Markets to remain volatile amid global cues

This week, we expect Indian equities to trade largely in a range with intermittent bouts of volatility, tracking mixed global cues, while stock-specific action is likely to remain pronounced amid the ongoing Q3 earnings season. Key developments to watch include: (a) India–EU trade deal, as India and the European Union are reportedly close to finalising a landmark Free Trade Agreement (FTA), which could provide a meaningful boost to labour-intensive export segments such as textiles, jewellery, and electronics; (b) the US FOMC policy meeting scheduled for Thursday, where interest rates are widely expected to be kept unchanged; and (c) Union Budget for FY2026–27 to be presented by the Finance Ministry on Sunday, 1st February —an event of heightened significance amid global trade uncertainties and the government’s continued efforts to support domestic growth.

The Budget is expected to stay focused on fiscal discipline, with the fiscal deficit likely to edge down to 4.3% of GDP, signalling a steady and credible path towards lower debt over time. The government is unlikely to announce populist measures or major tax giveaways, instead balancing growth with prudence under a nominal GDP growth assumption of ~10%. Spending priorities should favour capital expenditure, especially in infrastructure, defence and allied industries, power, nuclear energy, electronics manufacturing, critical minerals and select labour-intensive sectors. Revenue expenditure, subsidies and non-essential spending are likely to remain tightly controlled, reinforcing the capex-led growth model.

Last week, markets were highly volatile amid global trade tensions over Greenland and mixed Q3 earnings so far. Nifty50 ended with a decline of 646 points at 25,049 (-2.5%). Nifty Midcap100 and Smallcap100 indices fell by -4.5% and -5.8% respectively amid a broad based sell-off, with all major sectoral indices ended with losses in the range of 1%-4% each. Meanwhile, Indian Rupee weakened to a fresh record low of 91.97 against the US Dollar on Friday, extending pressure from continued FII selling (Rs 36,590 crore outflows during the month till January 22), weak global cues and persistent dollar demand.

Amongst sectors, the steel industry is structurally better positioned than global peers and is expected to deliver a robust ~8–10% volume CAGR over FY25–28E, driven by strong domestic demand, ongoing capacity expansions, and safeguard duties supporting profitability. India is likely to remain the fastest-growing steel market globally, providing a multi-year runway for volume and earnings growth. In contrast, China has shifted from a demand driver to a supply overhang, though rising global protectionism suggests its exports may have peaked, aiding price stabilisation. Domestically, steel prices are expected to recover on the back of a 12% safeguard duty, stable global prices, and benign raw material costs, supporting long-term growth visibility.

We remain constructive on the BFSI sector, with earnings expected to compound at ~16% CAGR over FY26–28E. While the sector saw earnings downgrades in recent quarters due to margin pressure, muted loan growth, and higher credit costs, the pace of revisions has now moderated materially. Large, well-diversified banks have shown notable resilience, even as mid-sized lenders faced near-term challenges. Importantly, margins are stabilising, asset quality stress in unsecured portfolios is easing, and loan growth is gradually gaining momentum. This sets the stage for a calibrated, U-shaped recovery in earnings, with growth expected to improve meaningfully from FY27 after a relatively flat FY26. 

Auto demand saw a strong revival across segments in 3Q, supported by the timely GST rate cut coinciding with the festive season. ICE two-wheelers, passenger vehicles, and commercial vehicles all posted strong growth, with demand broad-based across both economy and premium categories. The domestic 2W ICE segment has turned positive on a YTD basis, led by scooters, while motorcycles grew modestly and mopeds remained weak. Passenger vehicle volumes improved, driven largely by utility vehicles, while commercial vehicles reported double-digit growth across most sub-segments. 

Overall, near-term market direction is likely to remain driven by global developments, macro data prints and earnings-related cues. The India-EU FTA, US FOMC policy meet and the Union Budget 2026 would act as key triggers for the markets over the medium term.

(The writer is Head of Research, Wealth Management, Motilal Oswal Financial Services Limited)