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: 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: 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: However, rapid capacity creation has led to declining capacity utilization and falling private investment. To counter this slowdown: 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: 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: 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: 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: The latest budget increasingly emphasizes the services sector and future industries. Key positives include: Higher capital spending supports long-term productivity and economic growth. Policy Changes and Concerns Some policy measures generated debate: 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: 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: Opportunities India remains structurally well positioned due to: 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. Mutual fund investments are subject to market risks. Read all scheme-related documents carefully.
