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Global markets are facing a growing divergence between economic fundamentals and financial-market performance. France’s persistent fiscal deficits, rising debt, and widening sovereign spreads are reviving concerns over eurozone stability, while resilient US activity, elevated bond yields, and the AI investment boom continue to attract global capital toward dollar assets. However, the AI-led sell-off that has begun raises questions about the sustainability of this concentration and the returns on massive technology investments. Despite strong domestic growth, India has faced foreign portfolio outflows and currency pressure as global capital remains concentrated in US assets. In the sections below, we examine these global risks, the outlook for the dollar and US interest rates, and how a potential shift in global capital allocation could shape India’s market prospects.

Let’s talk France

* France’s fiscal problem has been building for decades, but rising borrowing costs and political uncertainty are making it harder to ignore. The fiscal deficit has exceeded the EU’s 3% of GDP limit in around 20 of the 26 years since 2000. The deficit widened to 7.4% of GDP in 2009 (from 2.7% in 2007) during the GFC and 8.9% in 2020 during Covid-19 (vs. 2.1% in 2019), but France struggled to bring it sustainably under control after these shocks passed. The deficit stood at 5.1% of GDP in 2025 and is expected to widen to 5.4% in 2026. Public debt rose from ~64% of GDP in 2007 to 84% in 2009 during the global financial crisis (GFC) and further mounted to 115% in 2020 (vs. 98% in 2019) amid the pandemic. The debt burden has continued to mount, reaching 119.3% of GDP (EUR3.6t) in 2QCY26 from 115.6% in 2025, and is projected to rise further to 121.7% by 2027.

* High debt, weak growth (projected at 0.6% in 2026), and rising interest payments—which are projected to increase from EUR79.2b in 2026 to EUR91.2b in 2027—are leaving less room for public spending. French 10-year government bond yields have approached 5%, their highest levels since 2002, while the spread over German bonds has approached 140–160bp (the first time since the 2011–12 eurozone debt crisis), reflecting growing investor concerns over France’s fiscal outlook and political stability.

* Austerity is now the political flashpoint. Prime Minister Sébastien Lecornu’s proposed 2027 budget envisages a total fiscal adjustment of around EUR54b, including EUR43b of measures in the draft budget, to bring the deficit down to 5.0% of GDP. These measures include restraining pension increases, freezing public-sector pay, tightening sick-leave rules, reducing healthcare costs, limiting selected tax concessions, and curbing public spending. They are unpopular because households, workers, and businesses are being asked to bear the cost of correcting years of overspending through lower real benefits, tighter services or higher taxes. With a divided parliament and opposition from unions and political parties, passing the budget remains uncertain. This creates a difficult cycle: France needs fiscal restraint to reassure bond investors, but political resistance could dilute or delay the measures, keeping borrowing costs elevated and making debt reduction even harder. The central risk is no longer simply high debt, it is whether France has the political capacity to control it.

The problem extends beyond France

* Italy and other more indebted eurozone economies have also faced pressure, with the Italian–German 10-year spread approaching 100bp during the recent sell-off. Europe’s common monetary policy coexists with nationally determined fiscal policies, leaving countries with different debt burdens and growth prospects exposed to diverging borrowing costs. The ECB faces a difficult tradeoff: persistent inflation argues for restrictive policy, but tighter financial conditions could weaken growth and increase sovereign financing stress. A full-scale eurozone debt crisis is not inevitable, but prolonged fiscal uncertainty and elevated sovereign risk premiums could tighten credit conditions across the region and complicate the ECB’s policy response.

* The euro’s sharp depreciation is an important channel through which European stress is affecting global markets. EUR/USD fell to approximately USD1.112 in early October, its weakest level in around 17 months. The decline reflects concerns over French fiscal credibility, political fragmentation, weaker relative growth prospects, and Europe’s exposure to higher energy prices. The dollar has benefited from this weakness, alongside relatively attractive US yields and demand for liquidity. The US Dollar Index (DXY), which assigns the euro a weight of approximately 57.6%, climbed to an 18-month high near 102.9 in mid-Oct’26 before easing toward 101.84 on 16 th Oct’26. This composition matters: the dollar can strengthen substantially because the euro is weakening, even without an equivalent appreciation against every other currency.

Our view: India’s Opportunity and risks

* Our view is that India’s opportunity depends on how the global AI cycle evolves. The AI sell-off has already begun, with investors reassessing stretched valuations, the sustainability of massive AI infrastructure spending, and the ability of companies to generate adequate returns on capital. The correction has spread from AI-linked equities to semiconductor manufacturers and companies financing data-center expansion. The global semiconductor index has fallen for seven consecutive sessions, losing more than 11% and ~USD1.6t in market value over the last six sessions. South Korea’s KOSPI fell 7.6% on 15th Oct’26, while Japan’s Nikkei dipped 4.9%, reflecting the heavy concentration of these markets in AI-linked stocks. The sell-off reflects a combination of hotter-than-expected US inflation, rising interest-rate expectations, concerns over debt-funded datacenter investment, and growing competition from China. If the sell-off remains orderly, US yields moderate, and the dollar weakens, capital could gradually rotate towards India’s domestic-growth story, supporting foreign portfolio inflows, equity-market performance, and currency stability. However, an outright AI bust or global recession would initially be negative for India, as investors seek dollar liquidity and emerging markets face further outflows.

* India’s medium-term fundamentals remain strong, but near-term market performance will continue to be determined by global yields, the dollar, crude oil prices, and the concentration of capital in AI-related assets. France’s fiscal stress and the wider eurozone sovereign repricing reinforce the importance of global financial conditions in determining currency and portfolio flows. A sustained recovery in Indian markets is more likely when US yields moderate, the dollar softens, and global capital allocation broadens beyond a narrow group of technology and semiconductor beneficiaries—not simply when India delivers another strong GDP print.

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