Strong Economy, Weak Tape: Who Is Right? | The Beam: Weekly Market Narrative

We are seeing a stark dichotomy in India.  The real economy is demonstrating strong resilience, decoupling from a hesitant stock market that remains weighed down by global macro anxieties and disinterested foreign institutional investors.  The question is who is right – the tape or the real economy? And if the economy and earnings are right, when will the tape take notice?

India's industrial production data for August, released on September 28, 2026, add to the evidence that the country is in a manufacturing and capital formation upturn. Industrial output grew 8.0%, up from an upwardly revised 7.4% in July and the second highest reading in 29 months after 8.8% in June. Manufacturing, with a weight of about 76 per cent, grew 9.0 per cent against a revised 8.2 per cent in July, the third straight month at 8 per cent or more, and April to August output is running at 6.7 per cent against 4.2 per cent a year earlier. Let us look deeper into the numbers, which show the scale and context of the recovery.  Eighteen of 23 manufacturing groups expanded, led by electrical equipment (30.9 %).  Capital goods grew 16.9% intermediate goods accelerated to 13.7 % from 10.4 per cent and consumer durables grew 11.1%.   Consumer non-durables were an outlier growing only 2.1%. Electricity grew 12.3 %, its best in more than two years. The August IIP print builds on high-frequency data that have pointed the same way for past few months and which we have been commenting on extensively in earlier issues of The Beam. 

Unfortunately, despite the strengthening domestic macro and a restored double digit earnings growth trajectory, India cannot avoid becoming hostage to the global macro volatility.  The combined impact of oil staying stubbornly above US$100 and the fast-paced rise in global bond yields has soured sentiment for equities, globally. During periods like the one we are witnessing currently, we will see a temporal disconnect between capital flows and corporate fundamentals.  Global asset allocators, constrained by rising risk-free rates in developed markets, are pulling back leverage and curtailing emerging market exposure indiscriminately.  We are witnessing strong outflows from all emerging markets, including favoured ones like Korea. 

Historical Precedents: Flow-Driven Declines Reverse When Liquidity Returns

India has been here before, and the sequence has been consistent. Let us look at the most recent precedent.   Between late 2021 and mid-2022 Nifty fell about 18 per cent even as earnings grew strongly, and in October 2023, with the US 10-year yield near 5 per cent, foreign investors sold close to ₹23,000 crore in a single month.  The US 10-year hit 5.01% on 23 October 2023 and had eased to about 3.9% by late December. The Fed's December meeting signalled that rate cuts were on the horizon.  Following the reversal in yields, the Nifty 50 and Sensex hit fresh all-time highs, with reported monthly gains of 5.52% in November and 7.94% in December 2023, the best since July 2022.

In each precedent of the market getting impacted by global macro we have seen that when external pressure eases foreign flows turn up.   It’s all about liquidity! Flow driven market declines are swift to reverse, when the variables turn.  That is what separates flow-driven market declines from earnings-driven ones. India's buffers today are stronger than they were in 2013.  If the precedents are right, India could move up sharply once oil and bond yields stabilize.  

In the near term, we expect sentiment to stay subdued until global bond yields settle, and oil prices show signs of froth coming off. The signposts we will be watching are demand at US long-bond auctions, Brent's behavior above $100, the rupee and the weekly foreign flow data.  The main risk to this view is the time duration.  How long will oil prices stay at elevated levels.  As we have highlighted in earlier issues of The Beam, India’s oil tolerance threshold is US$90.   If oil stays higher for a durable period, it will compress margins and widen the external deficit.  The shock will at that time move from valuations into earnings.   That is not our base case.  Our base case assumes some form of settlement or easing oil flows through the strait of Hormuz.   settlement on the West Asia conflict ahead of the American mid-term elections in November.   For long-term investors, the sentiment driven weakness creates entry opportunities, particularly in some large cap companies. We see four areas where investors can participate in the decline.  Companies that are benefiting from the renewable energy transition, AI infrastructure and electrical equipment.  Defense firms also appear attractive on the back of robust order books and expectations of continuing momentum in order books.    The Banking sector benefits from credit growth of 18 to 19 per cent, with industry credit growing 20 per cent, and expectations of a rate hike environment.  We clearly prefer banks over non-banking finance companies in current scenario of rising wholesale funding costs. 

We cannot however say when the global macro situation will stabilize so phased accumulation is more prudent than a single entry.

What to Watch Next: September Data and the Earnings Season

Over the next few days, the September readings for manufacturing PMIs, GST collections, auto sales and bank credit will show whether the strength seen in August has carried through. By the middle of October, the contours of the quarterly reporting season will begin to emerge. There, we will look past headline profit growth to the signals that matter most for a capital formation cycle: order books and execution in capital goods and engineering, volumes in metals, cement and power-linked businesses, credit demand from industry, and how well margins hold against higher energy and input costs. If those results confirm what the production and credit data are telling us, they will strongly underscore the foundation of a manufacturing and investment-led growth cycle.  We will be watching these closely!