Market Review

Divergent growth trend was witnessed across different regions of the world in February 2025 with economic activity in US remaining resilient (although there are initial signs of growth cooling off) while that in EU and China subdued. US job growth was lower than expected but higher than expected wage growth suggests that the labour market remains resilient. However, US house construction pace is moderating, and higher mortgage payments and higher tariffs could further pressure home building. Eurozone continues to report tepid growth in business activities and manufacturing sector remains in contraction mode. While Chinese factory output was higher than expected on back of foreign orders, this could be due to tariff uncertainty and buyers advancing their purchases to avoid higher tariffs in future. The new administration in the White House has led to rise in global uncertainties and US economic policies will be a key monitorable going forward.

Inflation has moved within a narrow range and largely on expected lines across most major economies. Consequently, most major central banks continue to remain in easing mode. However, the US Fed decided to take a pause in the January 2025 policy meeting as it waits to see the impact of new administrations' policies on growth and inflation.

Consumption led recovery in GDP growth in Q3FY25: India's GDP grew by 6.2% YoY in Q3FY25 (as against a upwardly revised growth rate of 5.6% YoY in Q2FY25) suggesting a cyclical recovery underway. For full year FY25, Central Statistics Office (CSO) now expects GDP growth rate of 6.5% YoY which implies significant recovery in growth rate in the final quarter of this fiscal. Pick up in growth rate in Q3FY25 was led by revival in consumption. While private consumption growth rate picked up on back of strong kharif output and revival in rural consumption, Government consumption saw acceleration in growth on back of increased Government spending in Q3. Although manufacturing sector growth remains below par, the sector saw meaningful recovery in Q3 compared to the previous quarter.

Source: - MoSPI, CEIC, Ambit Capital research. Note- PADO: Public Administration and Defence

Going forward, India's growth is expected to remain steady on the back of resilient consumption, revival in Government spending and easing monetary conditions. However, global uncertainties, tepid private investments and adverse weather conditions remain key risks for this growth outlook.

Indian economic activity moderated in Feb: The high frequency indicators point towards moderation in economic activities in February. While indicators pertaining to both urban and rural demand slowed down last month, services sector recorded robust growth, offsetting the moderation in manufacturing sector.

Source: www.gstn.org.in, www.icegate.gov.in, CMIE, PIB, RBI, www.vaahan.parivahan.gov.in, www.posoco.in ^Number >50 reflects expansions and number <50 reflects contraction compared to previous month. @ - figures are preliminary data and are subject to revision. * based on CMIE survey

Going forward, urban demand is likely to get a boost from income tax relief and easing monetary conditions while rural demand too is likely to rebound on the back of strong kharif output and better rabi prospects. However, global uncertainties due to restrictive trade policies may dampen sentiment and could affect India's growth too.

Central government finances in a comfortable position: The Government continues to focus on higher capital expenditure in recent months and is likely to meet the capex target as per the revised estimates despite a slow start at the beginning of this fiscal. The Government has targeted fiscal deficit of 4.4% of GDP in FY26 (vs revised estimate of 4.8% of GDP in FY25) and is likely to meet that target.

Source: CMIE

Trade deficit rises marginally, likely to remain rangebound: Trade deficit in Jan'25 rose marginally as exports contracted faster than imports. Fall in exports was led by petroleum products and engineering goods while fall in imports was primarily due to moderation in petroleum and gold imports. Non-oil, non-gold imports however witnessed pick-up in growth compared to previous month.

The trade deficit is likely to remain rangebound going forward. Further, healthy growth in services exports is likely to keep current account within manageable range. However, restrictive trade policies and a risk of trade war will decide future course of India's trade dynamics in the medium term.

Source: CMIE, Ministry of Commerce; *Net Gold includes gold, silver and pearls precious & semiprecious stones adjusted for gems and jewellery exports. ^NONG refers to Non-Oil Non-Gold (as defined above) imports/exports

Retail inflation moderates in Jan, likely to remain at similar levels going forward: India's CPI eased further in Jan'25 on the back of cooling food prices especially that of vegetables and pulses. However, price growth in fruits, vegetables, cereals and edible oil continue to remain elevated. Core CPI rose marginally due to rise in gold prices.

CPI inflation is likely to hover at current levels in the coming months on back of falling food prices and benign core inflation momentum. However, any inflationary effect of recent INR depreciation and difficult global trade environment will have to be monitored closely.

Source: CMIE; @-CPI excluding food, fuel, transportation & housing

Commodity prices: Brent crude prices moderated further in Feb'25 as uncertainties around global growth continued. Decent Chinese industrial data led to rise in metal prices like copper and zinc. However, global trade uncertainties around tariff rate and Chinese overcapacity meant steel prices witnessed moderation. Gold prices continue to rise amidst global uncertainties.

Source: Bloomberg; *Market prices as on February 28, 2025. ^M-o-M change. & - Change in FYTD25

Summary and Conclusion:

As noted earlier, divergent growth trend across economies persists with US growth holding up (though there are initial signs of growth cooling off) quite well while that of EU and China remaining subdued. While growth in US is expected to remain strong going forward, new administration's policy on trade and immigration will have bearing on growth inflation dynamics for not just US but for all major economies and needs to be monitored closely.

India's growth momentum moderated sequentially but services sector posted robust growth in Feb'25. Going forward even if growth in FY25 is expected to slow down compared to FY24, it still will be better than most global peers. Private consumption is also likely to get a boost going forward due to income tax relief announced by the Government and monetary easing by the Reserve Bank of India (RBI). Further, private corporate sector capital expenditure has potential to accelerate in view of low leverage, increasing capacity utilization, consistent corporate profitability, and a robust banking sector balance sheet. India's external sector also remains robust on the back of comfortable current account deficit (due to better-than-expected services export) and adequate forex reserves. Rise in geopolitical tensions and a possibility of a trade war are key near-term risks.

Looking ahead, the medium-term outlook for India's economy seems optimistic, in our view. This optimism is driven by policy continuity, benefits from Production-Linked Incentive schemes, opportunities arising from shift in the global supply chain, enhanced infrastructure investments, the potential of resurgence in private sector capex, and the likely boost to private consumption due to income tax relief and lower borrowing cost.