Inflation Takes a Backseat: Is the Market Now Betting on Lower Rates and Higher Returns?
India’s inflation narrative has taken a dramatic turn — from being the market’s biggest fear to quietly becoming one of its strongest macro tailwinds. The latest Economic Survey 2025-26, tabled in Parliament on January 29, has made a clear and confident assertion: inflation is unlikely to be a concern, averaging around 2% this fiscal and unlikely to exceed 4% in the coming fiscal.
For Dalal Street, this is not merely a data point. It is a powerful signal that could reshape expectations around interest rates, equity valuations, sector leadership and portfolio allocation in the months ahead. Investors are now increasingly asking: Is this the beginning of a sustained low-rate, high-liquidity cycle?
Inflation Forecast at 2% Changes the Market Narrative
The survey, citing IMF estimates, states that inflation will average 2% in the current fiscal year, while remaining below 4% in the next fiscal as well. December inflation stood at just 1.3%, marking the fourth consecutive month below the RBI’s tolerance band. Even more striking is the persistence of food price deflation, with December food inflation at -2.71% for the seventh straight month.
This data fundamentally alters how markets perceive macro risk. Low inflation typically creates an environment where both corporate profitability and investor confidence improve steadily over time.
Lower inflation generally supports:
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Higher equity valuation comfort
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Lower bond yields and borrowing costs
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Increased probability of monetary easing
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Stronger discretionary spending trends
However, the survey also carries a note of caution. As it states, “The trajectory of core inflation will need to be closely monitored in the context of monetary policy easing and potential upward pressure from global base metal prices.” This indicates that while the trend is positive, policymakers and investors must stay alert to global commodity dynamics.
Also Read : Economic Survey 2026: India’s Growth Potential Rises to 7% — What It Signals Markets, Economy
Here’s What Happened Today and Why Traders Reacted
Market action reflected cautious optimism rather than aggressive risk-taking. Interest rate–sensitive sectors such as banks, real estate, automobiles and consumer durables witnessed improved buying interest throughout the session, while bond yields edged marginally lower as expectations of further rate cuts strengthened.
Traders reacted primarily to three immediate cues:
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Inflation at 1.3% strengthened expectations of another RBI rate cut
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The survey’s confidence on macro stability improved sentiment in domestic cyclical stocks
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Rate-sensitive stocks attracted intraday momentum on hopes of cheaper capital
Short-term traders focused on high-beta names in banking and realty, while positional investors used intraday dips to accumulate consumption and housing finance stocks. The broader undertone suggested that markets are slowly pricing in a more accommodative policy environment.
RBI Rate Cuts Back in Focus After Survey Signals Comfort
The Reserve Bank of India has already cut rates by 125 basis points since the start of 2025, bringing the policy rate down to 5.25%. The survey’s inflation projections have further strengthened the case for continued monetary easing.
RBI itself expects inflation to average 2% for FY26 and around 4% in the first half of FY27. This aligns closely with expectations from economists. A Moneycontrol poll conducted earlier showed most experts pegging FY27 inflation near 4%, reinforcing the credibility of the current outlook.
Importantly, over two-thirds of economists now expect another rate cut in the February policy meeting, especially after the Union Budget is announced. Markets tend to front-run such expectations.
For investors, this has direct implications for:
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Banking stocks and NBFCs (benefit from lower cost of funds and improved credit demand)
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Real estate and housing finance companies (EMI affordability improves)
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Capital goods and infrastructure companies (cheaper project financing)
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Equity valuations, especially for long-duration growth stocks
GST Pass-Through Begins to Reflect in Corporate Pricing Trends
One of the more encouraging developments highlighted by the survey is the improving transmission of GST rate rationalisation benefits to consumers. This is now visible in real pricing data.
An earlier analysis showed that prices in consumer electronics and automobiles declined by 3.6% between September and December, compared to only 0.3% declines in the same period in previous years. This suggests that companies are increasingly passing on tax benefits rather than absorbing them into margins.
This trend signals:
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Stronger purchasing power for consumers
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Potential volume recovery in discretionary categories
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Better demand outlook for autos, appliances and electronics companies
For equity investors, this strengthens conviction in consumption-linked themes, especially companies with strong brands and distribution networks.
CPI Base Change Could Redefine How Markets Track Inflation
From February 12, India’s CPI series will shift to a new 2024 base, introducing a broader consumption basket and assigning greater weight to non-food components. While technical, this change carries significant implications for how inflation is measured and interpreted.
The survey itself notes that this transition “has implications for inflation assessment and warrants careful interpretation of price dynamics.” Practically, this could mean reduced volatility in headline inflation data and a more structurally stable inflation profile over time.
For markets, this strengthens the narrative that inflation may remain structurally benign — a factor that supports long-term equity optimism but also requires investors to go beyond headline numbers when assessing macro conditions.
Global Uncertainty Replaces Inflation as the Biggest Market Risk
Perhaps the most telling shift is not in the numbers but in sentiment. A pre-Budget poll of economists shows that global uncertainty has now overtaken inflation as the single biggest risk to the Indian economy.
Economists pointed to concerns such as:
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Trade protectionism
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Slowing global growth
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Geopolitical instability
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Unpredictable capital flows
CXOs appear less worried about inflation too. More than half expressed confidence that policymakers can keep inflation below the RBI’s 4% target, which has improved corporate outlook on borrowing costs and investment planning.
What Does This Mean for Traders and Investor Portfolios?
For traders, the message is increasingly clear: rate-sensitive sectors remain the preferred hunting ground. Banking, real estate, autos, NBFCs and infrastructure-linked stocks are likely to stay in focus around policy events and macro data releases.
For long-term investors, this environment supports:
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Higher equity allocation due to supportive macro conditions
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Focus on domestic demand-driven companies
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Gradual accumulation during market dips rather than chasing rallies
At the same time, investors must remain disciplined, as global shocks can still trigger short-term volatility.
The survey’s underlying message is balanced: inflation is under control, policy flexibility exists, optimism is justified — but complacency is not.
