Summary
Global growth is expected to moderate in 2026 despite rising fiscal deficits across major economies. While central banks have maintained accommodative policies in recent years, their policy flexibility may narrow going forward as debt burdens rise. Rising unemployment, flattening global consumption, and potential unwinding of the yen carry trade present new macro risks. However, India remains among the faster-growing large economies alongside select Asian peers.
Domestically, the Union Budget continues the government’s long-term strategy of infrastructure and manufacturing expansion while gradually improving fiscal discipline. Increased capital expenditure and structural policy reforms could support India’s medium-term growth trajectory if execution remains strong.
Global Macro Environment
Global growth is expected to slow in 2026 relative to both last year and long-term averages, even as fiscal deficits remain elevated. Central banks pursued relatively easy monetary policy during 2024–2025, but their room for further easing may narrow due to growing debt burdens and inflation considerations.
At the same time:
- Global unemployment has begun rising across both developed and emerging markets
- Consumption growth has flattened globally and declined in some emerging economies
- Investor cash allocations remain historically low, indicating high market optimism despite emerging macro risks
These factors create a backdrop of elevated market confidence despite weakening macro indicators.
Yen Carry Trade Risk
Japanese 10-year bond yields have reached multi-decade highs. For decades, Japan served as a major provider of global liquidity through the yen carry trade, where investors borrowed cheaply in yen to invest in higher-yielding assets globally.
If rising Japanese yields trigger unwinding of these trades:
- Global liquidity could tighten
- Certain asset classes may face capital outflows
However, India’s equity and bond markets appear to have limited exposure to yen carry trade flows, suggesting the impact may be relatively modest.
China: Growth with Overcapacity
China has demonstrated extraordinary industrial expansion, particularly in electric vehicles and power infrastructure.
Key highlights:
- EV sales in China reached ~15 million vehicles last year, exceeding total automobile sales in the US
- In the past four years, China added power generation capacity equivalent to the entire US capacity
- In a single year, China added power capacity comparable to India’s entire installed base
However, rapid capacity creation has led to declining capacity utilization and falling private investment.
To counter this slowdown:
- The Chinese government is increasing fiscal stimulus
- Debt issuance—particularly long-duration bonds—has increased significantly
Despite large-scale economic growth, Chinese equity markets have historically been volatile, experiencing multiple cycles of sharp gains and declines. A potential correction in Chinese markets could redirect capital flows toward India.
United States: Growth Driven by AI
The US economy has seen strong growth supported by domestic consumption and massive investments in artificial intelligence infrastructure. Technology companies including Amazon, Microsoft, Google, Meta, and Oracle are investing heavily in hyperscale data centers. These investments are estimated to contribute roughly 0.5% incremental GDP growth to the US economy.
Since the pandemic:
- US GDP has expanded from ~$20 trillion to ~$31 trillion in five years
- AI-driven capital expenditure has become a key growth driver
However, this growth has been accompanied by rising debt levels.
Rising Debt Risks in the US
Debt intensity in the US economy has increased significantly, meaning more borrowing is required to generate the same level of economic output.
Key concerns include:
- Nearly 25% of US government debt matures within the next 12 months, requiring large refinancing
- Debt servicing costs could exceed $1.4 trillion annually
- Servicing costs as a percentage of GDP are now higher than several other G7 nations
Additionally, labour market data has seen repeated downward revisions, with employment figures revised lower by roughly 600,000 jobs over the past year. Income inequality has also widened significantly, with consumption increasingly concentrated among the top 10% of households.
Dollar and Global Capital Flows
The US dollar index has weakened significantly since early 2025. A weaker dollar, combined with declining US equity market dominance, could trigger global capital reallocation.
Notable developments include:
- US share of global market capitalization declining from ~58% to ~47%
- Emerging markets outperforming US equities for the first time in over a decade
These dynamics may encourage global investors to diversify away from US assets.
India Budget: Long-Term Structural Focus
The Union Budget continued the government’s long-term economic strategy.
Earlier budgets focused on:
- Infrastructure development
- Manufacturing expansion
The latest budget increasingly emphasizes the services sector and future industries.
Key positives include:
- Capital expenditure of ₹12.1 lakh crore, exceeding net market borrowing for the first time
- Gradual improvement in fiscal discipline
- Expansion of capex share in government spending from ~14% to ~22%
Higher capital spending supports long-term productivity and economic growth.
Policy Changes and Concerns
Some policy measures generated debate:
- Increase in securities transaction tax (STT)
- Changes to capital gains taxation
- Tax treatment revisions for sovereign gold bonds
- Complexity in NRI investment processes
While some tax policies were viewed as inconsistent with earlier expectations, other reforms—including safe harbor provisions for global capability centers and improved buyback taxation rules—were seen as constructive.
Execution: The Key Variable
The effectiveness of several initiatives depends heavily on execution. Projects such as infrastructure funds, railway corridors, debt market reforms, and infrastructure guarantee schemes will require timely implementation to deliver intended benefits. Historically, certain financial market reforms—such as interest rate futures and credit default swaps—have struggled due to limited market adoption.
Indian Economic Outlook
The domestic economic outlook remains broadly positive. Government policy has supported consumption by directing financial support across several groups:
- Taxpayers
- Borrowers
- Consumers
- Welfare beneficiaries
In addition, the upcoming pay commission could inject roughly ₹3 lakh crore annually into the economy through salary and pension revisions, potentially supporting consumption growth.
Risks
Key risks to the outlook include:
- Rising global unemployment and slowing consumption
- Debt sustainability concerns in major economies
- Potential global liquidity tightening if yen carry trades unwind
- Policy execution risks in India
Opportunities
India remains structurally well positioned due to:
- Strong capital expenditure push
- Improving quality of government spending
- Fiscal consolidation path
- Potential global capital reallocation toward emerging markets
If global investors diversify away from US assets and China faces cyclical corrections, India could benefit from increased capital inflows.
FundYantra View
The global macro environment is entering a phase of slower growth but higher fiscal expansion, creating potential volatility across asset classes. India’s relative macro stability, improved public investment quality, and structural growth trajectory position it favorably within emerging markets. However, execution of policy initiatives and sustained capital inflows will remain critical determinants of market performance.
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