From the CIO’s Desk – India Insights February 2026

The India-US trade deal in early February, following January’s EU free trade agreement and a growth-oriented Budget, gave India three major catalysts in quick succession. Yet the recovery was overshadowed by a global sell-off in technology stocks and, more recently, the escalation of conflict in the Middle East. In this edition, we offer our framework for navigating the geopolitical uncertainty, explain why the indiscriminate reaction to AI disruption has created opportunity rather than risk for our portfolio, and answer the trillion dollar question about what happens to jobs in India.

Market Review

The MSCI India Index returned 1.45% (in USD terms¹)) in February, but underperformed regional peers which extended their strong run on the back of AI-driven rallies. By sector, Utilities and Health Care were the top performers, while IT and Communication Services were the worst performers.

Following the landmark India-EU free trade agreement announced in January, the India-US interim trade agreement was announced in February, reducing tariffs on Indian exports from 50% to 18%, while India committed to eliminating or reducing tariffs on US industrial and agricultural goods. Together, these deals meaningfully de-risked India’s external trade outlook. Foreign portfolio investors responded accordingly, turning net buyers of Indian equities for the first time in several months, with net inflows of approximately USD 1.4 billion in February, ending a prolonged selling streak that saw nearly USD 23 billion of cumulative net outflows from November 2024 through January 2026.²)

The FY27 Union Budget, presented on February 1, reinforced the government’s commitment to fiscal discipline while sustaining its infrastructure-led growth strategy. Public capital expenditure was raised to INR 12.2 trillion (~USD 133 billion), a 9% increase over FY26, while the fiscal deficit target narrowed to 4.3% of GDP (vs 4.4% in FY26), with the debt-to-GDP ratio estimated to decline to 55.6%.³) The Budget’s focus on scaling manufacturing across strategic sectors, expanding logistics infrastructure through seven high-speed rail corridors and new freight corridors, and strengthening MSMEs was broadly well-received by markets.

Domestic activity indicators remained robust. Manufacturing purchasing managers’ index (PMI) rose to 56.9 in February (vs 55.4 in January), the highest reading in four months, supported by stronger domestic demand and a pickup in new orders.⁴) Services PMI eased marginally to 58.1 (vs 58.5 in January) but remained well above the long-run average, with international sales rising at their fastest pace since August 2025.⁵) Headline consumer price index (CPI) inflation printed at 2.75% y/y in January under the newly rebased 2024 series, comfortably within the Reserve Bank of India’s (RBI) 2-6% tolerance band.⁶) The RBI retained the repo rate at 5.25% at its February policy review.

Portfolio Commentary & Outlook

Navigating the Middle East Conflict

Note: This outlook was prepared as of March 8, 2026. Given the rapidly evolving nature of events, we will continue to update our views as the situation develops.

The US-Israel military operation against Iran has been the dominant risk event shaping global markets since early March. The conflict has since widened beyond its initial scope, with disruptions to air travel, energy logistics, and shipping in the Strait of Hormuz.

Our base case remains that the conflict is more likely to move toward a negotiated resolution in the near term rather than a prolonged military engagement. Multiple parties have strong incentives to de-escalate:

• From the US perspective, midterm election primaries are already underway, and the administration faces growing domestic pressure as both the human and fiscal costs mount. More importantly, the administration’s most likely off-ramp is economic pain. Markets initially assumed the conflict would be short-lived, and that the administration would, as it has before, “TACO” and pull back quickly. But with oil now above USD 110 per barrel and equity markets falling, the pressure is mounting. We believe that another 10-15% move higher in oil or a further 5-10% decline in markets could be the catalyst for the administration to declare that the operation has achieved its objectives and wind down military action. We saw this playbook during the tariff episodes where it was ultimately market and economic pain that forced the reversal. We expect a similar dynamic here.
• China, as the world’s largest importer of oil and gas, has a direct economic interest in restoring stability – Beijing has publicly called for an immediate ceasefire and a return to dialogue, while pressing Iran to ensure safe passage through the Strait of Hormuz.
• India’s oil supply is also being disrupted, adding another major economy to the coalition of voices urging resolution.
• GCC states, several of which have been struck by Iranian retaliatory fire, have publicly emphasized neutrality, condemned the attacks, and urged de-escalation through diplomacy. Aside from impacts to oil and gas and tourism, GCC states also face threats to food security while passage through the Strait of Hormuz remains limited.

