UK Recession Risk Grows, Fueling BoE Rate Cut Bets

India has unveiled an annual budget that doubles down on manufacturing, signaling a strategic push to boost factory output and accelerate growth in Asia's third-largest economy. Finance Minister Nirmala Sitharaman outlined a plan focused on structural reforms designed to navigate a volatile global environment.

The budget prioritizes strengthening the manufacturing sector, building a more robust financial system, and increasing investment in advanced technologies like artificial intelligence. This comes as the Modi government aims to lift manufacturing's contribution to GDP from its current level of under 20% to a more ambitious 25%, a move critical for creating jobs for millions of new workforce entrants.

The Indian economy is projected to grow by 7.4% in the current financial year, with inflation expected to be near 2%. The government forecasts a fiscal deficit of 4.4% of GDP for the same period.

A Strategic Push for 'Made in India'

To drive private investment and demand, the government's budget builds on recent reforms, including tax cuts and an overhaul of labor laws. Sitharaman identified seven key sectors for a manufacturing scale-up:

• Pharmaceuticals

• Semiconductors

• Rare earth magnets

• Chemicals

• Capital goods

• Textiles

• Sports goods

In addition to focusing on these priority areas, the government also plans to revive 200 legacy industrial clusters to further bolster its manufacturing base.

Fiscal Targets and Infrastructure Spending

A key shift in fiscal policy is the adoption of the debt-to-GDP ratio as the primary target. The government aims to reduce this ratio from 56.1% in the current year to 55.6%.

To achieve this, the fiscal deficit is targeted to remain at 4.4% in the new financial year. To finance its spending, the government will undertake gross borrowing of 17.2 trillion rupees from the bond markets.

A significant portion of this spending is earmarked for infrastructure. The budget allocates 12.2 trillion Indian rupees ($133.08 billion) for infrastructure projects in the upcoming year, an increase from 11.2 trillion rupees last year.

Reforming the Financial Sector

The government will establish a high-level committee to review the country's financial sector regulations. The goal is to ensure the financial system can effectively support a growing economy. This review will cover rules for non-banking financial companies (NBFCs) and streamline foreign investment management rules to improve market access for international investors.

The budget also introduces measures to deepen the corporate bond market. This includes the introduction of total return swaps (TRS), a type of derivative contract that allows parties to transfer the economic exposure of a bond without an outright sale. Incentives will also be provided to encourage fundraising through municipal bonds.

Modi's Vision for a Developed India

Prime Minister Narendra Modi framed the budget as part of a long-term strategy, stating, "The nation is moving away from long-term problems to tread the path of long-term solutions."

Before the budget announcement, the government's economic survey projected growth between 6.8% and 7.2% for the fiscal year starting in April. Modi affirmed that India will press ahead with "next-generation reforms," calling the next 25 years crucial for transforming the nation into a developed economy.

These domestic reforms are complemented by international trade efforts, such as a landmark agreement with the European Union, intended to counter the impact of U.S. tariffs on certain Indian goods.

How Markets Reacted to the Budget

The stock market registered a muted initial response to the budget announcement. India's benchmark Nifty 50 index was nearly flat on the day.

However, specific sectors targeted by the budget saw positive movement. Stocks in electronics manufacturing, infrastructure, textiles, and pharmaceuticals edged higher, with the Nifty pharmaceutical index rising 0.1% and an infrastructure company gauge advancing by about 0.2%.

($1 = 91.6710 Indian rupees)

India's federal government is set to spend a record 12.2 trillion rupees ($133.08 billion) on infrastructure in the 2027 fiscal year, an 11.4% annual increase designed to accelerate growth in Asia's third-largest economy amid global uncertainty.

The plan, unveiled in the federal budget presented by Finance Minister Nirmala Sitharaman, continues a strategy of significantly raising infrastructure investment that began after the COVID-19 pandemic. This approach aims to stimulate economic activity and create jobs in the world's most populous nation, with a renewed focus on the manufacturing sector.

Indian Finance Minister Nirmala Sitharaman presented the federal budget, which includes a significant increase in capital expenditure.

