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Special Report

Modi Momentum: Finding Stability in India’s Goldilocks Economy

Written by Jeffrey Neal Johnson. Originally Published: 1/14/2026. 

Summary

• The combination of accelerating economic growth and stable consumer prices provides a strong foundation for long-term equity appreciation.
• Major financial institutions have successfully pivoted back to aggressive lending growth after improving their overall balance sheet health.
• Central bank policy shifts toward lower interest rates are expected to act as a significant catalyst for corporate expansion and profitability.

Investors entering 2026 face a complex investment landscape. Western markets are grappling with political uncertainty and policy shifts that have added significant volatility to portfolios concentrated in U.S. equities. As capital seeks shelter from these headwinds, a distinct rotation is underway: money is moving toward markets that combine political stability, accelerating economic output, and controlled prices.

India has emerged as the primary destination for this safety trade. The South Asian giant appears to be in a Goldilocks phase — growth strong enough to lift corporate profits, and inflation low enough to allow the central bank to support the economy. For investors looking to hedge domestic risks, Indian equities offer a data-backed alternative.

A Goldilocks Scenario: Why the Numbers Favor India

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The bullish case for India rests on hard economic metrics that diverge sharply from the developed world.

The most compelling metric as we enter 2026 is inflation. India’s Consumer Price Index (CPI) for December 2025 came in at just 1.33%, well below the Reserve Bank of India’s (RBI) medium-term target of 4%. Low inflation preserves purchasing power and helps businesses maintain healthy profit marginswithout passing soaring costs on to consumers.

At the same time, the International Monetary Fund (IMF) and OECD project India’s Gross Domestic Product (GDP) to grow roughly 6.7% for Fiscal Year 2026. That creates a powerful spread: the economy is expanding rapidly while prices remain stable.

That stability has given the central bank room to cut policy. The Reserve Bank of India recently trimmed the repo rate, the key interest rate for bank lending, to 5.25%.

In markets, rate cuts are usually seen as a positive catalyst. Lower rates reduce borrowing costs for corporations, encouraging expansion and capital expenditure. When a central bank cuts rates amid robust growth, it often acts like rocket fuel for equities — a different dynamic than the West, where cuts are frequently aimed at staving off recession.

The Broad Strategy: How to Play the Trend

For U.S.-based investors, a straightforward way to access this macro story is the iShares MSCI India ETF (BATS: INDA). The fund tracks the MSCI India Index and provides exposure to large- and mid-cap companies across the subcontinent.

While INDA is diversified, its performance is heavily tied to the financial sector. Banks and financial institutions make up roughly 30% of the fund’s assets.

That concentration matches the current economic setup. With GDP expanding at about 6.7% and interest rates falling, banks typically see stronger loan demand as businesses invest and consumers borrow for homes and durable goods.

The ETF is also benefiting from the China-plus-one strategy. As global manufacturers diversify supply chains away from China to reduce geopolitical risk, foreign direct investment is flowing into India. This structural shift provides a long-term floor for the ETF’s price that is less sensitive to short-term market noise.

The Engine Room: HDFC Bank’s Return to Growth

To gauge the potential of the Indian market, investors should look at INDA’s largest holding: HDFC Bank Limited (NYSE: HDB). Representing more than 8% of the fund, HDFC Bank is effectively the engine of the index — if HDFC stalls, it is mathematically difficult for the ETF to rally meaningfully.

Data from the bank’s most recent earnings reportand business update, released in early January, indicate the bank has shifted back into an aggressive growth phase.

• Loan Growth: The bank reported a 13% year-over-year (YOY) increase. A return to double-digit lending suggests integration issues from its earlier merger are largely resolved.
• Deposit Growth: Deposits rose 11.5% YOY, a key metric because steady, low-cost deposits are the primary funding source for profitable lending.

One metric risk-conscious investors watch closely is the Credit-Deposit (CD) Ratio. A ratio above 100% indicates a bank is lending more than it has in deposits, which can create liquidity strain in stressed markets.

After a large 2023 merger, HDFC Bank’s CD ratio rose to around 110%. The most recent figures show the ratio has normalized to 98.5%, and the bank says it is targeting a pre-merger level near 87%. That improvement points to a healthier balance sheet and suggests the bank is well positioned to lend aggressively in a lower-rate environment without being overextended.

Unlocking Hidden Value: The Sum-of-the-Parts Advantage

Beyond operational improvements, HDFC Bank benefits from structural valuation support that the market may be underestimating.

In July 2025 the bank listed a major subsidiary, HDB Financial Services, on Indian markets. Before the IPO, the subsidiary’s value was embedded in the parent and hard to quantify. Now that HDB Financial Services is publicly traded with its own market capitalization, that value is visible and liquid on HDFC Bank’s balance sheet.

That creates a sum-of-the-parts argument: buying HDFC Bank now gives investors exposure to the core banking franchise plus the market value of its stake in the subsidiary. The listing effectively raises the stock’s floor, offering a margin of safety for new entrants.

Strategic Diversification for 2026

The data show a clear divergence: Western markets wrestle with uncertainty while India presents a straightforward narrative of roughly 6.7% growth and 1.33% inflation.

Emerging-market investing carries risks — currency swings, regulatory shifts, and geopolitical developments can all affect returns. A materially stronger U.S. dollar, for example, can erode gains in foreign assets. Still, the RBI’s accommodative stance and the structural improvements at HDFC Bank provide buffers against several of these risks.

For investors looking to diversify away from U.S. political headwinds, a combination of the broad INDA ETF and exposure to HDFC Bank’s renewed growth offers a compelling, data-backed opportunity for 2026.

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