Despite stubbornly high oil prices, India's macro indicators have strengthened. More importantly, 1Q earnings have confirmed the transmission of the strengthening macro to India Inc's earnings. The surprise lies in the strong beat to corporate earnings, which no analyst or strategist saw coming. While ongoing global bond market upheaval can delay a full-fledged return of FII's until things settle, the enabling environment for the return of FII's has now been established – the return to a sustainable double digit earnings growth trajectory.
India's Resilience Story
Brent crude – the bete noire for the Indian economy - has stayed elevated in the high US$80s through August, touching nearly $90 a barrel recently as the Strait of Hormuz stand-off continues for a fourth consecutive month. The conventional response to such a sustained oil shock to the Indian economy should have resulted in a deterioration in business and consumer sentiment. Surprisingly and confounding all expectations, India's high-frequency data has not only stayed resilient during this period but strengthened as highlighted below -
1. GST collections rose 15.4% year-on-year in July to ₹2.11 lakh crore, the fastest pace in fourteen months, with net collections, after refunds, up 15.8%.
2. Industrial production accelerated to 7.3% yoy in June from 5.0% yoy in May, a 23-month high, with nineteen of twenty-three manufacturing sub-sectors expanding and capital goods output — the most direct available proxy for capital-expenditure intent — rising 14.2%.
3. The most compelling evidence of a recovery comes from bank credit growth, and its composition than just the headline figure: aggregate credit growth rose to 18.6% yoy for the fortnight ended June 30, a growth rate last observed during the 2010-11 credit expansion. Importantly, the growth rate of credit to industry has tripled to 19.2% yoy from 6.3% yoy, a year earlier, with such strong growth coming after a long period of dormant industry credit growth. It has been broad-based across micro, medium and large enterprises and concentrated in capital-intensive segments, with infrastructure lending up 10.9% and power-sector credit up 23.2%.
4. We have covered Indian markets through three decades of cycles — the period following economic liberalization, the 2003-08 investment boom and the consumption-led recoveries of the past decade until now. The simultaneous occurrence of the acceleration in capital goods output and the near-tripling of industrial credit growth suggests that India's growth engine may finally be broadening beyond consumption to private investment — the transition this market has anticipated, prematurely, more than once in the past decade. This is corroborated by corporate order books: L&T, ABB India, Siemens India, Hitachi Energy India and KEC International all reported quarterly order inflows at or near record levels, confirming the trend is sector-wide rather than a single company's story (see Exhibit at the end of this note). We will be watching this trend very closely as it has significant investment implications.
5. Automobile sales reinforce the pattern seen in other high frequency indicators: July was the industry's strongest on record, with passenger vehicle sales up 34.3% and two-wheeler sales up 22.6% year-on-year, indicating that both urban discretionary demand and rural consumption are expanding simultaneously, notwithstanding fuel costs that would ordinarily be expected to restrain precisely this category of spending.
From Data Points to Earnings – The Quiet Transmission
For all of us investors, nothing matters more than the transmission of economic growth into corporate earnings, because data itself does not move markets. Data that translates into earnings is what moves markets. The resilience of the high frequency data described above, reinforced by a modest pickup in inflation has transmitted into corporate earnings growth exceeding expectations. With 1QFY27 reporting now complete, Nifty profit growth reached 18% year-on-year, its strongest pace in ten quarters. It is also important for us to analyze the scale of the earnings surprise. Nineteen sectors exceeded consensus estimates and the earnings upgrade-to-downgrade ratio turned decisively positive at 1.5 times, the highest in almost two years.
While the economic data and earnings for the June quarter have been strong, the most important question for investors now is the direction of markets, from here. The market has traded in a narrow range for close to two years. What will move the markets out of this narrow range and towards a trajectory that investors in Indian Equity markets have seen before September 2024. In our view the answer lies not in a single good quarter, but the establishment of a trend, dependent on two conditions — a continuation of the economic momentum we have seen, and, more consequentially, whether this quarter's earnings beat mark the beginning of a sustained cycle of upward revisions.
Upward Earnings Momentum Is Now the Ultimate Catalyst for Indian Markets and the Return of Foreign Investors…But Ongoing Displacement in Global Bond Markets Needs to Settle Down
Markets move into durable uptrends only when earnings momentum turns, and a cycle of upward earnings revisions looks to be starting. What this quarter's corporate earnings and the economic data have done – after a gap of almost two years - is create the conditions and the foundation for that cycle to begin. This is now the single most important determinant for Indian equities. It is also the trend foreign institutional investors are watching most closely. They sold Indian equities unrelentingly since September 2024 and remain on the sidelines, due to the absence of earnings momentum, and of a credible path to sustained double-digit corporate earnings growth. For them, at India's premium valuations (India has always traded at a premium to other EM's and while lower it still trades at a premium), investments in India are only justified when the corporate earnings trajectory suggests durable double-digit earnings growth. Should this just started upgrade cycle entrench itself into an expectation of sustained corporate earnings growth more than 15%, it would be the most plausible trigger for a genuine and sustained return of foreign capital — not the modest stabilization in flows already visible, but a re-engagement on scale. Unfortunately, there may be a delay in the full-fledged return of foreign investors until the just started global bond upheaval settles.
Rising Bond Yields Globally Warrant Close Watching in Immediate Term
The global macro backdrop has turned more unsettled again. Long-dated government bond yields across the developed world have moved sharply higher through August: the 30-year US Treasury yield touched 5.33%, its highest level since 2007, as the Congressional Budget Office raised its projection for the annual US budget deficit to $2.1 trillion and a wave of AI-related corporate bond issuance are crowding out treasuries. The move is not confined to the United States. Japan's 10-year government bond yield reached 2.95%, a level last seen in 1996, and the 30-year JGB yield rose to 4.14%; UK 30-year gilt yields have climbed toward 6%. This synchronized repricing of long-duration global debt is the kind of global risk-off backdrop that has historically punished emerging markets, India included, regardless of the strength of domestic data. Its recent moves to fortify its balance of payments and the resultant FCNR inflows should insulate India's external indicators to a larger extent than what it would have been a few months ago. The critical question is whether the rise in long-dated yields remains an orderly, fiscally driven term-premium adjustment or turns disorderly. If the current upheaval in US (and broader developed market) bond markets continues to intensify rather than stabilize, the full-fledged return of FII inflows to India could be delayed, until this settles.
Exhibit — India High-Frequency Indicators: Snapshot
Resilience amid an oil-price shock · Q1 FY27 (April–June 2026) reporting season
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