<h2><strong>Political & Policy Issues to Watch</strong></h2>.<h4><em><strong>The fallout of the Bengal and TN results continues to spread… </strong></em></h4><p>Several weeks after results were declared, the political fallout of recent Assembly polls in Tamil Nadu and West Bengal continues to spread. In particular, the DMK and TMC’s poor showing has sent the already-shaky INDIA grouping into a tailspin. The DMK has already announced its formal exit, mainly owing to the INC’s decision to back the TVK coalition, while the TMC appears to be rapidly fracturing. With over a month to go for the start of the Monsoon Session, this could create space for the Central government to more aggressively push through legislative changes in Parliament, possibly including a renewed push on its failed delimitation-cum-women’s-reservations agenda. Meanwhile, with India buffeted by pressures arising from a widening CAD, a falling rupee and large FPI outflows, the government has been in damage-control mode. The recent scrapping of capital gains and withholding taxes on FPI investments in government securities, is the latest such measure.</p>.<h4><em><strong>Months of overseas parlaying - bearing fruit?</strong></em></h4><p>Diplomatically, India remains in overdrive. PM Modi’s whirlwind 5-country tour yielded $5 bn worth of deals (mostly around energy security) with the UAE; an ‘upgradation’ of ties with Sweden and Norway to ‘strategic partnerships’ (and with Italy to a ‘special strategic partnership’); and a host of agreements, including on semiconductors and water, with the Netherlands. A Quad foreign ministers’ summit in Delhi laid the ground for an upcoming leaders’ summit as well as for the first Narendra Modi-Donald Trump meeting since early 2025, at a mid-June G7 meeting in France. This could get the ball rolling on the ‘missing 1%’ in the supposedly ‘99% done’ US-India trade deal.. </p>.<h2><strong>Outlook for the Market</strong></h2>.<h4><em><strong>The economy grew strongly in FY26</strong></em></h4><p>At 7.7%, GDP growth in FY26 came in slightly above the government’s February estimate of 7.6%. Making this possible was a robust Q4 (7.8%), together with revisions to the Q1-Q3 numbers, mostly on the upside. Barring agriculture (3%, down from 4.2% in FY25) and mining (5.2%, compared to an unsustainable 11.7% the previous year), growth accelerated across most sectors, including manufacturing (10.7%), construction (7.4%) and especially services (9.3%). Private consumption (7.7%, up from 5.8%) picked up pace, as did capital formation (8.2%, up from 6.4%), with the public sector doing the heavy lifting in the latter case.</p>.<h4><em><strong>The FY27 outlook is markedly weaker…</strong></em></h4><p>Two months into the new fiscal, while the lead indicators remain, for the most part, strong, a mix of difficult external conditions and the high likelihood of a poor monsoon weigh heavily on the growth outlook. The May PMI index for Services (59.8, up 100 bps over the previous month) has held steady but that for Manufacturing (55, up from 54.7 in April) is currently (and for several months, consistently) ~3-3.5 pp below its late-2025 peak. Even as car and 2-wheeler sales (the former up 20% in May, and the latter by 7.4%) continue to grow above trend – the result of last year’s GST rate cuts – this suggests a cooling outlook for manufacturing growth. GST e-Way bill issuances rose by a healthy 11.8% in April, but, compared to the ~20% monthly average seen in FY25, below trend. (Subsequent months’ data should give a better sense of whether this was a blip or an early warning signal.) Conversely, exports and imports both jumped in April, by 13.8% and 10%, respectively, with non-oil trade rising even faster. Yet the sustainability of these numbers is in question, given the tough external conditions.</p> <p><em><strong>…and a slew of risk factors are at play</strong></em></p><p>Pulled down by a widening CAD (which could breach 2% of GDP this year) and continued FPI outflows (-$14.6 bn in the fiscal YTD), and despite several rounds of intervention by the RBI, the Indian currency remains at or below 96/$ levels. This, high oil prices and a poor outlook for monsoon rainfall (currently estimated at ~90% of the long-period average) will keep inflation on an upward trajectory. CPI inflation was a manageable 3.5% in April but worrying, WPI inflation (which is soon due for a series upgrade) hit a 42-month-high of 8.3%. As second-order effects play out across the economy, this is likely to take retail inflation close to the 5% mark later this year. The RBI, which again held off on a policy change in its June meeting, and could pause again in August, may eye a rate hike in October.</p>
