India’s economy is showing remarkable staying power as it moves into the new year. According to the latest market review from HDFC Mutual Fund, the country is balancing aggressive growth with a strict commitment to cleaning up its balance sheet. While global markets remain a bit of a mixed bag, the domestic story is one of resilience, boosted by tax reforms and new trade deals with the US and EU.

Fiscal prudence takes centre stage

One of the biggest takeaways from the HDFC Mutual Fund report is the government’s disciplined approach to the national budget. Despite a dip in tax revenue earlier in the year, the government hit its FY26 fiscal deficit target of 4.4% by tightening its belt on spending. Looking ahead to FY27, they’ve set an even more ambitious target of 4.3%, with a long-term goal to bring the debt-to-GDP ratio down to 50% by 2031. While the market was a bit surprised by the ₹17.2 lakh crore gross borrowing target, the overall fiscal path looks realistic, assuming a steady 10% nominal GDP growth.

Consumer demand and digital shifts

On the ground, the "common man" seems to be spending again. HDFC Mutual Fund points out that recent tax cuts have provided a clear shot in the arm for demand. Vehicle registrations—a key pulse-check for the economy—have seen strong growth for four straight months, with two-wheeler and tractor registrations jumping 20.6% and 22.6% respectively in January.

Digital habits are also cementing themselves into the economy. Spending through UPI and IMPS grew by 18.7%, while manufacturing and services PMIs both stayed well in the expansion zone at 55.4 and 58.5.

Market volatility vs. long-term value

It wasn't all smooth sailing in January. The Nifty 50 dropped by 3.1%, and small caps took a harder hit with a 4.7% decline. While foreign institutional investors (FIIs) pulled out roughly $3.2 billion, domestic investors (DIIs) pumped in $7.6 billion.

HDFC Mutual Fund notes that while most sectors are currently trading at a premium compared to their historical averages, private banks are actually trading at a discount. This suggests that "stock picking" is going to be far more important than just following the broad market index in the coming months.

The road ahead: Trade and interest rates

The report mentions two major "game-changers" on the horizon. First, the trade deal with the US—where tariffs could drop from 50% to 18%—is expected to be a huge tailwind for exports. Second, while inflation remains under control at 1.3% (as of December), the RBI is likely to stay on a "long pause" with interest rates to keep the recovery on track.