India faces a noisy macro environment in 2026, but policy discipline and regime-led investing offer stability: Emkay Global Financial Services

• Sees FY27E CAD/GDP at 1.3% with BoP staying in deficit
• Expect budget to stay focused on fiscal consolidation withDebt/GDP as the new fiscal anchor; FY27BE FD/GDP target at 4.3%
• Gross tax/GDP to ease to ~11%; RBI dividend to remain strong at ~Rs2.9trn

Mumbai, January 29, 2026: According to Emkay Global Financial Services, 2026 is likely to unfold amid elevated global macro uncertainty, driven by geopolitical fragmentation, shifting trade alliances, volatile capital flows and changing policy frameworks. Traditional economic relationships between growth, inflation and interest rates have weakened, increasing volatility across asset classes and complicating investment decision-making.

For India, while structural growth drivers remain intact, near-term market performance is expected to be increasingly shaped by external dynamics such as global liquidity conditions, currency movements and geopolitical risks. Emkay Global highlighted that commodities—particularly precious metals—continue to benefit from ongoing currency debasement, while bond markets face pressure from rising supply and shifting central bank priorities.

Ms. Madhavi Arora, Chief Economist, Emkay Global Financial Services said, “The new year has begun on a noisy note, with interconnected risks amplifying one another and blurring signal from noise. This might unsettle the global investment order and complicate policy choices, even as this creates new macro-investing opportunities. We outline key themes, seeded in 2025, that are likely to dominate policy debates in 2026 and beyond, and highlight the least-cost policy prerogatives.”

Global economic disorders = Return of fertile macro investing regime

Geoeconomic fragmentation, policy–institutional frictions, and elevated macro uncertainty have distorted macro signals, breaking conventional correlations and traditional policy reaction functions. Paradoxically, this disorder sets the stage for a more fertile macro-investing regime—one that rewards identifying regime shifts over cyclical noise. Looking to 2026 and beyond, key themes stand out: 1) Higher growth+inflation volatility, implying higher rates and equity volatility+ higher term premia, 2)  Continued USD debasement without a credible FX anchor, keeping precious metals still the best trade, 3) Fiscal profligacy is here to stay, making monetary stance complicated, 4) Amid various push and pull (read volatility), net softer global inflation bias driven by weak demand-pull factors, K-shaped led weak labor dynamics and paradoxes around China’s escape from involution, and 5) Commodities normal upcycle (not Supercycle yet) to continue, led by supply constraint in base metals.

Global trade reorder and India – trade deal is not enough

Tariffs have had limited impact on global trade imbalances this cycle, underscoring corporate agility. Trade War 2.0 has seen China deploy a familiar playbook from 1.0—albeit more refined and better prepared. India, facing a disproportionate tariff hit, is showing early signs of market diversification, though largely at the cost of margins; meaningful product and supply-chain diversification remain elusive, per our assessment. Despite INR weakness, India can sustain J-curve gains only if i) trade diversion becomes embedded in sticky supply chains via scale in key sectoral verticals, ii) logistics/customs/port efficiencies, iii) restrained tariffs on capital and intermediates, iv) long-term FDI inflows, and v) two-way FX volatility. These factors will matter far more than tariffs over the medium term.

INR musings - searching for equilibrium around BoP, FX strategy and fair valuations

INR underperformance, largely commencing from failed US trade deal was followed by policy choices to let two-way FX volatility back in and let market forces lead. But massive anti-INR speculative bets and scale of capital account pressures have complicated the softer policy stance. And therein lies the real dilemma for an EM central banker: where exactly does one draw the line between tolerance and FX defence without complicating domestic and external vulnerabilities? While considering a suit of valuation metrics beyond REER to assess the medium-term outlook, we assess that REER dipping below sub-100 (currently 97) is neither necessary nor sufficient condition to argue INR is deeply undervalued. That said, near-term tailwinds for CAD could be tactically good for INR. However, weak ‘basic BoP balance’ needs attention ahead. We see FY27E CAD/GDP at 1.3% with BoP staying in deficit, albeit lowering from the highs of (-)$25bn+ in FY26E. USD/INR moves will be non-linear, ranging 87-95, while USD/CNY could head towards 6.70 or lower and DXY could lose another 10%.