Record Capital Expenditure Detailed

For the current fiscal year ending in March 2026, the government's capital expenditure (capex) was revised down to 10.95 trillion rupees from the initially allocated 11.21 trillion rupees.

The upcoming fiscal year's proposed spending marks a clear commitment to continued public investment.

Figure 1: India's total expenditure from FY 2016-17 to FY 2026-27, showing a breakdown of revenue vs. capital spending. The budget proposes a total of 53.5 trillion rupees for FY27, with capital expenditure rising to 12.2 trillion rupees.

"The capex outlay for fiscal year 2027 looks a bit modest and misses market expectations slightly, but overall, a positive for the manufacturing sector," said Amit Anwani, an analyst at Prabhudas Lilladher. "It will also be good for private sector capex."

Market Reacts with Cautious Optimism

Following the budget announcement, capital goods companies saw their shares rise on the news of higher infrastructure development spending.

Key movers included:

• Larsen & Toubro

• IRB Infra

• NBCC

• Action Construction

These stocks jumped between 1.3% and 4% in response to the government's plans.

Fueling Growth Amid Global Headwinds

The consistent government spending on infrastructure, along with cuts to income and consumption taxes, has helped India's economy remain resilient. The country has so far weathered punitive U.S. tariffs imposed by President Donald Trump.

Economic growth for the current fiscal year is forecast at 7.4%, underscoring the effectiveness of the government's fiscal strategy.

($1 = 91.6710 Indian rupees)

South Korea's economy is on track to be dominated by its semiconductor sector in 2026, with chips projected to account for 30% of the nation's total exports. According to analysis from BofA Securities, a price-driven "super-cycle" in the semiconductor market is extending into its third year, reshaping the country's economic landscape.

The trend has already delivered a significant impact. In 2025, semiconductor exports surged by 22%, contributing 4.6 percentage points to South Korea's overall headline export growth of 3.8%.

The Unprecedented Super-Cycle in Numbers

The momentum has accelerated dramatically. In early January, daily chip export growth hit 70.2% year-over-year, marking the fastest pace recorded since 2017. This surge is largely fueled by DRAM prices, which have already climbed between 20% and 30% year-to-date.

BofA analysts forecast this trend will continue, with projections showing:

• Global DRAM sales will grow by 60% in 2026, following 50% growth in 2025.

• Average selling prices are expected to rise by 40% this year, on top of gains of 62% in 2024 and 26% in 2025.

This current upcycle, which began in the second half of 2023, is now the longest in decades. It has already outlasted the typical two-year cycles seen in 2019-2021, 2016-2018, and 2012-2014.

Economic Windfalls and Fiscal Benefits

The semiconductor boom is strengthening South Korea's national finances and supporting the won. In the January-October 2025 period, government tax revenue jumped 12.6% to 331 trillion won ($246 billion). Improved profitability for exporters drove a 22% surge in corporate and income tax receipts, which rose from 152 trillion won to 185 trillion won over the same period a year earlier.

This rally could also reduce the country's projected fiscal deficit for 2026, which currently stands at 4.0%. According to BofA, this may create more room for government spending on research and development and social welfare programs.

Concentration Risk: A Double-Edged Sword

While the benefits are clear, the economy's growing dependence on semiconductors creates significant vulnerabilities. Market concentration has reached new heights, with Samsung Electronics and SK Hynix now accounting for nearly 40% of the KOSPI index, a substantial increase from 25.4% in 2020. This makes the market highly sensitive to any reversal in the chip cycle.

Furthermore, with semiconductors representing 24% of total exports—the highest level in recent decades—the nation's economic cyclicality is amplified. The report warns that this risk is compounded by persistent weakness in other key sectors like consumer electronics, autos, and traditional intermediate goods.

What's Fueling the Chip Demand?

The primary driver of the current cycle is the soaring demand for advanced chips used in artificial intelligence. BofA notes that capacity for high-bandwidth memory remains extremely tight, which helps sustain elevated prices. Analysts expect the upcycle to continue through the second half of 2026.

