IGI Logo

AI-led capex boom continues: Growth remains elevated despite a higher base

* The semiconductor super-cycle is showing little sign of losing momentum: The extraordinary growth seen over the past four years is being sustained, with industry estimates increasingly seeing upgrades rather than downgrades as AI-driven demand continues to accelerate across GPUs, advanced chips, HBM, and semiconductor equipment.

* Growth is set to remain exceptionally strong over the next two years: Despite a significantly higher base, leading semiconductor and AI companies are expected to deliver growth rates that continue to dwarf the aggregate growth of the Indian market and most sectors, highlighting the exceptional earnings momentum embedded in the global AI ecosystem.

* NVIDIA’s latest results reinforce this structural upcycle: The Jun’26 quarter revenue jumped 106% YoY to ~USD96b, while Data Center revenue grew 117% YoY to USD89b. More importantly, NVIDIA guided for USD108b of revenue in the Sep’26 quarter, implying ~89% YoY growth, while its longer-term outlook points to ~75% revenue growth in FY28. These growth figures underscore that AI infrastructure demand remains far from peaking.

Strong 1Q GDP growth reinforces the resilience of the Indian economy

* Real GDP growth accelerated to 7.8% YoY in 1QFY27, up from 6.9% in 1QFY26, comfortably ahead of the RBI’s 7.0% estimate and market expectations.

* GVA growth strengthened to 8.2% YoY from 7.0% in 1QFY26, reflecting broad-based improvement across manufacturing and services. ? Domestic demand remained supportive, with private consumption growing 7.1% YoY, while GFCF growth accelerated to 11.9%, signaling stronger investment momentum.

* Nominal GDP growth stood at 10.3% YoY, despite elevated geopolitical uncertainties, energy prices, and global trade headwinds.

* Strong 1QFY27 GDP print reinforces the resilience of India’s domestic growth engine and provides a strong starting point for FY27. External risks remain, with elevated crude prices and persistent geopolitical tensions posing key risks to the growth outlook.

* FY27 growth outlook upgraded to 7.0–7.2%: Strong 1QFY27 GDP growth and resilient high-frequency indicators point to a firm start to 2QFY27, with broadbased strength across investment, consumption, manufacturing, and services. We now expect real GDP growth at 7.0–7.2% vs. 6.8–7.0% earlier and the RBI’s 6.7% forecast, while nominal GDP growth is pegged at ~13% for FY27. Key risks remain from geopolitics, global trade uncertainties, and El Niño.

* Stronger growth could bring RBI’s tightening back into focus: While we do not expect a rate hike in Oct’26, the RBI could use the meeting to signal a shift toward tighter policy, with a Dec’26 hike a possibility if growth and inflation remain stronger than expected.

Developed market yields surge as markets reprice inflation, rates, & fiscal risks

* Amid a volatile geopolitical environment and relatively stable INR, India's 10-year G-Sec yield inched up 10bp MoM to 6.9%. In contrast, the 10-year government bond yields across most developed economies further increased (US/Germany and Japan’s 10Y yields up +10bp/+10bp/+20bp MoM).

* The US 10-year yield edged 30bp higher MoM to 4.8%, its highest level since Nov’23. As a result, the India–US 10-year yield spread increased 10bp to 2.2%. Notably, the US 30-year Treasury yield remained elevated at 5.2%, a level last seen in 2007. This underscores persistently tight monetary conditions and higher required returns on global risk assets.

* Meanwhile, Japan's 10-year government bond yield rose sharply by 20bp to 3%, a multi-decade high, as markets continued to reprice the country's interest rate and inflation outlook.

* India’s relatively resilient bond yields reflect well-anchored inflation expectations and continued confidence in the RBI’s policy framework, despite heightened global uncertainty.

Private capex set for a sharp recovery

* Private-sector capex has remained subdued over the past two years, but is poised for a strong rebound from the muted FY26 base. We expect capex to accelerate meaningfully as the investment cycle gains traction.

* Our analysis of capex trends across the MOFSL Universe (310 non-financial companies) indicates that private capex is likely to increase 22% YoY in FY27 to INR9.2t, marking a significant step-up from FY26 levels.

* The expected acceleration will be driven primarily by Automobiles, Metals, O&G, Telecom, and Utilities, which are likely to account for a substantial share of the incremental investment. These top five sectors have consistently accounted for ~80-85% of total capex over the period and are expected to contribute ~82% of aggregate capex in FY27, highlighting the continued concentration of private investment.

* Defense and Metals are expected to witness the fastest YoY growth in capex in FY27, reflecting strong investment requirements and favorable sectoral demand.

* Overall, the combination of a low FY26 base, broadening sectoral investments, and strong capex growth in key industrial sectors points to a meaningful revival in the private investment cycle, which should support industrial activity, capacity expansion, and broader economic growth.

* Strong order books and constructive management commentary reinforce expectations of a strengthening private capex cycle.

For More Research Reports : Click Here 

For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412