We continue to monitor several signals that suggest further escalation may be contained:

• Early in the conflict, the UAE opened safe air corridors for commercial flights, a step that would typically not be taken if authorities expected the conflict to widen materially.
• China’s actions – calling for immediate ceasefire and pressing Iran on Hormuz – are consistent with the precedent set during the Venezuela situation, where both China and Russia expressed strong rhetoric but ultimately stayed out of direct military involvement.
• Finally, the majority of Iranian missiles launched have been intercepted, limiting the scale of physical damage. But according to certain press reports, the US’s interceptor stockpiles, having been used over the past few years, can be depleted quickly if the conflict is prolonged.

The key escalation risks we are watching include any retaliatory action by GCC nations beyond self-defense, which would represent a meaningful widening of the conflict. We are also monitoring for any indication that China or Russia may move beyond rhetoric to direct involvement – this remains a tail risk, though current signals suggest it is unlikely.

From a portfolio perspective, we have made no changes to our portfolio as a result of the conflict. The primary transmission mechanism to Indian markets is through oil prices, where India is more exposed than most regional peers given its status as the world’s third-largest oil importer and its heavy reliance on West Asian supply routes through the Strait of Hormuz. GCC and West Asia collectively account for 19% of India’s total goods trade – the largest bloc by share – with 21% of imports concentrated in crude, petroleum products, gold, and diamonds. A prolonged disruption would put upward pressure on inflation and the current account deficit, while risk-off sentiment would weigh further on the rupee. That said, India’s strategic petroleum reserves provide a near-term buffer, and we expect the RBI to intervene judiciously to manage currency volatility. Any portfolio adjustments made in recent weeks were driven by valuation discipline, not geopolitical considerations. However, the sharp correction in Indian equities in early March has created value in sectors such as industrials, financials, consumer discretionary, and health care, which we may look to take advantage of as clarity emerges.

Chart. India’s dependency on GCC could create headwinds in case of prolonged disruption, but that is not our base case

Source: Kotak Institutional Equities estimates, March 2026

The “SaaSpocalypse” and The Trillion Dollar Question for India’s Job Market

Markets have taken a “shoot first, ask questions later” approach to AI disruption. Following the widely circulated Citrini Research report warning of a dystopian wave of AI-led disruption, a massive sell-off swept through software-as-a-service (SaaS) stocks and broader consumer internet names globally. Indian equities were not spared, with IT services and consumer internet names bearing the brunt of the sell-off, dragging the broader index despite otherwise healthy domestic momentum.

The fear is twofold: 1) that agentic AI will render traditional aggregator apps obsolete (e.g. booking travel, hailing rides, ordering food) without needing a human to navigate an interface; and 2) that “vibe coding” and off-the-shelf large language models (LLMs) will make it trivially easy for enterprises to build in-house tools, eliminating the need for expensive third-party software.

We choose to ask questions first.

Can everything be disrupted? Perhaps not. We believe the current correction is a sort, not a crash. Markets are in the process of separating value-adding platforms with genuine moats from “thin” apps that merely provide an interface for data. That sorting will ultimately be healthy, but in the meantime, the indiscriminate sell-off has created significant dislocations. Here is why we think the market has overreacted.

Enterprise adoption takes time. Ask your own IT team how many systems they plan to replace with AI in the next 12-18 months. The answer is likely very few. There is a process that can’t be shortcut, including evaluation, vendor selection, testing, compliance review, and integration. If enterprises replaced their entire software stack overnight, businesses and economies would falter. As history consistently shows, the impact of technological disruption is overestimated in the near term and underestimated in the long term. Adoption will happen, but on the enterprise’s timeline, not the market’s.

There is a distinction between software and services. There is a crucial distinction between software products being disrupted and the services layer that implements, customizes, and manages enterprise technology. Indian IT services companies (which account for a significant share of the MSCI India IT sector) are not SaaS vendors selling off-the-shelf tools. They are systems integrators, consultants, and managed services providers. Every enterprise that wants to adopt AI still needs engineers to build the data pipelines, integrate with legacy systems, manage change across the organization, and ensure compliance. That work cannot be “vibe coded”. If anything, AI adoption increases the demand for external expertise, not decreases it, because the complexity of implementation scales with the ambition of the deployment.