India’s failing FX-FI loop – Fiscal-Monetary (mis)tango or dislocation?

The classic policy trade-off of FX (INR) and Fixed Income (India rates) not paying off. While domestic and global idiosyncrasies are limiting RBI’s intervention effectiveness for INR, the Indian rates market has turned a blind eye to the consistent liquidity infusion efforts and policy easing. We argue dislocation from current fundamentals is possibly a derivative of sub-optimal past policy choices. While RBI’s sizable unsterilized FX intervention in recent months has drained liquidity, past build-up of a heavy net dollar short position is weighing both on FX and FI. Historically, past easing cycles have ended with liquidity surplus well above 2% of NDTL vs current soft peg of 1%, while both RBI’s balance-sheet and reserve money growing only 4.4%/2% FYTD26, way lower than nominal GDP growth. We estimate additional primary liquidity injection of about Rs1.5trn over rest of FY26, totaling ~Rs16tn since Dec-24. However states fiscal trainwreck amid demand draught could imply bond bearishness may continue, even as the excessively steep yield curve flattens ahead. We see 10-yr yield ending FY26/27E at 6.50%/6.25%. RBI will have be the bond demand-supply balancing factor for better monetary transmission, especially as FY27 will likely see third consecutive BoP deficit ($15bn). We expect OMOs of ~Rs5tn in FY27E.

India Budget 2026 likely to stay focused on fiscal consolidation, with debt-to-GDP as the new anchor

Emkay Global expects India’s FY27 Union Budget to continue on the path of calibrated fiscal consolidation, with the government shifting its fiscal anchor to debt-to-GDP. It believes that Budget 2026 will aim to strike a fine balance between fiscal prudence, growth support and reform continuity, while keeping India’s medium-term macro stability intact.

According to Emkay Global a mixed macro picture, missing vigor in private capex, global noises, and volatility in risk assets form the backdrop of the FY27 Budget. Though economic trade-offs stay challenging, the consolidation will continue, albeit at a mild pace. With the shift toward debt/GDP as a fiscal anchor, FY27 GFD/GDP will be targeted at 4.3%. Ex-interest revex/GDP may fall further to 6.9%, while capex/GDP may turn sticky at ~3%. Amid low tax buoyancy, gross tax budgeted growth is likely to be ~8.2%, with gross tax/GDP easing to sub-11%. RBI dividend may stay solid, while it expect no new big sweeteners on taxes. The policy focus will be on raising productivity dynamics of factors of production, deregulation, and sectoral ease of doing business. Net borrowing (Rs11.5trn) will be lower than in FY25, with small savings likely to fund ~20% of GFD. Policy focus may move to re-establishing consolidated debt/GDP as the anchor. It maintains that boosting asset sales (via functional infra monetization, disinvestment, and strategic sales) and better resource allocation are the least growth-impinging ways of fiscal consolidation.

“While the macro backdrop remains challenging, fiscal consolidation is likely to continue at a measured pace. The shift towards debt-to-GDP as the anchor signals the government’s intent to prioritise medium-term debt sustainability without compromising growth. The policy challenge lies in simultaneously pursuing fiscal consolidation while maintaining a healthy expenditure-to-GDP ratio, with higher revenue spending and sustained capex, amid global and domestic growth uncertainties and tighter financial conditions. This requires maximizing fiscal impulse to support potential growth and vulnerable segments, finding an optimal fiscal deficit path to ensure medium-term debt sustainability, and advancing reforms through better resource allocation and innovative funding avenues such as infrastructure monetisation, disinvestment, and strategic asset sales.,” Madhavi Arora, Chief Economist at Emkay Global Financial Services, added.

Emkay Global notes that Macro stability is likely to remain the government’s primary Budget focus, with a mild consolidation of the fiscal deficit alongside continued reform momentum. Key measures to watch include targeted support for MSMEs and export-oriented sectors, especially labour-intensive industries, enhanced PLI schemes across new-age and manufacturing sectors, correction of inverted duty structures, and regulatory easing through IBC amendments and decriminalisation of business norms. The Budget may also offer tax and capex incentives to spur manufacturing investments, explore new infrastructure financing avenues such as InvITs and REITs, and address Centre–state fiscal dynamics, with the 16th Finance Commission’s recommendations on tax devolution and the fiscal glide path in focus.
 

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