This optimistic outlook has prompted the central bank to signal a likely upgrade to its 1.8% growth forecast for 2026 at its February meeting. BofA anticipates the Bank of Korea will hold interest rates steady throughout the year.

Major Headwinds on the Horizon

Despite the positive momentum, significant risks remain. On January 26, President Donald Trump announced on social media that he would raise tariffs on Korean goods to 25% from 10%, targeting autos, lumber, pharmaceuticals, and other products.

The cycle could also be derailed by a sharp reversal in DRAM prices, particularly if major technology companies alter their capital spending plans.

A Price-Driven Boom, Not a Production Surge

A key feature of this cycle is that it is driven more by price than by volume. Despite the strong export growth, facility investment by chipmakers has only grown moderately, lagging historical patterns. This suggests manufacturers are maintaining tight supply to support higher prices.

In 2025, semiconductor production rose by 15%. This figure is well below the 29% increase seen in 2021 and the 39% surge recorded in 2010, underscoring the price-centric nature of the current boom.

The euro's recent surge has turned heads toward the European Central Bank, but economists argue that the currency's rapid appreciation is unlikely to force policymakers into immediate action.

Last week, the euro climbed to $1.20 against the U.S. dollar, a level not seen since mid-2021. According to analysis from Capital Economics, the speed of this move is historically unusual. The currency has only strengthened by a similar magnitude over a 10-day period a few times in the last decade, and its trade-weighted exchange rate has now hit an all-time high.

Muted Inflation Impact Limits Urgency

Despite the sharp rise, the immediate effect on the eurozone's inflation is expected to be minimal.

Capital Economics cites the ECB's own sensitivity analysis, which suggests that if the euro stays at its current level against the dollar, headline inflation would only be about 0.1 percentage points lower next year than the central bank projected in December.

While this tilts inflation risks slightly to the downside, analysts say it falls far short of the threshold needed to justify intervening in the foreign exchange market on grounds of price stability.

Why Direct Currency Intervention Is Off the Table

The ECB is expected to discuss the euro's strength at its upcoming meeting, but direct intervention appears highly improbable.

The central bank has the power to intervene in currency markets to counter disorderly conditions that could threaten price stability. However, Capital Economics notes the euro would have to rise much further before such a move would be considered. Even then, an intervention involving the purchase of U.S. dollars is seen as very unlikely.

Historically, the ECB has intervened in currency markets on only two occasions: in late 2000 and March 2011. Both times, the goal was to support a stronger euro, and the actions were coordinated with other major central banks. Today, Capital Economics finds that a coordinated effort to push the euro lower is extremely unlikely, particularly given the U.S. administration's stated preference for a weaker dollar.

What to Expect From ECB Officials

So far, ECB officials have downplayed the currency's climb. Vice President Luis de Guindos previously described levels above $1.20 as "complicated" but also called the $1.20 mark "perfectly acceptable." Similarly, Austria's central bank governor reportedly referred to the recent rise as "modest."

Capital Economics expects ECB President Christine Lagarde may reiterate that policymakers are closely monitoring the euro but is unlikely to take active steps to talk it down.

The Long-Term Outlook: When Could the ECB Act?

While immediate action is not on the horizon, sustained gains in the euro could influence monetary policy over time.

According to ECB analysis cited by Capital Economics, a gradual rise to between $1.25 and $1.30 over the next three years would lower headline inflation by approximately 0.3 percentage points in 2028. In such a scenario, policymakers would more likely turn to stronger verbal warnings and interest rate cuts rather than direct currency market operations.

For now, economists believe the euro's strength is more a reflection of dollar weakness than fundamental momentum in the eurozone, which lessens the need for an ECB response. As a result, the central bank is expected to remain on the sidelines unless the currency's appreciation becomes significantly larger and more persistent.

India's federal government plans to borrow a record 17.2 trillion rupees ($187.63 billion) in the 2026–27 fiscal year, a figure that surpasses most market expectations. The proposal was announced by Finance Minister Nirmala Sitharaman during her budget speech on Sunday.

For the upcoming fiscal year, the country's net market borrowing is projected to be 11.70 trillion rupees, which is slightly lower than the borrowing for the 2025-26 fiscal year.

