The month gone by – A snapshot

Global markets: The Trump administration has announced imposition of tariffs on key trading partners. This has increased uncertainty and induced volatility in global markets. The recent high frequency data points from the US indicate weakness in economic momentum. Fed policymakers have ‘pointed to upside risks to the inflation outlook’ and have indicated that they may keep policy rates unchanged for now.

In Europe, persistent weakness in the economy may prompt further rate cuts by the European Central Bank. In China, given the increasing trade friction with the US, economic outlook remains uncertain. Amidst weakening global growth, crude oil prices declined by 5% last month.

Economy: Q3 FY25 GDP data indicates growth revival

India’s December quarter GDP growth increased to 6.2% from 5.6% in the September quarter. Increase in government spending contributed to growth, while private consumption also showed signs of revival. The growth in agriculture sector was robust; however, growth in the manufacturing sector continued to remain subdued.

The recent policy measures, including tax relief announced for the middle class, infusion of liquidity by RBI, and easing of norms for lending to NBFCs by the banking system, has led analysts to project improved economic outlook. Rating agency Moody’s has projected India’s 2025 GDP growth at 6.4%, though has cautioned that ‘weakening rupee, declining foreign investment, and volatile inflation are the areas of greatest economic risk’.

Equity Markets: FIIs continue to sell

Indian equity markets continue to remain under pressure on the back of significant increase in global macro-economic uncertainties, driven by tariff announcements by the US, and profit booking by foreign institutional investors. While Nifty index was down 5.9% in February, Midcap index (-10.5%) and Small cap index (-13%) saw sharp declines. Amongst sectors, Banking and Metals sectors outperformed, while Automobiles and Information Technology sectors underperformed. Flows from domestic investors remained strong at US$ 7.1 bn while Foreign Institutional Investors (FIIs) sold equities worth US$ 5.4 bn.

Outlook: While global macro-economic conditions look increasingly challenging, India’s growth prospects remain intact. The recently announced GDP numbers suggest strong increase in economic activities on a sequential basis driven by government capex, agricultural activities and private consumption. Recent measures announced by the Reserve Bank of India (RBI) with regards to enhancement of systemic liquidity should aid in faster revival of growth. Post the sharp correction, valuations look attractive. While markets may consolidate in the near term, our view on equities remains positive.

Fixed Income market: RBI initiates monetary policy easing

After two years of holding policy rates steady, RBI’s monetary policy committee, initiated rate cuts with a 25bps reduction last month. In supporting its decision, MPC members expressed comfort on the inflation outlook and shift in focus towards reviving growth. Aided by decline in food prices, retail inflation in January has declined to a five-month low at 4.3%. RBI has projected inflation to remain close to its target of 4% through the current year. Given the relatively benign inflation outlook, analysts expect additional reduction in policy rates this year.

FPIs inflows into Indian debt markets remained steady at US$ 1.3 bn in February, as increasing weightage of Indian Government Bonds in prominent global debt indices attracted investor interest.

Outlook: Amidst significant global volatility, India’s stable macroeconomic parameters continue to attract interest from global debt investors. Favourable fiscal outlook and start of the domestic monetary policy easing cycle should further enhance India’s relative appeal. Given this context, domestic yields may continue to exhibit a gradual declining trend.