Physical assets are being completely discounted. The sell-off has ignored the real-world infrastructure that underpins many consumer internet companies, including their fulfilment centers, warehouses, delivery fleets, and logistics networks. Regardless of how AI might reshape the front-end of consumer discovery, goods still need to move from point A to point B, returns still need to be processed, and service issues still need to be resolved. Companies with these tangible assets will endure. Consumer-facing businesses that have spent years fine-tuning last-mile logistics, returns processing, and dispute resolution have built deeply embedded processes that are far harder to replicate. When there is a physical back end involved, operational sophistication is the moat. India’s leading consumer internet companies have survived periods of intense competitive pressure (e.g. Jio’s disruptive entry into telecoms and consumer-facing businesses, and the quick commerce subsidy wars between Blinkit, Zepto, and Swiggy Instamart) and have largely emerged with stronger market positions and improving unit economics. To assume these companies will be asleep at the helm while AI disruption unfolds is to dismiss their track record.

Staying focused on the rotation

As we outlined in last month’s commentary, we maintain that the defining story of this year is the rotation from AI enablers to AI adopters. The early signs are already visible. Nvidia, despite delivering another blockbuster quarter, is seeing its share price plateau. It becomes increasingly difficult for companies at such extraordinary market capitalizations to compound at past levels. Meanwhile, questions remain about whether hyperscaler capex will actually be executed at the levels estimated for the coming years. A significant portion of planned AI infrastructure investment is expected to be funded through private markets, but with private assets now marked down due to software exposure, the ability of private credit to support the required capex is uncertain. The “AI enabler” trade is becoming stretched, and when the market recognizes that it has been too dismissive of the adopter side of the equation, a correction will follow.

This is exactly the environment in which our investment approach comes into its own. We are investing in “last man standing” companies – businesses with deep moats, proprietary data, fulfilment and logistics infrastructure, and demonstrated value-add that cannot be easily replicated by an AI agent or a new entrant.

The trillion dollar question: What about jobs in India?

The more significant issue is AI’s potential impact on employment. As we first wrote about in our August commentary, we believe AI-driven job displacement – particularly in white-collar, entry-level, and middle-management roles – is a real and valid concern. But we do not expect large-scale job losses to materialize within the next one to two years. The more likely timeline is four to five years or beyond, as enterprise adoption cycles and organizational change management takes time.

What we also haven’t fully baked in is the likelihood of government intervention. If job displacement begins to materialize at scale, policymakers will almost certainly respond – whether through regulation, retraining programs, or fiscal measures – to minimize the pain of disruption. India’s recent labor code consolidation, which brought 250 million unorganized workers into the formal economy, is an example of the kind of proactive institutional reform that positions the country to manage workforce transitions more effectively.

Meanwhile, the narrative around AI and jobs has been almost exclusively focused on white-collar displacement. But a closer look at labor markets globally reveals a very different story for blue-collar workers. The construction industry in the US faces a monthly shortfall of approximately 350,000 workers, with 94% of firms reporting difficulty filling positions.⁷) The EU also reports labor shortages in 98% of occupation categories.⁸) Critically, this is not cyclical – it is structural, driven by the convergence of an aging workforce (over 21% of US construction workers are now 55 or older), a depleted vocational training pipeline, immigration constraints, and a cultural bias toward university education that has diverted generations away from skilled trades.⁹)

India, despite having the world’s largest working-age population, faces its own version of this paradox. Our research indicates the country has an estimated shortage of 100-150 million skilled blue-collar workers across construction, manufacturing, logistics, energy, and services.¹⁰) Construction alone faces a gap of 30-35 million skilled workers, with project delays of 6-12 months attributed to labor unavailability.¹¹) In manufacturing, 76% of firms report skilled labor shortages impacting profitability, while India’s renewable energy buildout requires a massive scaling of installation and maintenance workforces that the current training pipeline cannot deliver.¹²)

In the near term, we also see offsetting forces. New business formation in the US is surging, fueled by AI and LLMs that are dramatically reducing the cost and complexity of launching a company. India is seeing a parallel dynamic – its startup ecosystem remains one of the most active globally, with strong IPO activity and a growing cohort of digitally native companies scaling rapidly. The gig economy, tourism, and new consumer services continue to absorb labor, providing a buffer while the economy adapts. As these firms scale, they will hire for sales, operations, customer success, and roles we have not yet imagined – underscoring that AI is more likely to strengthen than disrupt the labor market over the next couple of years.

