2026 outlook: Trade tensions, tariffs set the stage for a delicate policy balance, says report
HSBC expects India’s GDP growth in FY26 to come in at about 7.3%, revised up sharply from earlier estimates, while average inflation is projected to stay near 3.5%, comfortably below the Reserve Bank of India’s 4% target.
- Dec 22, 2025,
- Updated Dec 22, 2025 11:59 AM IST
2026 will be a transition year shaped by global tariffs and trade uncertainty, with the full impact of a more protectionist global order expected to start showing up across growth, inflation, currencies and bond markets. According to HSBC Asset Management’s Fixed Income Outlook 2026, the coming year will mark the first real test of how economies adapt to a world of higher tariffs, fragmented supply chains and shifting trade alliances.
The report notes that 2025 will be remembered as a “tariff-ied year”, while 2026 will be about adjustment. Global effective tariffs now average around 14%, but India faces significantly higher barriers on exports to the US, placing it among the most exposed emerging markets. As bilateral trade agreements proliferate and countries recalibrate their equations with Washington, global trade and capital flows are likely to undergo structural changes, adding to policy uncertainty.
Despite these external headwinds, India’s domestic macro fundamentals remain supportive. HSBC expects India’s GDP growth in FY26 to come in at about 7.3%, revised up sharply from earlier estimates, while average inflation is projected to stay near 3.5%, comfortably below the Reserve Bank of India’s 4% target. Structural factors, including supply-side reforms and benign commodity prices, are expected to keep inflation contained, assuming a normal monsoon and stable global conditions.
Policy support, however, is entering a more constrained phase. After aggressive fiscal and monetary easing in 2025 — including tax cuts, capital spending and cumulative RBI rate cuts of 125 basis points — the scope for further stimulus is limited. HSBC assigns a greater-than-50% probability to one final 25 basis point rate cut in early 2026, after which policy rates are likely to stabilise around 5% for a prolonged period. The report does not expect any rate hikes in 2026.
One of the key risks highlighted is liquidity management. FX intervention to stabilise the rupee has tightened banking system liquidity, even as credit growth continues to outpace deposit growth. Ensuring adequate liquidity transmission will be crucial to prevent policy easing from being blunted, HSBC said. The rupee, which weakened sharply in 2025, may be closer to the end of its depreciation cycle, supported by strong domestic fundamentals, though trade negotiations with the US remain a key swing factor.
For bond markets, the outlook calls for caution rather than aggressive positioning. While central government borrowing is expected to remain contained, elevated state-level borrowing could keep overall supply pressures high. RBI open market operations and a potential inclusion of Indian bonds in global indices could provide support, but volatility is likely to persist.
Against this backdrop, HSBC recommends an accrual-focused fixed income strategy for 2026, complemented by selective and tactical duration exposure, as investors navigate a year defined by global shifts and fine policy balancing at home.
2026 will be a transition year shaped by global tariffs and trade uncertainty, with the full impact of a more protectionist global order expected to start showing up across growth, inflation, currencies and bond markets. According to HSBC Asset Management’s Fixed Income Outlook 2026, the coming year will mark the first real test of how economies adapt to a world of higher tariffs, fragmented supply chains and shifting trade alliances.
The report notes that 2025 will be remembered as a “tariff-ied year”, while 2026 will be about adjustment. Global effective tariffs now average around 14%, but India faces significantly higher barriers on exports to the US, placing it among the most exposed emerging markets. As bilateral trade agreements proliferate and countries recalibrate their equations with Washington, global trade and capital flows are likely to undergo structural changes, adding to policy uncertainty.
Despite these external headwinds, India’s domestic macro fundamentals remain supportive. HSBC expects India’s GDP growth in FY26 to come in at about 7.3%, revised up sharply from earlier estimates, while average inflation is projected to stay near 3.5%, comfortably below the Reserve Bank of India’s 4% target. Structural factors, including supply-side reforms and benign commodity prices, are expected to keep inflation contained, assuming a normal monsoon and stable global conditions.
Policy support, however, is entering a more constrained phase. After aggressive fiscal and monetary easing in 2025 — including tax cuts, capital spending and cumulative RBI rate cuts of 125 basis points — the scope for further stimulus is limited. HSBC assigns a greater-than-50% probability to one final 25 basis point rate cut in early 2026, after which policy rates are likely to stabilise around 5% for a prolonged period. The report does not expect any rate hikes in 2026.
One of the key risks highlighted is liquidity management. FX intervention to stabilise the rupee has tightened banking system liquidity, even as credit growth continues to outpace deposit growth. Ensuring adequate liquidity transmission will be crucial to prevent policy easing from being blunted, HSBC said. The rupee, which weakened sharply in 2025, may be closer to the end of its depreciation cycle, supported by strong domestic fundamentals, though trade negotiations with the US remain a key swing factor.
For bond markets, the outlook calls for caution rather than aggressive positioning. While central government borrowing is expected to remain contained, elevated state-level borrowing could keep overall supply pressures high. RBI open market operations and a potential inclusion of Indian bonds in global indices could provide support, but volatility is likely to persist.
Against this backdrop, HSBC recommends an accrual-focused fixed income strategy for 2026, complemented by selective and tactical duration exposure, as investors navigate a year defined by global shifts and fine policy balancing at home.