External uncertainties remained high, led by evolving geopolitical scenario and US’s tariff policies. The Iran conflict escalated and has led to an increase in crude oil prices. Prolonged continuation of the conflict could put further pressure on crude prices. On the tariff side, India and US announced the completion of a trade deal which will reduce tariffs to 18% for Indian goods vs 50% earlier, which was followed by the US Supreme Court striking down Trump’s tariffs.
US Manufacturing PMIs softened to 51.6 in February 2026 vs 52.4 in January, and has remained in expansionary mode for 7 consecutive months. Services PMI also softened marginally to 52.3 in February vs 52.7 in January and has remained in expansionary zones for over a year now. US headline CPI came in at 2.4%, marginally lower than expectations of 2.5%. Core inflation came in at 2.5%, in line with expectations. Both the headline and core CPI have been on a softening trend in recent months, after continuously inching up post tariff announcements. US labour markets are also showing signs of improvement. US unemployment declined for the second consecutive month and came in at 4.3% vs 4.4% in the previous month. Non-farm payrolls also showed an uptrend, and came in at 130k, vs 48k in the previous month and an average of 14k over the last 6 months.
India’s GDP growth for December came in at 7.8% YoY under the new series released during the month. GDP growth was driven by private consumption (8.7% in Q3FY26), supported by GST rate cuts. Investment growth moderated to 7.8% in Q3FY26 vs 8.4% in Q2FY26 on account of slowdown in government capex. On the GVA front, the 7.8% growth was led by strong performance in the services sector and industries which recorded a 9.5% and 9.7% YoY growth respectively, while agriculture remained relatively subdued at 1.4%. For the full year FY26, the second advanced estimate was revised to 7.6% vs first advanced estimate of 7.4%.
India also released the first CPI under the new 2024 base year series. Under the new series, the weighting of the food & beverages category has dropped by ~9% to 36.8%, while the share of core (CPI excluding food & beverage, fuel) has risen by ~10% to 57.9%. The new series has a higher weighting for urban CPI and for services (housing, transport, information & communication, restaurant & accommodation). The January CPI came in at 2.75% (vs 1.33% for the previous month in the old series). Food & beverages, which was trending in deflationary zone for 4 consecutive months till December, came in sharply higher at 2.1% in January 2026 – since the weightages of vegetables, pulses and cereals (which were showing sharp price declines) have reduced in the new series, whereas items like fruits & dairy which had higher price increases have a higher weightage. Meanwhile, core inflation was lower than expected at 3.4% in January 2026 (vs 4.7% in December on old base year series), reflecting lower rental inflation in the new series as well as lower weight for jewellery made from gold, diamond, platinum and silver (at 0.94% vs 1.2% in the old base). As a result, personal care inflation which captures gold and silver, saw a much more moderate inflation of 19% YoY in new base-year compared to 28% in old series in December. Inflation has been trending closer to ~2.1% in FY26, and is expected to normalize to around 4% in FY27.
Manufacturing PMI inched up to 56.9 in February from 55.4 in January, touching a four-month high. The rise in the index was driven by domestic demand, with new orders surging at their strongest pace over the past 4 months. Services PMI eased to 58.1 in February from 58.5 in January, but remained well above the 50 mark. New business growth softened to a 13-month low but remained well in expansion mode, while new export orders rose to a six-month high. The index of eight core industries rose by 4% in January 2026. Five of the eight core industries reported a rise in production, while three reported a fall. Cumulative output of eight core industries during April - Jan 2026 rose by 2.9% on a YoY basis.
India’s balance of payments (BOP) deficit widened to USD 24.4bn in Q3FY26 vs USD 10.9bn deficit in Q2FY26. The 9M FY26 BoP deficit is running at USD 30.8bn. The widening in Q3FY26 was driven by the capital account turning deficit at USD 10.0 bn in Q3FY26 vs net surplus of USD 2.1bn in Q2. Net outflows were seen in FDI (USD 3.7 bn in Q3) and FPI (USD 0.2bn) as well as other capital. On the other hand, current account deficit came in lower on a qoq basis at USD 13.2 bn (1.3% of GDP; vs a deficit of USD 14.1 bn in Q2FY26 and USD 11.3 bn in Q3FY25). The reduction in CAD in Q3FY26 was due to robust services surplus (USD 57.5bn in Q3FY26 vs USD 50.9bn in Q2). The majority of services surplus is due to software services (USD 47.1bn) and GCCs (USD 17.6bn). Remittances remained robust at USD 35.1bn vs USD 36.3bn inflows in Q2, out of which ~35-40% comes from the Middle East and will bear watching given the current Iran conflict escalation. Crude prices have inched up post Iran conflict, and sustained high prices will be a key risk to CAD – USD 10/bbl of increase in crude leads to 0.4% increase in CAD.
India’s merchandise trade deficit jumped to a three-month high in January 2026 at USD 34.7bn vs USD 25bn deficit in December. Historically, the last quarter of the year witnesses a narrowing of trade deficit; however, the increased investor interest in gold led to an increase in gold imports and widened the trade deficit. Gold imports rose to USD 12.1bn in January vs USD 4.1bn in December. Overall exports growth was subdued at 0.6% YoY, driven by a 8.5% growth in oil exports and a 0.2% de-growth in non-oil exports. Exports to US de-grew by 25% YoY, partly offset by growth to European and Middle East countries. Imports grew by 19.2% YoY, driven mainly by a large jump in gold imports. Non-oil non-gold imports grew by 4.8% YoY, whereas oil imports de-grew by 0.2% YoY. The trade deficit was partly offset by net services exports of USD 21.5 bn, marginally lower than USD 22.7bn in the previous month. FX reserves remained flattish at USD 723bn (as on Feb 20th), vs USD 723 bn reported at the end of previous month.
Central Government’s gross fiscal deficit (GFD) till January 2026 was 62.6% of its annual budgeted target vs 72.5% during the same time in the previous year. Government receipts till Jan 2026 grew by 12.8%, driven by a 19.2% growth in non tax revenues (on account of higher RBI dividends). Net tax revenue growth has picked up in recent months to 10% on a YoY basis. On the expenditure front, the government has managed to keep revenue expenditure (excluding interest) in check, recording a de-growth of 4%. Total expenditure increased by 3.4% yoy during April – Jan 2026, driven by large increase of 11.2% in government capex. As the government has already achieved 75.1% of the budgeted capex by December (vs 68.2% in the previous year), we expect the capex momentum to slow going forward. The government collected INR 1.88 trillion GST in February 2026 vs INR 2 trillion in the previous month. Government is likely to meet its budgeted fiscal deficit of 4.4% in FY26. For the next year, the nominal growth trajectory will bear watching, specially given the government targeting the debt / GDP metric and nominal GDP coming ~3% lower in the new GDP series.
Overall domestic demand and activity levels have remained strong during the year, however the same is expected to moderate in Q4FY26 on account of lower fiscal impulse and base effect kicking in. Investment cycle remains firm supported by government capex, however government capex is expected to slow down in the last quarter of the fiscal. Overall inflation is expected to remain within RBI’s comfort zone and will help consumption. On the global front, volatility is expected to remain high.