Nifty ended October with the biggest monthly gain of ~4.5% (since Mar’25) amidst hopes of a possible India-US trade deal, overall healthy 2Q earnings releases, dovish FOMC bets and newsflow surrounding a potential increase in FII limits for PSU Banks. Realty, Telecom and IT indices outperformed while Auto, FMCG and Pharma indices were underperformers. Small-caps were up +4.6%, Midcaps were up 5.8% as the broader markets did well on the back of strong commentary on festive demand.

Key developments during the month: (1) IMF Forecasts India’s GDP to Expand 6.6% in FY26, Surpassing China’s Growth (2) India announced Rs700 bn for Maritime sector revival (3) Government Unveils Rs6.4trn Plan to Build 31,000 km Grid, Boost Hydropower from North-East (4) India Adds Record 34.4 GW of Solar and Wind Capacity in First Nine Months of 2025.

High-frequency data  High-frequency growth has exhibited nascent signs of picking up during the festive season. GST collections (activity in Sept) edged up to INR 1.96tn in October, while the growth rate softened to 4.6%YoY vs 9.1% in September. However, adjusted for the monthly revenue foregone due to GST rate cuts, the growth rate is higher at a robust~10%YoY. Manufacturing PMI edged up to 59.2 in October, vs 57.7 in September, while Services PMI edged down to 58.9 in October from 60.9 last month, as festive-related holidays impacted output. Credit growth picked up to 11.5% YoY in October, the highest since Nov-24, from 10.4% in September. The central govt capital spending has been front-loaded in FH126, as it touched INR 5.8tn (51.8% of the budgeted target), growing by 40% YoY. Vehicle registrations (proxy for retail sales) saw a healthy acceleration of ~25% across both two-wheelers and passenger vehicles in the festive period, relative to last year while enquiries and bookings also were strong. As per data from Confederation of All India Traders (CAIT), the retail sales during Diwali surged 25%YoY to INR 6.05tn, with INR 5.4tn in goods and the balance being spent towards services. Similarly, as per Unicommerce, thee-commerce industry recorded a 24%YoY uptick in order volumes in festive season-related spending.

Outlook

The global markets are largely expected to maintain strength as macros on aggregate demand, labour market and inflation continue to display resilience. While the AI trade appears over-extended in the short run, it seems far from having run its course and strong spending and investment trends therein and resultant productivity benefits over time are likely to drive overall economic resilience. Additionally, recent thawing of relations between US-China on trade is likely to be growth supportive. 

For India, the 2QFY26 earnings have generally been in line, with the intensity of earnings cuts moderating. Although Indian equities have registered a lacklustre performance over the past one year, performance relative to other developed and emerging markets is beginning to see some signs of stability. The earnings cycle seems like bottoming out, with some street estimates even indicating at possible upgrades for FY26/27 Nifty earnings based on 2QFY26 results. This brightens the prospects for growth to accelerate into double digits by the end of FY26. A more pronounced earnings acceleration may likely get deferred starting early part of FY27. While valuations are reasonable, with the Nifty trading at 21.4x, near its LPA of 20.8x, earnings alone may not be sufficient for valuation expansion. Continuity of recent strength in consumption post the festive season, resolution on the tariff stalemate and a moderation of the global AI trade will be required to drive a meaningful expansion to valuations from current levels.

Meanwhile India will have to continue to exert its domestic levers and unleash new generation reforms as a response to an increasingly fractured global economy. We see pockets such as consumption, banking, healthcare, power and parts of manufacturing offering better growth opportunities in the present environment. We believe high-conviction, bottom-up orientation of strategies will likely yield better results in the present economic scenario. While small and midcaps trade at expensive valuations, we continue to focus on this segment given their superior growth characteristics, selectively picking high-conviction Small and Mid-cap stocks for our portfolios.

US’s Treasury yields rallied during the month and 10 year treasury yield dipped below 4% in anticipation of FOMC’s rate cut & also as private credit concerns surfaced. Even as FOMC delivered the second consecutive 25 bps rate cut of CY2025, yields inched up by ~10 bps post policy as FOMC’s Chairman stuck a hawkish tone by saying that a further reduction in December meeting is not a foregone conclusion. Domestic G-Sec yields remained volatile with a downward bias as market participants awaited 1st Oct MPC amidst low inflation and high global uncertainty. Corporate bonds outperformed the G-Sec on healthy demand at elevated yields.

Outlook

Global backdrop remains volatile and fast-evolving. Few countries have reached a more favorable tariff policy with US while many others including India are still in the works. US Government shutdown has obstructed the critical data supply especially on jobs market. FOMC delivered its second consecutive rate cut but turned hawkish for December policy guidance as it assesses the evolving inflation and jobs market data. Dollar index has hardened sharply, crossing 100 mark, reflecting currency pressure on trading partners.

On the domestic front, MPC finally delivered a dovish pause in its October policy, after remaining hawkish in the previous two policies which had weighed heavily on market sentiments. Inflation projections were further revised lower for FY26 and growth concerns highlighted for 2HFY26 amidst higher US’s tariffs. As of now, inflation is expected to come even lower, supported by healthy monsoon and GST rate cuts. Against this backdrop of well contained inflation and below potential growth, we expect a 25bps policy rate cut in FY26, timing of which may depend on the weakening of growth momentum.

RBI has increased its Fx intervention in order to reduce INR volatility which has resulted in large INR liquidity withdrawal of more than Rs 3.5 lc cr of liquidity in FY26, of which ~Rs 2.0 lac cr has been drained in October alone. Even as RBI has resorted to Fx swaps to avoid excessive INR liquidity squeeze, given the large Forward Fx book and seasonal currency leakage in 2HFY, there is a likelihood that RBI may have to undertake Open Market Purchase Operations (OMOs) of G-Sec in order to provide adequate core liquidity – a positive trigger for G-Sec rally. In the past, RBI’s OMO purchase of G-Sec has been largely concentrated in 5-15 yr tenor.

On the fiscal front, even as there has been a tax revenue shortfall so far, Central Govt is largely expected to meet its fiscal deficit target for FY26 by active expenditure management in 2HFY26. In line 2HFY26 dated G-Sec borrowing calendar validates that. SDL calendar for 3QFY26 also came much lower at Rs 2.8 lac cr against the market expectations of ~Rs 3.2 lac cr and further adds comfort. With the fiscal clarity and lower supply, we believe demand – supply dynamics for G-Sec will remain favorable in 2HFY26, especially in 5-15 year tenor space as we expect banks to shore up buying after remaining subdued in 1HFY26.

Market sentiment had turned negative after the June policy when RBI had delivered a hawkish cut and further worsened by fiscal concerns. While the recent fiscal clarity and RBI’s dovish October policy has provided support, absolute yields continue to remain elevated. For instance, current 10 yr G-Sec (old benchmark) yield is at ~6.52%, similar to the levels before October MPC. Current elevated yields and the running inflation at ~1.5% provides a favorable risk reward for investors. Having said that, as we come to the last leg of the rate cut cycle, it is important to re-align the return expectations from fixed income strategies as capital gain opportunities may be limited.

The corporate bond spreads in the 1 to 5 years segment are elevated, offering an attractive investment opportunity from accrual perspective. Additionally, the steepness in 5 to 10 years segment of the G-sec yield curve presents a value buy opportunity on the back of favorable demand–supply dynamics and likelihood of OMO in second half of FY26.

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