February 2026 unfolded against a backdrop of heightened global macroeconomic uncertainty. Escalating geopolitical tensions disrupted global risk pricing, energy shocks triggered a repricing of inflation expectations and safe-haven flows strengthened the US dollar. Simultaneously, developed market rate expectations were recalibrated upward. Although peak US tariff rates observed in July 2025 (ranging between 35% and 64%) have moderated, most effective tariff bands continue to remain elevated at 15%–18%, sustaining pressure on global trade flows.
Indian equities have struggled since September 2024. In 2025, India ranked as the fifth worst-performing market among 24 emerging market (EM) economies, reflecting valuation compression, earnings downgrades and persistent FPI outflows amid global capital reallocation.
Global Backdrop: Resilient Growth, Elevated Yields
Developed markets continue to demonstrate relative resilience, maintaining a pro-growth orientation despite global turmoil. US Treasury yields remain elevated, with forward curves indicating expectations of sustained higher rates, even as the fiscal deficit expands beyond 6% of GDP. The US economy remains supported by a stable labour market and robust consumption trends, despite inflation proving stickier than anticipated.
In India, consumption has expanded consistently over the past six quarters and currently contributes growth at approximately 8%, remaining the primary driver of economic expansion. However, global headwinds and policy uncertainties continue to cast a shadow over medium-term outlooks.
Crude Oil Sensitivity and Macroeconomic Spillovers
India’s structural dependence on crude oil remains a critical macro risk. A sustained $10 per barrel increase in crude prices could widen the current account deficit (CAD) by 0.3–0.4% of GDP. The INR has emerged as the weakest-performing Asian currency year-to-date, largely due to crude-linked outflows and pressure on trade balances.
If crude remains elevated:
- Inflationary pressures are likely to intensify.
- Risk appetite toward EM assets could weaken as domestic savings rates compress.
- Precious metals and commodities may continue to outperform amid a “flight to safety.”
- Potential geopolitical instability in the UAE may slow foreign remittances, exerting additional pressure on the INR.
- Nifty 50 valuations may witness further derating.
Within the 8 core energy sectors, crude oil and natural gas remain negatively impacted, largely owing to the price volatility.
Domestic Macro: Manufacturing-Led Recovery
India’s nominal GDP outlook remains constructive, supported by accommodative fiscal and monetary positioning and partial tariff normalization.
Industrial activity has shown meaningful improvement:
- IIP (December 2025): 7.8% YoY growth — fastest pace in over two years.
- Sharp recovery from 0.4% growth in October 2025.
- Acceleration from revised 7.2% in November 2025.
- Manufacturing growth at 8.1%, driven by:
- Computer, electronic and optical products
- Automobile production
- Improved domestic demand conditions
PMI indicators remain expansionary, underscoring resilience in manufacturing momentum. The Union Budget has emphasized fiscal consolidation through a targeted reduction in the debt-to-GDP ratio, aiming to balance growth support with macro stability.
Market Technicals and Volatility
The India VIX reflected a temporary decline following the geopolitical shock; however, options positioning indicates elevated downside hedging, particularly in out-of-the-money (OTM) puts. This skew suggests continued caution among institutional participants.
Commodities: Gold and Silver Dynamics
Gold and silver funds have attracted substantial inflows over the past year, serving as safe-haven assets amid macro volatility. However, selective equity opportunities may gradually divert flows back toward riskier assets.
Silver corrected more than 16% over the past month, largely due to aggressive speculative long positioning unwinding. Despite the recent correction, it remains up over 140% on a YoY basis. Softer Chinese demand — particularly amid tariff-related manufacturing slowdowns — has contributed to near-term weakness.
Unless tariff normalization accelerates:
- Margin compression risks persist.
- Price pass-through attempts may intensify.
- Export diversion away from the US may accelerate, especially in labour-intensive sectors such as textiles, garments, leather and gems.
SMID Segment: Valuation Risks
Small and mid-cap (SMID) stocks have experienced aggressive rerating over recent years. While index-level corrections appear moderate, stock-level drawdowns have been significantly more severe.
Despite recent normalization, the 5-year returns and valuations of Nifty 500 and SMID indices remain in the 70th–90th percentile of their historical range. Structural business model recalibrations in response to trade uncertainty and funding costs continue to pressure this segment. The sector has not yet entered an “attractive” valuation zone from a risk-adjusted perspective.
Factor Leadership and Portfolio Positioning
Return on Equity (ROE) remains the dominant valuation driver in Indian markets. However, dispersion between high-quality franchises and low-quality speculative names has widened. Investors prioritizing sustainable growth over deep value are likely to benefit from disciplined quality screens.
Strategic Outlook
Given elevated macro volatility, geopolitical uncertainties, currency sensitivity to crude and extended valuations in SMIDs, multi-asset strategies with tactical flexibility appear prudent. Allocation frameworks that dynamically rebalance across equities, commodities, fixed income and cash may offer superior risk-adjusted outcomes in the current regime.
In summary, while domestic manufacturing recovery and fiscal discipline provide structural support, global macro crosscurrents and valuation excesses necessitate caution. Tactical agility and quality bias remain central themes for portfolio construction in the evolving 2026 landscape.