<h2><strong>Political & Policy Issues to Watch</strong></h2>.<h4><em><strong>The fallout of the Bengal and TN results continues to spread… </strong></em></h4><p>Several weeks after results were declared, the political fallout of recent Assembly polls in Tamil Nadu and West Bengal continues to spread. In particular, the DMK and TMC’s poor showing has sent the already-shaky INDIA grouping into a tailspin. The DMK has already announced its formal exit, mainly owing to the INC’s decision to back the TVK coalition, while the TMC appears to be rapidly fracturing. With over a month to go for the start of the Monsoon Session, this could create space for the Central government to more aggressively push through legislative changes in Parliament, possibly including a renewed push on its failed delimitation-cum-women’s-reservations agenda. Meanwhile, with India buffeted by pressures arising from a widening CAD, a falling rupee and large FPI outflows, the government has been in damage-control mode. The recent scrapping of capital gains and withholding taxes on FPI investments in government securities, is the latest such measure.</p>.<h4><em><strong>Months of overseas parlaying - bearing fruit?</strong></em></h4><p>Diplomatically, India remains in overdrive. PM Modi’s whirlwind 5-country tour yielded $5 bn worth of deals (mostly around energy security) with the UAE; an ‘upgradation’ of ties with Sweden and Norway to ‘strategic partnerships’ (and with Italy to a ‘special strategic partnership’); and a host of agreements, including on semiconductors and water, with the Netherlands. A Quad foreign ministers’ summit in Delhi laid the ground for an upcoming leaders’ summit as well as for the first Narendra Modi-Donald Trump meeting since early 2025, at a mid-June G7 meeting in France. This could get the ball rolling on the ‘missing 1%’ in the supposedly ‘99% done’ US-India trade deal.. </p>.<h2><strong>Outlook for the Market</strong></h2>.<h4><em><strong>The economy grew strongly in FY26</strong></em></h4><p>At 7.7%, GDP growth in FY26 came in slightly above the government’s February estimate of 7.6%. Making this possible was a robust Q4 (7.8%), together with revisions to the Q1-Q3 numbers, mostly on the upside. Barring agriculture (3%, down from 4.2% in FY25) and mining (5.2%, compared to an unsustainable 11.7% the previous year), growth accelerated across most sectors, including manufacturing (10.7%), construction (7.4%) and especially services (9.3%). Private consumption (7.7%, up from 5.8%) picked up pace, as did capital formation (8.2%, up from 6.4%), with the public sector doing the heavy lifting in the latter case.</p>.<h4><em><strong>The FY27 outlook is markedly weaker…</strong></em></h4><p>Two months into the new fiscal, while the lead indicators remain, for the most part, strong, a mix of difficult external conditions and the high likelihood of a poor monsoon weigh heavily on the growth outlook. The May PMI index for Services (59.8, up 100 bps over the previous month) has held steady but that for Manufacturing (55, up from 54.7 in April) is currently (and for several months, consistently) ~3-3.5 pp below its late-2025 peak. Even as car and 2-wheeler sales (the former up 20% in May, and the latter by 7.4%) continue to grow above trend – the result of last year’s GST rate cuts – this suggests a cooling outlook for manufacturing growth. GST e-Way bill issuances rose by a healthy 11.8% in April, but, compared to the ~20% monthly average seen in FY25, below trend. (Subsequent months’ data should give a better sense of whether this was a blip or an early warning signal.) Conversely, exports and imports both jumped in April, by 13.8% and 10%, respectively, with non-oil trade rising even faster. Yet the sustainability of these numbers is in question, given the tough external conditions.</p> <p><em><strong>…and a slew of risk factors are at play</strong></em></p><p>Pulled down by a widening CAD (which could breach 2% of GDP this year) and continued FPI outflows (-$14.6 bn in the fiscal YTD), and despite several rounds of intervention by the RBI, the Indian currency remains at or below 96/$ levels. This, high oil prices and a poor outlook for monsoon rainfall (currently estimated at ~90% of the long-period average) will keep inflation on an upward trajectory. CPI inflation was a manageable 3.5% in April but worrying, WPI inflation (which is soon due for a series upgrade) hit a 42-month-high of 8.3%. As second-order effects play out across the economy, this is likely to take retail inflation close to the 5% mark later this year. The RBI, which again held off on a policy change in its June meeting, and could pause again in August, may eye a rate hike in October.</p>
