Market Review - August 2026

The geo-political deadlock in West Asia persisted through the month of August 2026 resulting in rise in crude oil and other commodity prices and stoking concerns of higher inflation going forward. This coupled with elevated public debt led to significant rise in long end bond yields across the AEs. Moreover, global weather and international agencies raised concerns over EL Nino, officially upgrading the ongoing climate pattern to a 'Super El Niño'. US Labour markets continue to remain mrtable with 1.05 job openings for every unemployed person. This along with buoyant asset market and AI driven capex are supporting growth momentum in the US. While Eurozone manufacturing PMI was recorded at 51 months high in August, a significant divide persists among member states, with countries like Italy, Spain, and Poland experiencing a continued slowdown. Chinese manufacturing PMI, despite some improvement, remains in contraction territory, while its services slump continues due to tepid domestic demand. However, its exports remained robust.

With US inflation running above the 2% target, Federal Reserve Governor Kevin Warsh's hawkish speech at the annual Jackson Hole Symposium has brought forward the timeline of rate hike by the US Fed. Further, other major central banks remained in wait and watch mode too with Bank of Japan expected to raise rates as inflation remained resilient in the near term.

India Q1FY27 GDP growth was higher than expectations: India's GDP growth was recorded at 7.8% YoY in Q1FY27 (Q4FY26: 8.6%) which was above consensus expectations and higher than RBI's forecast of 7%. The growth remained resilient despite West Asia crisis. The growth in Q1 was driven by robust investment demand on the expenditure side while on the supply side it was driven by manufacturing and services sector. Within services sector, Trade, Hotel, Transport etc. slowed down in Q1FY27 compared to Q4FY26 possibly due to impact of West Asia crisis.

Notably, nominal GDP grew at a modest rate of 10.3% YoY despite high CPI (3.9%) and WPI (9.3%). This was because the new GDP series uses a double deflation method where inputs and output prices are deflated using different price indices unlike in the old series where input and output was deflated using a single price index. Therefore, as in this quarter input prices rose faster than the output prices, the overall deflator got suppressed.

Source- Ministry of Statistics and Program Implementation (MoSPI). PADO refers to Public Administration, Defence & Other Services

Economic activity continues to hold up well: The high frequency indicators for August suggest that economic activity continue to hold up well. Vehicle registrations (except tractors) and power demand recorded another month of strong growth, along with strong GST collections and pick up in Services PMI. While Manufacturing PMI, which has been trending lower, moderated further in August but remained in expansion zone.

Source: www.gstn.org.in, www.icegate.gov.in, CMIE, PIB, RBI, www.vaahan.parivahan.gov.in, www.posoco.in
*GST collections for the month is for economic activity in the previous month. ^Number >50 reflects expansions and number <50 reflects contraction compared to previous month. @ - figures are preliminary data and are subject to revision. ** based on CMIE survey

Going forward, growth is likely to remain steady on the back of sustained demand momentum. However, prospects of lowerthan- expected south-west monsoon, and continued geo-political tensions remain key risks for growth this year.

Government expenditure growth on a strong footing: Fiscal deficit (as % of budgeted) during the first 4 months of this fiscal has been ~27% compared to ~30% during the same period last year. On tax collections front, while direct tax collections have been strong led by both corporate and income taxes, indirect tax collections have contracted due to reduction in GST and excise duty rates. Lower transfer to state governments has aided in keeping the deficit lower than last year. Total Government expenditure has grown by 12.7% YoY in 4MFY27 driven by robust capex growth which is up 30% YoY.

Robust direct tax collections, significant fall in fertilizer prices from their peak and economic stabilization fund reduces risk of fiscal slippage this year. There is also a likelihood of disinvestment receipts exceeding budget estimates, which could be used to cover any shortfall in tax revenue.

Source: CMIE Note: YoY: Year on year growth

CPI inflation in July remained broadly similar to June: CPI inflation was recorded at ~4.4% in June, broadly similar to the level seen in June 2026. Core-Core inflation (core inflation ex of precious metals) rose 10bps to 2.3% but remains subdued.

Going forward, inflation is likely to inch up in FY27 on adverse base effect, and a prospect of a below normal monsoon but is likely to be within the RBI's tolerance band. The geo-political situation and monsoon progress remains key monitorable from an inflation perspective.

Source: CMIE; @-CPI excluding Food, Fuel & light, Food services, Petrol, Diesel, Gold and Silver

Current Account Deficit (CAD) remained benign in Q1FY27: Despite West Asia crisis, India's CAD remained low at 0.5% of GDP driven by services surplus and higher remittances flows even as goods trade deficit widened. Balance of Payments (BoP) deficit however widened compared to both Q4FY26 and Q1FY26 due to capital outflows. Going forward, CAD is likely to widen in FY27 compared to FY26 but is likely to remain manageable. Moreover, India's capital account will get a boost from h i g h e r - t h a n - e x p e c te d d o l l a r fl ow s u n d e r R B I ' s concessional swap window. This is likely to result in BoP remains in large surplus in FY27.

Trade deficit increased in Jul 2026: Trade deficit rose marginally in July 2026 due to rise in Gold and Non-Oil Non- Gold (NONG) imports even as net oil imports decreased during the month. Higher NONG imports in turn were driven by significant jump in electronics and machinery imports. Notably, merchandise exports have registered a growth of 17% YoY in 4MFY27 compared to growth of 4% YoY during same period last year. Going forward, upward pressure on trade deficit is likely to ease on back of healthy merchandise exports growth. However, given the elevated oil prices and rising transportation cost, net oil imports can weigh on trade deficit. However, healthy growth in services exports will help keep CAD within manageable levels.

Commodity prices increased in Aug 2026: As tensions in West Asia persisted in August, crude oil prices remained elevated at USD ~90/bbl. Prices of both industrial and precious metals also increased during the month.

Source: CMIE. RBI

Source: CMIE. NONG refers to Non-Oil Non-Gold

Source: Bloomberg; *Market prices as on August 31, 2026, ^MoM change, & Change in FY27TD

Summary and Conclusion:

Growth in the US so far has held up well on the back of AI/tech related capex, strong Government spending, resilient labour markets and buoyant household wealth. Growth in China is following a two-speed path where domestic consumption, investments and property markets are in a slow lane, but exports and manufacturing are holding up well. The geo-political tensions in West Asia continued through the month of August and risk of it getting prolonged remains high. This is likely to adversely impact global growth and push inflation higher.

Contrary to expectations, growth in India held up remarkably well despite disruptions caused by West Asia crisis as reflected in latest GDP data for Q1FY27. High frequency indicators also continue to hold up well with resilient rural demand and urban demand showing signs of uptick. Inflation remains well anchored and though it's expected to rise from here due to adverse base effect and deficient monsoon. RBI has projected an average inflation of 5% in FY27 with risks evenly balanced. With buoyant FCNR (B) flows, external sector is likely to remain well supported.

Looking ahead, the medium-term outlook for the Indian economy seems optimistic, in our view. This optimism is driven by steps taken by RBI and Government, opportunities arising from shift in the global supply chain, momentum of private consumption sustaining due to tax relief and lower borrowing cost and improving corporate profitability. However, elongation of geo-political conflicts and significantly below normal monsoon remain key risks to growth this year.