India Perspectives - India in 2026: Resilience, contradictions, and the path to returns

Highlights: After a roller-coaster ride in 2025, we expect India’s GDP growth to be robust in 2026 aided by domestic resilience, disciplined government spending and potential for a trade deal with the US. We are bullish on Indian local currency bonds as we expect easy financial conditions and favourable technicals to drive yields lower. We expect the INR to stabilise before eventually appreciating modestly versus the USD over the next few quarters. However, we are neutral on Indian equities given still elevated valuations, modest earnings growth and mixed technicals.

• Looking forward to 2026, it is hard to miss the contradictory signals from various indicators – while GDP growth has surprised on the upside, consumption remains strong and inflation is at multi-year lows, the INR is at its weakest levels versus the dollar, exports are slowing down, and Indian equity market has underperformed regional peers by the widest margin in a decade
• We see limited room for further RBI rate cuts despite the subdued inflation outlook. However, we expect the RBI to maintain sufficient liquidity and loose monetary policy to support growth
• We are neutral on Indian equities. Strong GDP growth, robust domestic investor flows, an expected uptick in earnings growth and the potential for US-India trade deal are supportive factors. However, elevated valuations, the risk of a downgrade of consensus earnings expectations and muted foreign investor flows due to limited exposure to the AI theme remain key headwinds We retain our preference for large-cap stocks. We favour domestically-oriented sectors and are overweight consumer discretionary, financials and industrials
• We are bullish on Indian local currency bonds. Despite the RBI rate cuts, the longer-maturity bonds continue to offer attractive absolute and relative yield and offer diversification benefit due to their low correlation with global bonds. We expect technicals to remain supportive and any changes in upcoming review of inflation targeting framework could pave way for structurally lower yields. We are neutral on the INR and expect USD/INR to edge towards 87.5 by mid-2026