 1930s.

Critics overstate Smoot-Hawley’s relevance, projecting a worst-case scenario without acknowledging 2025’s resilience (e.g., diversified U.S. economy and tech dominance). The analogy ignores that tariffs today are often diplomatic tools, not ideological commitments, unlike Smoot-Hawley’s protectionist zeal.

·         The New Deal addressed 25% unemployment and a collapsed banking system. In 2025, U.S. unemployment is low (4–5%), and banks are stable, though inflation and debt ($36T) pose challenges. The urgency for New Deal-scale intervention is absent.

The New Deal was a comprehensive overhaul of the extant system. Adherence to Keynesian theory was at core of the New Deal. Trump’s infrastructure spending may echo WPA projects, but without the New Deal’s social safety net expansion or unified vision. Besides, current policies are often stalled by partisan gridlock or judicial review, unlike Roosevelt’s legislative dominance.

The New Deal’s trade liberalization (1934 Act) countered Smoot-Hawley’s damage. In 2025, trade policy is biased towards protectionism, not liberalization; and global allies are skeptical of the US leadership, unlike the 1930s’ pre-WWII alignment.

·         In 1985, the G5 shared aligned interests (Cold War unity, Japan’s deference). In 2025, the Sino-US rivalry, EU autonomy, and BRICS expansion (e.g., India’s growing role) complicate cooperation. A coordinated currency intervention (like in Plaza Accord) is unlikely given China’s managed yuan and the US political volatility.

The Plaza Accord used currency markets, not tariffs or fiscal policy. Current US actions emphasize more on tariffs and sanctions, not multilateral agreements, reflecting unilateralism over 1985’s teamwork.

The Accord strengthened the US’s exports but sparked Japan’s asset bubble and a lost decade. In 2025, similar interventions risk unintended consequences (e.g., inflation from a weaker dollar), but global economic fragmentation reduces the Accord’s replicability.

G-5 has now been replaced with G-20, which is not necessarily aligned with the US on trade or geopolitical issues.

·         Unlike 1930 or 1985, today digital economies (e.g., AI, e-commerce) and global supply chains dominate trade. A 1930 like trade war would disrupt tech flows (e.g., semiconductors), not just goods, with broader fallout. Similarly, a New Deal’s public works may be much less transformative today when remote work and AI are reshaping labor markets.

·         Current US political polarization and debt levels materially constrain a New Deal-scale ambition, while cultural shifts (e.g., distrust in institutions) differ from 1930s’ unity or 1985’s optimism.

In my view, rather than forcing old frameworks in the current crisis, it would be more useful if the US policymakers craft a “new solution” suitable to 2025 conditions. The new solution may, for example, include:

·         Fair taxes on trade: Tax goods from some countries but let allies like India sell clothes or spices without extra costs. This keeps prices low for Indian shops and helps American workers.

·         Green projects: Build solar panels, electric car batteries and chargers, like new roads in the 1930s, to create jobs and fight climate change.

·         Global teamwork: Create a new group with India, China, and others to agree on development of a neutral digital currency for international trade settlements; framework for global digital payments, like a global UPI, as an alternative to SWIFT, so no one country controls everything. These ideas can help the US to grow together with its trade partners, without repeating past mistakes.

These are just a few of the suggestions. A pragmatic approach, rather than adopting whimsical and jingoistic measures to achieve MAGA goals, will lead all down, including the US.

 

Also read

Straitjacketing a crisis-1

FY25 – All’s well that ends well

Financial Year 2024-25 (FY25), may be recorded in the annals of history as a watershed year for global politics, geopolitics, markets and the financial system. The events that occurred during the past twelve months have opened up significant possibilities for emergence of a new global order. Although the contours of the likely new global order are yet to begin taking a shape, it appears that fight for dominance over technology; endeavor to gain fiscal strength; interventionist democracy where the state exercises intensive control over citizens; and top priority to energy security would be four key characteristics of the new order.

The markets began to take cognizance of the broader developments and oscillated wildly between the extremes of greed and fear during the year. However, thankfully, markets managed to close the year on a rather satisfactory note. Most asset classes – equity, bonds, precious metals, base metals and real estate yielded decent returns for the year. Moreover, as we begin the new financial year (FY26), some of the key concerns, e.g., wider trade conflicts, geopolitical escalations, and fiscal implosions have peaked and showing some early signs of easing.

In India, the economic growth returned to the normal pre-Covid trajectory, as the base effect of FY20 and FY21 low growth tapered off, and external challenges mounted. Equity markets settled close to their long-term average valuations, after witnessing one round each of euphoria and despondency. Bond markets and INR have also managed to end the year on a rather optimistic note.

The following are some of the highlights of the performance during FY25.

