Executive Summary

This report examines the performance of seven key Indian sectors—Steel, Oil & Gas, IT, FMCG, Textiles, Pharmaceuticals, and Automobiles—during Q2 FY2026 (July-September 2025). Amid US tariffs imposed on August 27, 2025, rupee depreciation to ~88.8/USD, and global volatility, aggregate sector revenue growth reached 5-7% YoY, modestly outperforming pre-Q2 expectations of 4-6%. Domestic demand emerged as the primary driver of resilience, contributing 60-70% to overall growth, while exports showed mixed results, cushioned by diversification but vulnerable to tariffs. The report poses the central question: “To what extent did domestic demand shield India’s key sectors from external pressures in Q2 FY2026, and what are the implications for sustainability?” Based on analyzed data, domestic strength sustained momentum, but fading festive boosts (e.g., Diwali spending projected at ₹4.25-4.75 trillion) and GST reforms (effective September 22, 2025) risk amplifying tariff impacts without alternatives like new FTAs.

Key findings include:

• Strong domestic-led outperformance in Steel (10-14% YoY) and FMCG (5-7% YoY).
• Export vulnerabilities in Textiles (flat, -2.73% exports in August) and Pharmaceuticals (7-9% YoY but US pressures).
• Overall GDP forecast for FY2026 revised to 6.5-6.8%, supporting a 1-3% Nifty 50 uplift in Q3, though volatility persists.

Introduction and Approach

Research Question

How did domestic demand versus export performance influence the outcomes for India’s key sectors in Q2 FY2026, given macroeconomic challenges like US tariffs and rupee volatility? Did reality align with expectations, and what does this mean for future growth sustainability?

Methodology

Our approach involved a comprehensive analysis of Q2 FY2026 data, drawing from official sources (e.g., Ministry of Commerce, ICRA reports), analyst forecasts (e.g., Motilal Oswal, ADB), and sector-specific metrics (e.g., production indices, export figures). We segmented performance by:

• Domestic Demand: Internal consumption trends, influenced by rural recovery, infrastructure spending, and policies like GST reforms (rates simplified to 5%, 18%, and 40% for sin goods).
• Export Performance: External trade dynamics, impacted by US tariffs (additional 25% on ~$50 billion of Indian exports) and rupee depreciation (4.7% YTD).
• Expectations vs. Reality: Pre-Q2 forecasts (e.g., 4-6% aggregate growth) compared to actuals, incorporating quantitative data (e.g., YoY growth rates) and qualitative factors (e.g., tariff mitigation via diversification).

Data was cross-verified for accuracy, focusing on July-September 2025 trends, with projections for FY2026. This balanced view highlights resilience while identifying risks, such as fading Diwali boosts and potential tariff escalation.

Sector Analyses

1. Steel Sector

• Domestic Demand: Contributed ~70-80% to growth, with consumption rising 9-10% YoY driven by infrastructure (e.g., per capita at 105 kg) and government capex.
• Export Performance: ~20-30% share, up 20% YoY in April-July, with minimal tariff impact (low US exposure; EU offsets) and rupee aid.
• Expectations vs. Reality: Expected 8-10%; actual 10-14% (e.g., 14.2% production in August), outperforming on domestic strength.
• Key Numbers: Capacity targeting 300 million tonnes by 2030; HRC prices stable.
• Implications: Domestic focus sustains momentum, but export risks rise without alternatives.

Conclusion/Commentary: The steel sector’s Q2 resilience underscores India’s infrastructure-led recovery, with domestic demand absorbing global shocks like coking coal import surges (projected +55% by 2030) and minimal tariff disruptions. However, sustainability hinges on policy continuity, such as decarbonization initiatives from the September summit, and addressing secondary steel growth amid employment stability. Without enhanced FTAs, export gains could erode, potentially capping FY2026 at 9-12% overall growth, emphasizing the need for balanced onshore-offshore strategies.

2. Oil & Gas Sector

• Domestic Demand: ~85-90% driver, with oil consumption up ~220,000 bpd YoY to 5.57-5.59 million bpd, supported by industrial needs.
• Export Performance: ~10-15% contribution, down 3% in petroleum products due to tariffs and competition.
• Expectations vs. Reality: Expected flat to -3-5%; actual aligned at -3-5% YoY contraction, with Russian pivot mitigating some losses.
• Key Numbers: Natural gas demand projected to double long-term; upstream output targeted +11%.
• Implications: Domestic stability holds, but export drags could worsen without diversification.

Conclusion/Commentary: Despite Q2 contractions, the oil & gas sector maintained energy security through domestic demand, bolstered by yuan payments for Russian imports and upstream partnerships. Geopolitical exposures, including Middle East tensions, amplified import costs amid rupee volatility, but capacity expansions (e.g., +22% planned) offer recovery potential. Long-term, sustainability requires balancing fossil fuels with LNG shifts and policy reforms to counter tariff effects, positioning the sector for modest FY2026 stabilization if global prices stabilize around $62.50 for WTI.

3. IT (Information Technology) Sector

• Domestic Demand: ~20-30% role, steady at ~7% growth from government projects.
• Export Performance: ~70-80% dominant, flat due to US caution, H-1B hikes, and tariffs.
• Expectations vs. Reality: Expected 0-2%; actual ~5-7% YoY but weak sequential, slightly better via midcaps.
• Key Numbers: Exports ~$283 billion annually; Q2 deal wins stable at $2-3 billion.
• Implications: Export reliance exposes vulnerabilities; domestic limited to buffer.

