Hopes run high in the new year

Year 2026 could bring good tidings. A US trade treaty may finally be thrashed out, crude oil is likely to remain at or below $60, and hopes of FPIs returning appear stronger than before. The year may well go down as the first of the 5 years leading to the dream of Viksit Bharat. Geopolitics, of course, could play the spoilsport.

2025 was not among the best of years for mankind, and few would regret seeing it go – out of sight and out of mind. For India, one would like to believe it was a little better than for most other countries. There is still no tax proposed on one’s thoughts, so one can believe whatever one wants. Imagine the chaos that would ensue before a tribunal if that were not the case. The ITO would seek to tax 24 of his ideas, while the assessee would argue that he had only 10 ideas and that the rest were merely rehashes of earlier original ideas on which tax had already been levied in previous years. One cannot tax an idea twice. For want of conclusive evidence, the ITO’s claim would be whittled down, and the taxpayer would heave a sigh of relief. For want of a better idea, the ITO would let the matter drop.

On a more serious note, India did emerge relatively unscathed, with manufacturing finally finding its mojo. India did have its share of heavy rains, floods, and other calamities, both natural and imported. The latter were triggered by President Trump, who sought to get the world to part-fund the enormous debt the US had incurred and continues to incur. He imposed tariffs on one country after another, after his efforts to take control of Greenland, Canada, and Panama did not yield results.

India, which he considered a friend, was hit with a 25 per cent tariff, later doubled to 50 per cent, to penalise it for importing crude oil from Russia. Exports from India to the US – notably gems and jewellery, textiles, and shrimp – suffered to an extent. However, thanks to government efforts led by Prime Minister Narendra Modi, who has cultivated relationships across countries during a decade of travel, overall exports did not suffer materially. Merchandise exports rose marginally by 2.4 per cent during April-November 2025. At $285 billion, goods exports exceeded services exports of $270 billion. The trade deficit, however, remained broadly at last year’s level, despite a sharp drop in crude oil prices, owing to higher imports of gold, particularly in October 2025.

The Modi government’s strong response to the terrorist attack on civilians in Kashmir saw several terror camps in Pakistan destroyed under Operation Sindoor.

Trade treaty discussions that had been pending for years were accelerated and concluded. The major ones included agreements with the UK and, more recently, the EU. The US agreement remains in limbo, with Washington keen to push its agricultural and dairy products into India on a tax-free basis. Over the past 2 years, India also signed the Trade and Economic Partnership Agreement with the European Free Trade Association countries – Switzerland, Norway, Iceland, and Liechtenstein – linking markets in return for investment. Following Modi’s visit in December, exports to Ethiopia, Jordan, and Oman are expected to rise. The government has firmly resisted US pressure while quietly diversifying export markets.

Beginning of a multipolar world

Trump’s tariffs have pushed the world away from a unilateral system dominated by US ideas and institutions towards a multipolar order, with emerging markets taking the lead. India, China, Brazil, and Russia are among the countries that have begun diversifying their asset portfolios, increasing investments in gold and silver at the expense of dollar-denominated US government securities. With central banks shoring up gold and silver to some extent for the second consecutive year, precious metals delivered spectacular returns in 2025, following strong gains in 2024. 

Equity markets may see better days in 2026

This shift is also one of the reasons equity markets underperformed. FPIs pulled out of Indian equity markets in a big way, though this was largely offset by retail investors and mutual funds. FPIs withdrew $16.4 billion (Rs1.59 lakh crore) to date. The Sensex delivered just 8 per cent returns in 2025.

Better returns can be expected in 2026. Much depends on the US tax treaty being finalised in the first quarter. Secondly, crude oil prices, currently hovering around $60, may remain at or below that level. The economy remains in fine fettle, with GDP growth for 2025 projected at 7.3 per cent by the RBI, among the highest for large economies.

To encourage FPIs to return in a meaningful way, the government may tweak capital gains tax rates and restore the short-term capital gains tax to 10 per cent. To promote longer holding periods, it could consider abolishing long-term capital gains tax for securities held for 2-3 years. This would not only incentivise investors to stay invested but also rein in speculation.

Will equities continue to play second fiddle to gold and silver in 2026? Most likely yes, although one cannot expect precious metals to repeat returns of 75 per cent for gold and 120 per cent for silver.

The IPO pipeline remains strong, and 2026 could well outdo 2025, with several large issues expected. Corporate results are also likely to improve in FY26. Government measures to boost consumer incomes, including reductions in income tax and GST, lifted automobile demand, particularly during the festive season. With private-sector capex picking up over the past two quarters, the combined benefits of investment- and consumption-led growth could unfold over the next 2-3 years.

It is surprising that despite strong fundamentals and controlled inflation, the rupee has depreciated beyond R90 to the dollar. A weak rupee, despite hopes to the contrary, does little to boost exports. While exports account for a relatively small share of total trade, imports – nearly four-fifths the size of exports – become significantly more expensive. Whether higher imports will spur substitution and encourage domestic manufacturing remains doubtful.

If crude oil stays at $60 a barrel or below in 2026, the trade deficit can be contained. The government may also revisit import duties on gold in the forthcoming Budget, as gold remains a major drain on foreign exchange. Sovereign demand for gold, however, is likely to stay elevated as countries continue diversifying their reserves.

Will BRICS challenge the US dollar with a precious-metal-backed digital currency? That seems highly unlikely. However, greater bilateral trade in domestic currencies may be expected.

By most measures, 2026 should be a better year. If the war between Ukraine and Russia is resolved – as appears possible in the first half of the year – crude oil prices could move lower as Russian oil returns to global markets. The crude import bill, a major component of India’s imports, could fall further. With inflation under control and interest rates remaining low, both investment and consumption demand should receive a boost. Alongside manufacturing, agriculture may also gain ground. Geopolitics, of course, remains the joker in the pack.