Figure 1: India's gross market borrowings are projected to hit a record 17.2 trillion rupees in FY 2026-27, continuing a trend of elevated government debt issuance since FY 2020-21.

Bond Yields Under Pressure Amid Supply Concerns

The announcement comes as India's bond yields have already been climbing for months. The heavy borrowing by both federal and state governments has been overwhelming demand for government debt securities.

Even after the Reserve Bank of India cut its policy rate by 125 basis points, the benchmark 10-year bond yield has edged slightly higher since February of last year. Market analysts had anticipated gross borrowings to be in the range of 16 trillion to 17.50 trillion rupees, with a Reuters poll of 35 economists showing a median expectation of 16.3 trillion rupees.

Traders fear the substantial supply of new debt could continue to suppress demand and keep yields elevated. This concern persists despite significant support from the Reserve Bank of India, which has included record bond purchases and foreign-exchange swaps designed to inject more liquidity into the banking system.

With government bond markets closed on Sunday, the benchmark 10-year bond yield (IN10YT=RR) is expected to see a further increase when trading resumes on Monday. A trader at a private bank noted that any negative reaction might be partially offset by the central bank's choice of paper for its open market purchase scheduled for Thursday.

New Fiscal Targets: Debt-to-GDP and Deficit Goals

The government is shifting its fiscal policy to focus on a debt-to-GDP ratio target. The goal is to lower this ratio to 55.6% in the next fiscal year.

This strategy corresponds to a fiscal deficit target of 4.3% of the gross domestic product (GDP). The fiscal deficit, which measures the gap between government spending and revenue, is a critical metric for markets as it directly influences borrowing requirements, overall debt levels, and investor confidence.

Figure 2: The government's budget outlines a strategy to reduce both the fiscal deficit to 4.3% of GDP and the debt-to-GDP ratio to 55.6% by the 2026-27 fiscal year.

($1 = 91.6710 Indian rupees)

India is set to unveil an annual budget designed to accelerate and sustain strong economic growth while enhancing business competitiveness in a volatile global climate. Finance Minister Nirmala Sitharaman announced that the government's priorities are geared towards long-term stability and expansion.

The upcoming fiscal year's budget will center on critical areas, including structural reforms, strengthening the financial sector, and increasing investment in advanced technologies like artificial intelligence.

Finance Minister Nirmala Sitharaman and her team present the annual budget, which outlines a strategy for sustained economic growth and reform.

Economic Outlook and Projections

The Indian economy is projected to grow at a rate of 7.4% in the current financial year, with inflation expected to remain near 2%. Meanwhile, the government's fiscal deficit for the year is anticipated to be 4.4% of GDP.

Looking ahead, the government's economic survey has forecast growth between 6.8% and 7.2% for the fiscal year beginning in April.

A Foundation of Recent Reforms

To stimulate private investment and demand, New Delhi has recently implemented a series of significant policy changes. More adjustments are expected in the forthcoming budget. Key reforms already rolled out include:

• Cuts to consumption and income taxes.

• A comprehensive overhaul of labor laws.

• Measures to open up the tightly controlled nuclear power sector.

Modi's Long-Term Vision for India

Prime Minister Modi emphasized a shift in focus, stating, "The nation is moving away from long-term problems to tread the path of long-term solutions." He noted that such solutions create the predictability needed to foster global trust.

Modi added that India will push forward with "next-generation reforms," highlighting the next 25 years as crucial for achieving the goal of transforming the South Asian nation into a developed economy.

Revitalizing Domestic Manufacturing

A core component of this long-term strategy is a third major initiative to boost manufacturing's share of the economy, following two previous attempts. The government is also expected to ease regulations for investment in defense manufacturing to support this objective.

Navigating Global Trade Challenges

On the international front, India is actively pursuing new trade agreements to mitigate external economic pressures. A landmark trade deal with the European Union is a key example of this strategy.

This move is intended to offset the impact of the 50% tariffs that President Donald Trump's administration imposed on certain Indian goods exported to the United States.