Conclusion/Commentary: The IT sector’s muted Q2 highlights its export dependency, with US pressures from tariffs and visa hikes constraining growth, though midcaps and GenAI adoption provided some uplift. Domestic contributions from digital initiatives remained secondary, underscoring the need for client diversification beyond North America. Headcount restructuring and stable margins (e.g., 20-22% for Infosys) signal operational efficiency, but without rebounding global tech spending, FY2026 could stay flat at 3-5%, emphasizing strategic shifts toward emerging markets for long-term independence.

4. FMCG (Fast-Moving Consumer Goods) Sector

• Domestic Demand: ~90-95% driver, with 13.9% value growth (6% volume) from rural/urban recovery.
• Export Performance: ~5-10%, negligible impact.
• Expectations vs. Reality: Expected mid-single digit; actual 5-7% YoY, outperforming mildly.
• Key Numbers: Input inflation high but easing; staples lead.
• Implications: Domestic-centric, low tariff risk; sustainable if rural trends persist.

Conclusion/Commentary: FMCG’s Q2 outperformance reflects robust domestic consumption, with rural waves and category splits (e.g., beverages +30%) offsetting input inflation and monsoon disruptions. Negligible export exposure insulated it from tariffs, while GST tweaks enhanced affordability. However, challenges like destocking and e-commerce channel shifts require sustained innovation in sustainability (e.g., green packaging). With rural recovery ongoing, the sector is poised for 5-8% FY2026 growth, but fading festive boosts could pressure volumes if urban demand softens without further policy support.

5. Textiles Sector

• Domestic Demand: ~40-50% stabilizer, supported by GST fixes.
• Export Performance: ~50-60% key, down 2.73% in August from tariffs (5-10% revenue hit).
• Expectations vs. Reality: Expected 5-10% decline; actual flat to 0-3% YoY, resilient via UK/EU shifts.
• Key Numbers: Exports $12.18 billion April-July (+3.87%); market ~$179 billion.
• Implications: Export exposure high; needs alternatives to avoid deeper impacts.

Conclusion/Commentary: Textiles demonstrated Q2 flat resilience through balanced domestic stabilization and export diversification, mitigating tariff shocks despite US market pinches. Labor-intensive with 45 million jobs, the sector benefits from raw material stability (e.g., cotton/yarn) but faces value chain weaknesses in spinning/weaving. Policy efforts like UK FTA talks and eco-fabrics push are crucial, as stagnant $40 billion exports risk further erosion without alternatives. FY2026 could see 3-5% growth if domestic apparel surges, but tariff escalation demands urgent market redirection.

6. Pharmaceuticals Sector

• Domestic Demand: ~50-60% lead, up 8-10% from chronic therapies.
• Export Performance: ~40-50%, 10-12% growth but US hit (100% on branded).
• Expectations vs. Reality: Expected 7-9%; actual aligned, with Europe offsetting.
• Key Numbers: Exports ~$50 billion; capex ₹42,000-45,000 crore planned.
• Implications: Balanced, but tariffs threaten exports without generics focus.

Conclusion/Commentary: Pharmaceuticals aligned with Q2 expectations through strong domestic chronic therapy demand and R&D pipelines, offsetting US tariff hits on branded drugs via European gains. As the “pharmacy of the world,” the sector’s generics resilience and capex investments (e.g., late-stage deals) highlight efficiency, but regulatory watches and therapy splits remain key. Sustainability requires inorganic growth and green manufacturing to counter global patent pressures. With FY2026 at 7-9%, the balance tilts toward domestic, but export vulnerabilities could widen without diversified markets.

7. Automobiles Sector

• Domestic Demand: ~70-80% core, with September PV records amid retail stability.
• Export Performance: ~20-30% supportive, up ~13.2% in Q1 spillover.
• Expectations vs. Reality: Expected subdued 6-7%; actual 1-3% YoY, better via GST cuts.
• Key Numbers: Market ~$100 billion; EV shifts ongoing.
• Implications: Domestic-led recovery; exports resilient but watch parts tariffs.

Conclusion/Commentary: Automobiles’ modest Q2 recovery was anchored in domestic retail and GST reductions (e.g., small cars), with EV adoption and wholesales/retail dynamics adding layers. Export support from rupee effects mitigated indirect tariff hits on parts, but supply chain stability is vital. As a manufacturing pillar (~7% GDP), the sector’s PV vs. CV splits and SIAM initiatives signal H2 potential, but fading festive demand risks slowdowns. FY2026 projections at 6-8% hinge on policy-driven localization to enhance independence from global disruptions.

Overall Market Impact and Conclusions

The analysis reveals domestic demand as the cornerstone of Q2 resilience (5-7% growth vs. 4-6% expected), shielding sectors from external shocks like tariffs. Exports, while better than feared in some areas (e.g., steel, autos), remain vulnerable, contributing to mixed outcomes. This supports Nifty 50’s stability (~25,108 September close), with 1-3% Q3 uplift from GDP revisions (6.5-6.8%). However, fading Diwali boosts and GST reforms risk exposing tariff bites by Q4, potentially dragging growth without alternatives (e.g., FTAs, PLI expansions). Investors should prioritize domestic-focused sectors (FMCG, autos) for stability, while monitoring exports-heavy ones. This positions India as increasingly independent from global events, but not fully—sustained reforms are key.