Market Review - September 2026

The West Asia conflict entered its seventh month in September 2026 with no end in sight, pushing up crude oil prices and stoking fear of higher inflation. The bond yields rose further across the developed world with US 10-year G-sec yield crossing 5.3% during the month, its highest level since 2002. The repricing of US Fed rate outlook and strong growth led by AI is also pulling yields higher. El Nino conditions also strengthened further, raising concern on global food production along with disruption in fertilizer and other inputs. Growth in US continues to hold up well though September 2026 payrolls were lower than expected and unemployment rate inched up marginally. The Eurozone manufacturing PMI rose to its highest level since May 2022, led by German demand for capital goods linked to AI and defence. China's manufacturing PMI moved back into expansion for the first time since June 2026, driven by industrial exports, but weak domestic demand continue to affect the confidence and outlook of businesses and households.

Major central banks – Fed, BoJ and ECB raised policy rates by 25bps in line with expectation in September 2026 as inflation continue to remain above target. Markets expect central banks to raise rates further as inflation remains elevated in the face of elevated crude oil, commodities and food prices

Economic activity continues to hold up well: The high frequency indicators for September 2026 suggest that economic activity continue to hold up well. Vehicle registrations and power demand recorded another month of strong growth, along with strong GST collections and pick up in Manufacturing and Services PMI. CMIE unemployment rate fell to 4% which is near to all-time low. This was mainly because of fall in labour force participation which fell more than 100bps in September 2026 rather than a significant improvement in employment conditions.

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, El Nino conditions and its impact on food production, and continued geo-political tensions remain key risks for growth this year.

Government has maintained capex growth: Total Government expenditure has grown by 10.5% YoY in 5MFY27 driven by capex growth which is up 18% YoY. 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. Fiscal deficit (as % of budgeted) during the first 5 months of this fiscal has been ~42% compared to ~38% during the same period last year. Robust direct tax collections, and economic stabilisation fund reduces risk of fiscal slippage this year. There is also a likelihood of disinvestment/asset monetisation 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 rose further in Aug: CPI inflation was recorded at 4.8% in Aug 2026, driven mainly by uptick in food and fuel inflation. Core-Core inflation (core inflation ex of precious metals) also rose 20bps to 2.5% but remains subdued.

Going forward, inflation is likely to inch up in FY27 on adverse base effect, higher oil prices and below normal rainfall but is likely to be within the RBI's tolerance band. The geo-political situation, El-Nino conditions and pass through of input price inflation remain key monitorable from an inflation perspective.

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

Trade deficit narrowed in Aug 2026: Trade deficit narrowed significantly in Aug 2026 due to exports rising much faster than imports. Merchandise exports have registered a growth of 19% YoY in 5MFY27 compared to growth of 2% YoY during same period last year. Exports are mainly drive by Engineering and electronic goods. 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 rebounded in Sept 2026: Brent crude rose ~14% MoM to ~USD103/bbl in September as attacks on Saudi energy facilities revived supply fears. 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 September 30, 2026, ^MoM change, & Change in FY27TD

Summary and Conclusion:

The geo-political tensions in West Asia continued through the month of September with no end in sight. An elongation of the conflict is likely to have material implications for the global economy, driving up inflation and pushing down growth. On the other hand, rising bond yields across the developed world poses significant risks for emerging market economies like India. 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 held up remarkably well despite disruptions caused by West Asia crisis. High frequency indicators continue to hold up well with resilient rural demand and urban demand too showing signs of uptick. 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 and improving corporate profitability. However, elongation of geo-political conflicts and El Nino conditions persisting through next year remain key risks to growth this year.