Chart. Weekly business formation in the US is rising rapidly, likely driven by AI

Source: US Census Bureau, Shikhara Investment Management, February 2026

This provides a powerful counterpoint to the AI job displacement narrative. While AI may displace certain white-collar roles over the medium term, blue-collar labor is becoming scarcer, and automation in physically complex sectors like construction and skilled trades remains years away from making a meaningful impact. Wage growth in blue-collar occupations is already outpacing white-collar – a trend that is likely to persist. And companies that own physical infrastructure are being undervalued by a market fixated on software disruption.

Interpreting the Noise Around Chinese Bidders in Indian Infrastructure

Earlier this year, Indian industrial stocks witnessed a sharp pullback, partly driven by media reports that the government may be considering easing restrictions on Chinese companies participating in Indian infrastructure tenders. The news unsettled capital goods, power equipment, and transmission-linked names, compounding an already fragile sentiment amid concerns around delays in transmission capex, moderating electricity demand growth, and unsigned power purchase agreements.

February’s price action told a different story. Industrials returned 8.11% for the month, among the best-performing sectors, as the market began to distinguish between headline noise and underlying fundamentals. We believe this rebound is justified.

The restrictions on Chinese firms were imposed in 2020 following border incidents and were intended to safeguard critical national infrastructure and promote domestic manufacturing. At present, there has been no formal communication confirming any broad rollback of these rules, and there has been no sweeping policy notification altering the tendering framework.

That said, recent reports do indicate that the government has begun selectively easing procurement restrictions in areas facing equipment shortages. In particular, state-run power and coal companies have reportedly been allowed limited flexibility to source certain electrical equipment from Chinese suppliers to prevent delays in projects. These moves appear to be administrative, case-specific exemptions aimed at addressing supply bottlenecks, rather than a structural reopening of government tenders to Chinese competition.

Importantly, segments such as high-voltage transmission (particularly HVDC networks, FACTS, and STATCOMs) operate under stringent qualification requirements and extended testing cycles. These systems are central to India’s energy security, grid stability, and renewable energy integration. Entry barriers are inherently high, vendor onboarding is a long-drawn process, and given the national security considerations, meaningful participation by Chinese firms in these segments appears unlikely irrespective of broader tendering frameworks.

The recent earnings season reinforces this view, with order inflows for high-voltage power equipment players continuing to trend upward. These companies remain well-insulated, supported by strong order books and long-term visibility across structurally attractive themes such as grid expansion, renewable evacuation, and electrification. Recent management commentary from industrial and power equipment companies has also been reassuringly constructive, with firms reiterating that they do not expect any weakening of the Make in India framework and that the recent concentrated ministry level interventions have eased the right of way (ROW) challenges which has accelerated project execution. For us, the earlier valuation reset was an opportunity, not a warning – and February’s recovery suggests the market is arriving at the same conclusion.

Overall, the market has treated India as a blanket AI loser, but the picture is far more nuanced. High-end urban consumption may face near-term pressure as AI affects formal sector wages in white-collar services. But for the rest of India – the tier-2 and tier-3 cities where the bulk of the population resides – we believe AI is a productivity tool, not a threat, unlocking efficiencies for small businesses and local manufacturers that were previously constrained by limited access to technology. At the state level, India’s most populous states are benefiting from improved governance, accelerating infrastructure, and purposeful policy leadership – secular tailwinds that are largely independent of AI disruption. Southern states with high IT concentration may face localized hiring pressure, but this will be mitigated by the manufacturing export opportunity as India’s trade agreements take effect. The net result is that India’s growth drivers are rotating. Just as the benchmark has evolved over the past few decades, the next decade will produce a new set of winners, and we are positioning our portfolio on the right side of that transition.