SBICAPS EcoCAPSule Feb'26 : Growth To Shine As The Horizon Is Cleared Of Global Clouds

Executive Summary

Historic trade deals signed with the USA and EU set to put India at a comparative advantage vis-à-vis peers India was amongst the countries left with the highest tariffs (50%) imposed by the US relative to other emerging markets towards the end of CY25. Come CY26, and things turned a leaf as India not only signed a deal with the US, but also the EU. The US deal promises 18% tariffs on most items, with a removal of the punitive levy of 25% which had been imposed due to Russian oil imports. Multiple sectors, including textiles, leather, plastic, rubber, organic chemicals, seafood etc. are expected to benefit from the move, with duty free access for nearly half of India's exports to the US market. While an overall positive for the economy, the impact of the deal on cost of the Indian energy import basket, besides the impact of items in Section 232 (mainly metals), is yet to be fully felt

Currency concerns diminish, affording RBI an opportunity to rebuild its toolkit

The INR responded to the news of the deal by quickly appreciating from historic lows. Foreign investors too reposed their confidence in the Indian equity markets, pumping in USD 1.3 bn in MTDFeb'26 as against over USD 6 bn withdrawn in 10MFY26. These factors mean that the pressure on the external front stands diminished, allowing the RBI to shore up any forex it had spent to prop up the INR in the past. Importantly, it keeps the option of doing swaps to help domestic INR liquidity open.

Union Budget seeks to manufacture growth, filling in gaps left by previous Budgets

The Union Budget recognised that further measures were needed to boost the manufacturing segment, which has shown greenshoots in the previous few quarters. Towards this, initiatives were mooted in sectors such as bio-pharma. Further, after a lull period, capex allocations to both Roads and Railways saw a healthy boost in FY27BE (vs. FY26RE). The effective capex has grown at a sharper pace vs. Union capex, indicating that while the Union is willing to shoulder the responsibility of the core sectors, it expects the States and private bodies to shoulder the burden of capex in other sectors.

Fiscal headroom is now reducing as government chalks out hefty borrowing programme

The Union managed is likely to reach its fiscal deficit target in FY26, and a modest improvement is pencilled in for FY27. However, this itself may be hard to achieve. Tax revenue projections appear rosy in light of muted nominal GDP growth expectations and GST collections will be impacted by rate rationalisation. On the expenditure side, budgeting for subsidies and pensions seems to be on the lower side, and an overshoot could prompt revision in revex figures. In any case, the government has outlined a monumental Rs. 17.2 trn gross borrowing programme. FY27 could see a greater dependence on shorter tenor borrowing by the Union as indicated by increased T-bill outstanding projected, to take advantage of the steep yield curve.

Yields firm up as RBI salutes the status quo on rates and remains fluid on liquidity

A combination of high Union borrowing plan, expectation of hefty borrowing by States with large States such as TN, Gujarat, West Bengal and Kerala approaching election year, and a stiff upper lip on policy & liquidity exhibited by the RBI has created upward pressure on yields. 10Y benchmark Union G-sec yields are up ~25 bps between the Dec'25 and now despite a cut in the Dec'25 policy. Easier liquidity has meant that lower tenor yields have tanked below the repo, creating a steep yield curve. Going forward, it is expected that the RBI will carefully modulate liquidity, using two-sided operations.

Source : Equity Bulls

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SBICapitalMarkets SBICAPS EcoCAPSule February2026