Chief Economist at the National Stock Exchange of India
Global debt surpasses three times annual GDP, fueled by fiscal stimulus, rising interest costs, and structural imbalances. Unchecked, it risks a debt spiral, crowding out private investment and destabilizing economies. Traditional exit routes—growth, fiscal consolidation, and inflation—all have varying degrees of infeasibility. The last two months have seen the US leverage its global positioning with tariffs, geopolitical shifts, and resource deals. Recent US-Russia talks, and Ukraine’s mineral agreement highlight evolving power dynamics for the macro environment and markets. Meanwhile, Europe’s zeitenwende gains momentum with leadership changes. Markets and policymakers must navigate this shifting landscape, where debt sustainability, geopolitical realignments, and policy responses will shape the next phase of global economic and financial stability.
Global markets started out in 2025 on a reasonable note, on the back of Mr. Trump taking charge and multiple pro-US policy measures, until the announcement of the Chinese ‘DeepSeek-R1’ LLM put a spanner in the works; Nvidia lost nearly US$600bn in market cap, before staging a recovery later in February (more on this in the report). The MSCI World index, representing DM equities, is up 3.5% YTD, helped by a resurgent Europe, the Euro Stoxx rose 11.8%, while the MSCI EM index rose 1.7%. Global debt signals were mixed with US and UK yields easing on softer inflation prints, while Europe (fiscal expansion expectation) and Japan (higher inflation) saw rising yields.
Weighed down by global uncertainty, weak corporate earnings, and an uncertain domestic outlook, Indian markets continued to correct with the fifth consecutive months of negative returns, the longest streak since July 2002. FPI outflows continued in the new year, hitting US$24bn (Rs 2 lakh crore) since October 2024. In line, DIIs remained buyers for the 19th consecutive month, adding Rs 3.2 lakh crore over the same period. DII inflows at Rs 5.5 lakh crore in FY25 have now exceeded the combined flows for FY23 and FY24. The benchmark Nifty 50’s 0.6% drop in January and a 3.0% drop in February now add up to a 13?cline from the late-September peak (16.1% in dollar terms). Cautious sentiments hit small- and mid-caps harder. The INR has dropped 4% since September, and FX intervention by the central bank has kept liquidity conditions tight. For more details, please see our Market Roundup section.
On the macro front, the month gone by saw two major events. The Union Budget FY26 posed a fine balance between supporting consumption with a tax-break for the salaried class and maintaining focus on capital expenditure (+10%), even as the fiscal deficit was set to 4.4% of GDP. Such prudence allowed the central bank with to look beyond the recent inflation trajectory, and MPC unanimously voted for a 25bps cut in the repo rate to 6.25%, the first since May 2020. Growth for FY26 was pegged at 6.7% and inflation at 4.2%. While a decline in petroleum product exports weighed on merchandise exports in January (-2.4% YoY), Services continued to perform well (+24.3% YoY); Services exports surpassed goods exports for the first time since April 2011. The overall Services exports surplus at US$155.6bn this fiscal remains lower than Merchandise exports (US$233.8bn), but the convergence is clear. We have three featured stories in the NSE Market Pulse this month, beginning with the quarterly ownership report. “Who owns India Inc.?” is our quarterly flagship report on stock ownership in the country. The relentless FPI outflow over the past five months has led to a readjustment in ownership across major categories. Foreign portfolio share of the listed universe is now 17.4%--the lowest in 13 years, with higher outflows from the large-cap space. In contrast, domestic investors saw their share increase in the quarter; mutual funds reached 10% for the first time, nearly a fifth in passive money. Individuals now account for 9.8% of the market directly and 18.2% when their mutual fund share is added. Individuals thus own more of the Indian markets than FPIs—the first time since 2006! An increased share of household savings into the markets–directly and indirectly–when coupled with the rally in markets has translated into an increase in household financial wealth over the years. Our estimates point to a net accretion of ~Rs 30 lakh crore to household wealth in Indian equities in the last two years to Rs 79.6 lakh crore (10- year CAGR: +21.3%).
So, what have FPIs been selling, and DMFs been buying? Turns out that foreign investors added to their outsized OW bet on Financials, turned incrementally more cautious on consumption and commodity sectors. Au contraire, DMFs trimmed their OW stance on Financials, tapered negative bias on Energy and Materials and turned incrementally positive on Consumer Discretionary, while retaining an UW stance on Consumer Staples. More in the report.
Our second Story of the Month reports corporate earnings, where revenue growth slowed to a 16-quarter low for the Nifty 50 universe and a five-quarter low for the Nifty 500. Lower input costs and expanding margins helped EBITDA and PAT growth despite the weak top-lines. Financials accounted for 70% of the Nifty 50 bottom-line growth of 9.5%. Earnings estimates were downgraded across the board, especially so for Energy and Materials. Consensus earnings are now expected to grow a mere 3.2% for FY25E, vs. 10% in September! Seeing beyond the optical FY26E earnings jump (now 17.6%), we note that the two-year FY24-26 earnings CAGR is 10.2%. Our last story of the month looks at the Union Budget. Maintaining a fine balance between consumption and investment, the Budget met the FY22 FRBM target of a sub-4.5% fisc by FY26. While the details are available in our report, a noteworthy change going forward is a shift of the fiscal anchor from the annual fiscal deficit to a debt/GDP metric. The Government now targets a reduction in the central debt/GDP ratio from the current 55.1% of GDP to 50 +/-1% of GDP by FY31. The change in metric provides short-term operational flexibility and brings attention back to what we have highlighted above, i.e., the relevance of debt sustainability in the markets today.
Market activity followed the benchmark indexes on the way down in January and February, across all major segments. Fund-raising started on a weak note, down 53% since December across debt and equity. New investor additions continued after the 11-crore mark was reached in January, while activity showed mixed trends. Average daily cash turnover fell below Rs 100,000 crore for the first time since March 2024, and equity options rose marginally, but remained below levels seen before new regulations in November 2024. Nearly 79% of the Rs 22 lakh crore traded in the cash segment in January was executed by 0.2% of investors, while 91% of investors contributed 2.4% of the turnover.
The technology world continues to surprise. The announcement of the ‘DeepSeek-R1’ model in China has presented a new, significantly cheaper challenger to the hitherto US-only models; DeepSeek matches the top models across multiple AI benchmarks and is reportedly open-source too. We noted the market impact earlier, but the strategic significance of the LLM cannot be underestimated. The availability of such models raises the stakes in great-power competition on one hand but also increases the possibility of widening availability of such models, adding more companies (and countries) in the mix, and a shift of capex from the ever-higher bar of training to inference, where models provide more ‘complete’, ‘reasoned’ answers that resemble a ‘chain-of-thought’, rather than fast, but sequential answers based on the training set. The overall market potential for both hardware and software has risen substantially. The customer, of course, remains spoilt for choice.