Equity Markets

The Indian equity market managed to end the year in positive territory, despite showing negative in six out of twelve months. Indian equities underperformed the global peers. The benchmark Nifty yielded a return of ~5% (3% in USD terms), which was in line with the US markets (S&P500 +8%), and Europe (Stoxx600 +5%, DAX +21%) but much lower than China (Hang Seng +38%, Shanghai Composite +9%). Asian markets, ex China, were mostly negative, with Japan (Nikkei225 -10%), Indonesia (IDX-10%), Korea (KOSPI -10%) and Singapore (SET -15%) ending the year with decent cuts. The valuation premium of Indian markets to the other emerging markets therefore remained elevated.

Banks saved the day for Indian benchmark indices

The benchmark Nifty (+5.3%) performed in line with broader markets (NSE500 +5.4%, Smallcap 100 +5.4%); though midcap stock did somewhat better (Midcap100 +7.5%). The gains in benchmark indices were mostly led by banks (Nifty Bank +9.3%). Overall market cap of NSE was higher by 6.9%, explained by many new listings and outperformance of midcap stocks.

Sector-wise, Financials, Services, Private Banks, Pharma and Metals were top outperformers. Media, IT Services, PSU Banks, Realty, FMCG, Auto, Infra and Commodities were notable underperformers. Micro-sector-wise, Ship builders and EMS were outstanding. Renewable energy and real estate builders were notable losers.

2HFY25 witnessed 5/6 negative months

The benchmark Nifty50 yielded negative month-on-month (MoM) returns for five out of six months in FY25. The second half of the year was worst with five out of six months resulting in negative MoM return. However, the market breadth was negative in nine out of twelve months implying much higher volatility in the broader markets.

Institutional flows positive

Over institutional flows were materially positive for FY25. Net domestic and foreign flows in the secondary equity market amounted to Rs3591bn. Foreign Portfolio Investors (FPIs) were however net sellers of Rs2480bn in the secondary market, while domestic institutions pumped in a record Rs6071bn. FPIs were net sellers in eight out of the twelve months. The nifty-institutional flow correlation (73%) was decent in FY25.

Debt and Currency Markets

Indian debt and currency markets were volatile in tandem with the global trend. However, both bonds and INR managed to close the year on a buoyant note.

RBI cut the policy rates by 25bps and Cash Reserve Ratio for commercial banks by 50bps. The benchmark 10-year treasury bond yields eased to 6.58% from 7.11% a year earlier. USDINR weakened 2.6% to 85.59 from 83.35 a year earlier. Lending and term deposit rates were higher by up to 10-20bps. The yield curve shifted lower and flattened completely.

The RBI changed its policy stance to “neutral” from “withdrawal of accommodation” in FY24. The liquidity position however continued to remain tight, with banking system liquidity remaining in deficit for most part of the 2HFY25. The credit growth outstripped the deposit growth. Overnight and call money rates cooled 25bps in 4QFY25, due to aggressive open market operations carried out by the RBI.

Economic conditions

Overall FY25E GDP growth slowed down to ~6.2% as the effects of the low base of FY21 and FY22 tapered off and fiscal correction progressed further. The consensus estimates for FY26E GDP growth is slightly better at ~6.5%. Nominal GDP growth for FY25E has been materially lower at ~9.1%, and is expected to pick up to ~10.5% in FY26E.

·         CPI Inflation mostly remained within the RBI’s tolerance band of 4-6% (except for a short spike in October 2024). Core inflation eased below 4% in August and then February 2024.

·         Real rates have mostly remained in positive territory during FY24.

·         Fiscal deficit remained high despite moderation over the past few years.

·         The private sector investments failed to gather the desired pace, despite several government incentives. The government capex also slowed down in FY25. 9MFY25 investment to GDP ratio dropped to 32.6%. Private consumption recovered in FY25E from the sharp dip in FY24.

·         External conditions worsened during FY25. Merchandise trade balance deteriorated to USD292bn. Exports were lower yoy, while imports were higher by 6% yoy. External debt was higher by 10%. Net FDI flows continued to slow for the third consecutive year.

Commodities

FY25 was a mixed year for commodities. Precious metals (Gold +40%, Silver 39%) and Industrial metals (Zinc +17%, Copper +10%) recorded good gains, while energy (Brent Crude -17%, Coal -20%) and agri commodities (Wheat -16%, Soy -14%) ended the year with strong losses.

Crypto shine

Cryptocurrencies further strengthened their position with material rise in trading volumes and market capitalization. Bitcoin ended the year FY25 with a strong 21% yoy gain. More jurisdiction accepted cryptocurrencies as a valid medium of exchange, financial asset and/or tradeable asset.