By Jitendra Gohil
On several occasions, India has faced economic, political, and strategic challenges while striving to protect its strategic autonomy and remain truly sovereign.
This time is no different. India was leading efforts to sign a trade deal with the US, but instead, the US imposed sanctions, visa restrictions, and punitive 50% tariffs on Indian imports—among the highest globally—for buying Russian oil.
Adding to tensions, remarks like “we will destroy your economy” by a US senator close to Donald Trump rattled nerves. Although the US views India as a counterbalance to China and a strategic partner, it excluded India from the Pax-Silica initiative, aimed at countering China’s grip on critical minerals and semiconductor supply chains, despite India’s role in QUAD’s mineral initiatives. Consequently, foreign portfolio investors (FPIs) withdrew a staggering Rs 2.4 lakh crore from Indian secondary market equities in 2025, driving foreign holdings to a 15-year low of about 16.6%.
In contrast, 2025 was a stellar year for emerging markets, with the MSCI EM Index delivering 35% returns in dollar terms and the MSCI All Country Index 23%. Despite India’s strong economic growth and record-low inflation — often termed “goldilocks”— 2025 was a dud squib for Indian financial assets. The MSCI India Index significantly underperformed with just 2% dollar returns, and the rupee became one of the worst-performing major currencies.
Most paradoxically, 10-year benchmark yields remained largely flat despite aggressive repo rate cut of 125 bps and CRR cuts by the RBI. This disconnect underscores a harsh reality: Macroeconomic stability does not guarantee stock market returns when geopolitics overrides fundamentals.
The year 2026 appears more challenging amid global headwinds. Countries are ramping up defence spending as trust in US security guarantees fades. Trump has vowed to resume nuclear testing and renamed the Department of Defense to the Department of War, with a defence budget proposed over $1 trillion, up 13.4%. The IMF warns global sovereign debt is reaching unsustainable levels, yet austerity remains absent. According to the IMF, global government debt will rise, with the US alone issuing about $3-trillion additional debt to fund its deficit in 2026. A major risk global equity markets seem to ignore is the sharp rise in sovereign bond yields across developed markets, including Japan.
For India, Operation Sindoor isn’t officially over, and neighbourly hostilities are at their peak while the Modi government grapples with youth unemployment, household financial savings being 40-year low, rising disparity, declining job quality, weak net FDI flows, and upcoming state elections in opposition-led states like West Bengal, Kerala, and Tamil Nadu.
Amid this chaos, the silver lining is India’s remarkable political and financial stability, making it the right time for the government to push bold reforms. The reform momentum accelerated in 2025 with eased labour laws, rollback of 80 quality control orders, tax cuts, GST rationalisation, relaxed mining regulations, and opening of nuclear and defence sectors to private players.
As 2026 begins, foreign investors still hold large short positions on Indian equities, yet most analysts expect a bullish outcome, driven by mid-teen earnings growth and strong corporate balance sheets with world-class ROEs and multi-decade low leverage. The urgent need is to channel corporate cash hoards into productive use; the onus lies on the government to reform, revive animal spirits, and lift the nominal GDP growth to above 12%. Otherwise, 2026 could be another damp squib for Indian assets.