The year that saw wild swings in
global financial markets— defence stocks riding over geopolitical tensions, AI
mania; gold hitting record highs as investors searched for safety beyond the
dollar, silver’s competing sprint; and bond markets, crypto craziness, and
greedy carry-trades that saw wild gains and spectacular wipeouts amid shifting
political tensions— has come to an end.
American stock markets were at an
all-time high—the stock market index reached a record high of 6952.84 in
December 2025. Conversely, the Indian equity market declined in the first
quarter of 2025, owing to record selling by Foreign Institutional Investors
amounting to over Rs 1 lakh crore. This trend did not reverse as they remained
net sellers of Indian equities throughout the year. Indeed, they sold equities
worth Rs 1.6 lakh crore over the course of the year. One reason cited for such
a sell-off by FIIs was the high price-to-earnings ratio of Indian equities,
which is considered as one of the most expensive in the world.
Country-specific tariffs unveiled
by the US have created substantial trade tensions. After hectic negotiations,
tariffs have, of course, substantially receded from their highs in the case of
the European Union and some other countries, such as Vietnam, Indonesia, etc.,
while China and India are still bearing the brunt. In fact, Indian businesses
in copper, steel, aluminium, automobiles, gems and jewellery, textiles, and
marine products are reeling under the 50% tariff imposed by the US on their
exports. According to the Commerce
Ministry, shipments to the US dropped by 15% during the second quarter of
2025-26. Persistent trade barriers and a fragile global environment are bound
to hurt not only India’s exports but also private investment and employment
generation.
Amid this turbulent global
scenario, it is heartening to note that the Indian economy continues to grow
strongly, driven by robust domestic demand. Yet, the financial system, as the
RBI observed, is likely to face near-term risks such as “increased exchange
rate volatility, dampened trade, reduced corporate earnings, lower foreign
investment and tightened financial conditions” owing to the spill overs from
external uncertainties. However, the outlook for growth will become clearer
once the tariff negotiations with the US come to a logical conclusion.
As international trade has become
more fragmented and politicised, Indian exporters are now diversifying exports
to markets outside the US, which rose by 5.5% between May and November 2025.
The already signed Comprehensive Economic and Trade Agreement with the UK shall
further support this attempt in 2026. Indeed, the government is actively
negotiating free trade agreements with various countries to secure predictable
and reasonable trade terms.
The recently concluded
negotiations with New Zealand on a free trade agreement that emphasises
services and labour mobility, areas in which India enjoys a comparative
advantage, are expected to aid growth in 2026. The trade deal with the European
Union, which is at an advanced stage of negotiations, is likely to come into
force in the new year. Similarly, talks
with the US on a bilateral agreement on tariffs are expected to come to a
logical end in 2026. Thus, the Indian economy appears well-positioned to weather
the shocks of 2025.
The real challenge now is to
ensure that the FTAs work to drive export growth. This obviously calls for
strengthening domestic production capacity by developing robust component
ecosystems and better design and tooling processes. In short, we must move beyond
the assembly stage to build manufacturing capacities.
Encouragingly, inflation, despite
the rupee depreciating sharply, remained well below the targeted rate of the
Reserve Bank. Thus, the growth-inflation trade-off remaining mild, a low-interest-rate
scenario is likely to continue. This will help corporations exhibit improved
performance. Once the corporate earnings become visible, FIIs are likely to
return in the new year. The rupee, having already adjusted to the US tariffs,
should stabilise with the return of FIIs in 2026.
The growing wave of
anti-Indian sentiment on US social media and the heightened scrutiny of H-1B
visas pose mobility risks for Indian tech talent. However, investments
committed recently by companies such as Google, Meta, Microsoft, and Amazon,
totalling US $ 67.58 bn to establish data centres in India, and the growing
interest of multinationals in establishing GCCs – 110 new centres by late 2025
– offer counterbalancing employment opportunities for technical personnel in
the country.
That aside, RBI affirms that
“strong domestic growth drivers, sizable foreign exchange reserves, and
adequate capital and liquidity buffers across the financial system and
corporate sector should help the economy withstand adverse shocks.” Thus, 2026
promises accelerated growth through resilient policies and investments – a
positive divergence from 2025. Nevertheless,
challenges remain.
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