Market Review - October 2026

The conflict in West Asia persisted through October 2026 with fresh strikes on Saudi energy infrastructure and commercial shipping in the Strait of Hormuz. This led to further rise in crude oil prices and combined with persistent El Niño weather anomalies constraining grain yields and ongoing fertilizer bottlenecks, food price pressures intensified across both developed and emerging markets. Despite external uncertainty, US economy accelerated to an annualized rate of 3.4% in Q3 2026, up from 2.2% in the second quarter, driven by resilient consumer spending, AI led capital investment, and government spending. US sovereign yields also retreated significantly during the month after hitting fresh highs during the start of the month as investors looked for safe haven amidst growing scepticism around the AI trade. Eurozone manufacturing PMI eased in October but remained firmly in expansion zone. On the other hand, China's factory activity contracted for the third time in four months, weighed down by sluggish domestic consumption and slowdown in export orders.

After hiking in September 2026, the Fed, ECB, and Bank of Japan all paused in October 2026. However, with inflation persisting above central bank targets, policymakers maintained a hawkish tone, keeping the door open for additional rate increases.

Economic activity remains resilient: The high frequency indicators for October 2026 suggest that economic activity continues to hold up well. GST collections and power demand growth scaled new highs during the month and while manufacturing PMI moderated in October compared to previous month, it remains firmly in expansion zone supported by robust export orders. Vehicle registrations however, contracted on YoY basis driven by a high base effect resulting from households deferring automobile purchases to October 2025 ahead of GST cuts last year. However, vehicle registrations rose 23% MoM in Oct 2026.

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 supported on the back of sustained demand momentum. However, El Nino conditions and its impact on food production, fading stimulus effect, and continued geo-political tensions remain key risks for growth in the second half of this year.

Risk of fiscal slippage is low this fiscal: Total Government expenditure has grown by 10.7% YoY in H1FY27 driven by capex growth which is up 12.7% YoY. On tax collections front, while direct tax collections have been strong led by corporate taxes, indirect tax collections have contracted due to reduction in GST and excise duty rates. Fiscal deficit (as % of budgeted) during the first 6 months of this fiscal has been ~42% compared to ~37% during the same period last year. Robust corporate tax collections, and higher than budgeted disinvestment/asset monetisation receipts reduces risk of fiscal slippage this year. The Government has also kept aside economic stabilisation fund of INR 1 trillion which could be tapped in case of any tax revenue shortfall.

Source: CMIE Note: YoY: Year on year growth

CPI inflation rose further in Sep 2026: CPI inflation was recorded at 5.5% in Sep 2026, driven mainly by surge in food and fuel inflation. Core-Core inflation (core inflation ex of precious metals) also rose 30bps to 3.2% due to rise in services inflation such as Information and Communication, Recreation, Restaurants and accommodation services.

Going forward, inflation is likely to rise in FY27 on adverse base effect, higher oil prices and below normal rainfall but will likely peak in Q3FY27 before trending down. The geopolitical situation, El-Nino conditions and pass through of input price inflation remain key monitorable from an inflation perspective.

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

Trade deficit increased in Sep 2026: Trade deficit jumped in Sep 2026 mainly due to higher oil and non-oil non gold (NONG) imports. Merchandise exports have registered a growth of 19% YoY in H1FY27 compared to growth of 5% YoY during same period last year. Exports are mainly driven by Engineering electronic goods and chemicals. Going forward, trade deficit is likely to remain contained on back of healthy merchandise exports growth. Moreover, healthy growth in services exports will help keep CAD within manageable levels.

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

Crude oil prices rose further in Oct 2026: Brent crude rose ~14% MoM to ~USD118/bbl in October as supply chains remained disrupted in West Asia. Gold and industrial metals on the other hand saw moderation as markets are pricing in a global rate hike cycle which could potentially affect global demand.

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

Summary and Conclusion:

Fragile geo-political situation resulting in higher crude oil and other commodity prices remains a key risk for the global economy going forward. Moreover, persistent El Niño conditions poses fresh risk for food prices across geographies. Despite these risks, global growth continues to hold up well driven by AI/tech related spending and strong fiscal support. IMF has again upgraded global growth forecast for this year, which will be led by Advanced Economies. Sovereign bond yields, which had scaled fresh highs, have retreated from peak, easing some of the concerns surrounding potential risks from the bond markets. 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.

Contrary to expectations, growth in India has held up remarkably well despite disruptions caused by West Asia crisis. High frequency indicators continue to hold up well with resilient consumption and investment demand. Inflation remains well anchored and though it's expected to rise from here due to adverse base effects, higher oil prices and deficient monsoon, it's unlikely to increase significantly. RBI has projected an average inflation of 5.2% in FY27 with risks evenly balanced.

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, uptick in private investment demand and improving corporate profitability. However, elongation of geo-political conflicts and El Nino conditions persisting through next year remain key risks to growth going forward.