Global Economy: Fed resumes rate cuts

Global markets rallied strongly last month. The Organisation for Economic Co-operation and Development (OECD) has raised global growth forecast to 3.2% for 2025, with most major economies projected to perform better than expected. The OECD has stated that impact of trade friction on global economy has been lesser than feared. Market sentiment was also supported by resumption of rate cuts by the US Fed, which cited signs of slowdown in the employment market in support of its decision. Markets expect the Fed to implement additional rate cuts in the coming months.

MSCI Global Index rallied by 3% in September, while MSCI Emerging Market Index outperformed with 7% returns. Amidst trade related uncertainty, MSCI India rose by 0.5% last month. Indian Rupee declined to record low against the USD amidst continuing outflows by foreign investors from equity markets.

Indian Economy: Policy focuses on growth revival

RBI has raised India’s current year growth forecast to 6.8%. This will make India the fastest growing major economy globally. However, RBI has cautioned that increased tariffs on exports to the US, are likely to adversely affect India’s economy in the second half of the year. Proactive policy measures such as GST reforms, as well as recently announced regulatory reforms for the banking industry are expected to support growth. The impact of GST reforms is already evident in automobile sales which saw robust growth in September. Good monsoon rainfall has helped in kharif sowing, which should help improve prospects for the agriculture sector and rural economy. Progress of ongoing trade negotiations with the US remain a key monitorable.

India’s sovereign credit rating has been reaffirmed at Baa3/stable by global rating agency Moody’s. It has highlighted India’s inherent advantages including ‘substantial and rapidly expanding economy’ and has opined that ‘these strengths lend resilience to adverse external trends’ such as ‘high US tariffs and other international policy measures’. S&P has retained its current year growth forecast for India at 6.5% as it expects ‘domestic demand to remain strong’, while Fitch has raised its growth forecast to 6.9%.

Equity Market: Consolidation underway

Indian markets ended the month on a positive note amidst significant volatility. While Nifty Index was up 1.6%, Mid and Small Cap indices were up 0.6% and 1% respectively. On the sectoral front, PSU Banking and Metals sectors outperformed while Information Technology and Real Estate sectors underperformed. Domestic flows remained steady with inflows of US$ 7.4bn, while Foreign Institutional Investors (FIIs) sold equities worth US$ 2.1bn.

Outlook: The global economic data points continue to show resilience as the front-loading of exports and supply chain adjustments, amidst tariff imposition, have shown positive impact on macro-economic growth. This coupled with monetary easing by major global central banks should aid the consumer sentiments and global liquidity. On the domestic front, the outlook for economic growth is turning sanguine driven by cut in Goods and Services Tax (GST) for consumption-focused categories, expectation of further monetary easing by the central bank and festive-heavy calendar which should elevate consumption demand. The impact on growth arising from tariffs remain key concern in the near term. Corporate earnings growth trajectory which has witnessed multi-quarter consolidation, on the back of higher base and challenges in the external environment, is expected to improve from H2 FY26 onwards. Valuations appear reasonable basis the earnings growth estimates. We maintain positive view on markets from a medium to long term perspective.

Fixed Income Market: RBI sees space to support growth

Retail inflation in recent months has continued to remain benign, with August CPI at just 2.1%. Expectations of low food prices on account of good monsoon rainfall, and reduction in prices of goods post the GST reforms, have led RBI to further lower its inflation forecast for FY26 to 2.6%. While RBI expects inflation to trend up next year, it has acknowledged that ‘current macroeconomic outlook has opened up policy space for further supporting growth’. Most analysts now expect RBI to implement additional rate cuts in the current financial year.

The Finance Ministry has reiterated its commitment to adhere to fiscal target for the year. It has announced marginally lower than budgeted issuances of government securities for the second half of financial year. FIIs bought US$ 0.8bn of domestic debt in September. Reinforcing India’s attractiveness to global debt investors, Bloomberg has initiated the process of potential inclusion of Indian GSecs in its Global Aggregate Index.

Outlook: Domestic bond yields, after trending up since June, stabilised in September with the 10-year GSec yield closing unchanged during the month. With the government reinforcing its commitment towards achieving its fiscal deficit target, and RBI opening space for possible additional rate cuts, bond yields may exhibit a possible declining bias in the coming months.