Global Economy-
The Global dynamics is filled with uncertainty and markets are
dancing on the edge. Looking carefully, the fundamentals have
improved since 2022, be it inflation which has come down for
major economies as well as growth has found a stable ground,
but still the markets are repricing especially Emerging Market
Economies (EMEs) are witnessing selling pressures from foreign
portfolio investors and currency depreciation. All the hysteria
stems out from recent US tariffs and trade policy. A US first
approach has set a changing dynamic between US and countries,
even the closet allies for years are facing the heat.
The immediate reaction of current geopolitical tensions has been
visible in currency markets with dollar index strength leading
to depreciation of emerging market currencies. Overall global
yields remained attuned to movement in US treasury yields.
Another key development globally was visible in inflation
numbers. Japan’s inflation climbed to 4% y/y in Jan-2025.
Whereas US inflation remained at 3% with sticky core. Along
with US, eurozone inflation is also seeming to inch up with
Germany at 4% in Jan-25, highest since Aug-23. The divergent
macroeconomic conditions are reflected in monetary policy
actions across countries. With US keeping its policy rate
unchanged, Japan, however, hiked its policy rate by 25 bps.
The commodities have an interesting twist. Gold prices have
been trading at its all time high in Feb-2025, trading as high
as 2950$/ounce. The interesting part is that historically rise of
both gold and dollar index is an unlikely event. Historically, gold
has a shown a negative correlation with the dollar, except for a
few instances such as during the Russia Ukraine war. The gold
market has undergone fundamental changes over the last few
years, ultimately leading to one of the biggest rises in prices
in the last decade. On the contrary, brent prices continued to
remain range bound hovering around 72-75$/bl.
China’s economic policies have been in light to support its ailing
economy. Last two years China’s Government and Central Bank
have laid out supportive measures with loose monetary and
fiscal policies. The fiscal and monetary impetus can reflect in
growth recovery and should be a key watch.
Domestic Economy-
The Indian economy is regaining its growth momentum driven
by recovery in consumption demand and overall investment.
The Q3 FY25 numbers reflected India’s GDP growth to have
bottomed out and has seen modest improvement relatively to Q2 FY25. Real GDP growth in Q3 FY25 stood at 6.2% y/y.
Nominal GDP growth stood at 9.9% y/y. More importantly the
future trajectory has seen some positive revisions. The second
advanced estimates have projected FY25 GDP growth at 6.5% y/y
better than first advance estimates of 6.4% y/y. This implies that
the worst of India’s growth reflected in Q2 FY25 is behind us.
RBI Monetary Policy Committee (MPC) after a span of 5 years
unanimously delivered a rate cut of 25bps. Economic Growth to
have taken precedence over inflation. Currency concerns were
evident in this monetary policy. RBIs commitment to provide
sufficient liquidity to the banking system was re iterated and
was encouraging.
High frequency indicators suggest that demand economy is
recovering from the slowdown witnessed in H1 FY25. E-way
bills growth accelerated to 23.1% in Jan-25. The two-wheeler
segment saw a recovery, primarily driven by a surge in scooter
sales. Tractor sales recorded double digit growth for the second
consecutive month.
India’s Manufacturing Purchasing Managers Index registered
56.3 in Feb-25, down from 57.7 in Jan-25 but still indicative of a
further robust improvement in the health of the manufacturing
sector. The survey highlighted new export orders rose strongly
in Feb-25, as manufacturers continued to capitalise on robust
global demand for their goods
On the fiscal front, fiscal deficit touched 76% of Budget estimates.
Income tax remains strong at 22% y/y on YTD basis. Indirect
taxes including GST collections grew by 9% y/y in line with
budget estimates.
Domestic Inflation-
- Headline inflation has softened to 4.3% in January-25 led by
favourable base effect and sharper decline in vegetable
prices.
- The estimate for Feb-25 inflation is tracking around 4.1%,
after account for continued decline in food prices.
- The daily food price data by department of consumer affairs
indicates further decline in vegetable prices in February-25
led by improving supplies and seasonal winter crop arrival.
Domestic Liquidity –
- Liquidity continued to remain in the deficit zone, but
the tightness eased driven by Cash reserve ratio (CRR)
drawdown, Open market operations (OMO) purchases and
RBI’s Forex (FX) swap auctions.
- Following the liquidity conditions, overnight rates declined
to 6.2%.
- The year-end government spending is expected to offset
the tightness by end-March.
- Any forex intervention remains a risk to our expectations.
Fixed Income outlook -
- Global monetary policy dynamics have started witnessing
bumps in their path to recalibrate the monetary rates.
- US Fed’s shift in the forward guidance and the recent pickup
in inflation must be carefully monitored.
- Trumps tariff threats and spillovers on currencies is the
existing risk that is driving the markets volatile.
- Going forward RBI may remain pro-growth especially as
inflation aligns with the targeted levels.
- RBI has been and is expected to continue infusing liquidity
through OMO, FX swap in essence of the monetary policy
stance.
- Irrespective of the tools, liquidity measures are expected to
have an impact on the short end of the curve.
- The spreads on the short end are already elevated and
attractive and a rate cut going forward may compress the
current spreads.
- Having said that, the fundamentals of India’s fiscal demand
supply remain balanced and that is expected to maintain a
downside bias on yields.
Source: Bloomberg, RBI, BBNP Paribas Internal Research
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