DBS Group Research’s GDP Nowcast indicates India’s real GDP growth may cool in early 2026 after a firmer second half of FY26, as weaker industrial activity, trade and government spending weigh on momentum in 1Q and 2Q. The framework is presented as an estimate of real GDP growth for the current quarter using available economic data alongside forecasts, and it points to full-year 2026 growth easing from 2025.
The revised and rebased GDP series shows activity firmed modestly in the second half of FY26, even as the pace softened. Real GDP increased 7.8% year on year in Oct–Dec 2025 (3QFY26), down from 8.4% in Jul–Sep 2025, with indirect tax rationalisation and festive demand providing support, alongside firmer investment activity and improved rural farm outcomes. Attention now turns to 1Q26 (4QFY26), due later this month, with the model projecting 7.2% growth in 1Q and 6.9% in 2Q.
Market Outlook And Defensive Positioning
Given the outlook for slowing growth in the first half of 2026, we believe the market’s upward momentum is likely to face headwinds. The forecast moderation to 7.2% and then 6.9% suggests that the peak growth rate is now behind us. This requires a shift in strategy from outright bullishness to a more cautious and defensive posture.
We are already seeing confirmation of this trend in high-frequency indicators. For example, the HSBC India Manufacturing PMI for May 2026 dipped to a three-month low of 57.5, signalling a slight loss of steam in the industrial sector. This, combined with a recent contraction in merchandise exports, reinforces the view that economic activity is cooling.
Hedging Strategies And Sectoral Considerations
For the coming weeks, we should consider buying out-of-the-money put options on the Nifty 50 index. This provides a cost-effective way to hedge our long positions and profit from a potential market correction. The increased uncertainty should also start to push up implied volatility, making these options more valuable.
Alternatively, for those holding a portfolio of stocks, writing covered calls is a prudent strategy. This approach allows us to generate income from premiums while the market potentially moves sideways or drifts lower. It’s a lower-risk way to capitalize on a market that is no longer making strong upward moves.
We are also closely watching for any change in tone from the Reserve Bank of India. Historically, a slowdown like this, similar to what we saw in the post-tightening cycle of 2023, eventually leads the central bank to pivot towards a more accommodative stance. Any hint of a future rate cut could create opportunities in interest rate futures.
Considering the slowdown is also driven by reduced government spending, we anticipate weakness in sectors heavily reliant on public contracts, like infrastructure and capital goods. Therefore, we should consider using stock futures to initiate short positions on specific companies within these sectors that look overvalued. This allows us to target weakness directly rather than just playing the broader index.
