Market Review

FY25 was a year that witnessed divergence in growth across major economies amidst heightened global uncertainties. It was a year for policymakers as not only did more than half of the world went to the polls, but the results led to pivotal changes in macro-policies led by the US. The US exceptionalism continued as growth beat consensus estimates driven by strong consumer spending, private investments, robust services sector and a tight labour market. But the policy shocks introduced by the new US administration, including tariffs and firing of government employees have led to slowdown of growth in Q1CY25 and might signal an end to US exceptionalism. While Europe avoided recession in CY24, growth ahead needs to be looked at cautiously as geo-political instability and resultant gas price volatility continues to put pressure on European manufacturing competitiveness and cost of living. China saw subdued economic growth in the last one year as the country continues to struggle with sluggish domestic demand and subdued property sector.

Falling inflation prompted major central banks to commence rate cut cycle. However, last mile disinflation has proved to be sticky led by robust demand for services in AEs and tight labour market in the US.

Few key developments in FY25 were:

• Major economies, such as the US, Germany, France, India, etc. conducted their general elections. US saw Trump elected as the President.
• Globally, interest rate cut cycle commenced – ECB has cut rates by 125bps since June-2024, US Fed has cut by 100bps since September, while the RBI undertook its first rate cut (25bps) in Feb’25.
• Japan undertook rate hike cycle – Japan increased its policy rates to 0.5%, highest since GFC. Japan’s tight monetary policy actions is a response to the elevated inflation in the country.
• India became a part of JP Morgan Index – India was included in the index in Jun’24. This has facilitated flows in the Indian debt market.
• China announced a USD1.4trn stimulus – It aimed to ease local government financing strains and stabilize economic growth.
• Major European countries undertook a shift in fiscal policy. Germany announced in March 2025 that it plans to loosen its constitutionally enshrined limit on annual borrowings.
• The incoming US President issued 159 executive actions since the inauguration of his Presidency: These actions include reciprocal tariffs on all countries, mass firing employees from various government departments, stringent measures to enforce actions against illegal immigration, withdrawing US from WHO, etc.
   

GDP growth slowed down in 9MFY25: India’s GDP grew by 6.1% YoY in 9MFY25 (as against an upwardly revised growth rate of 9.5% YoY in 9MFY24). The slowdown was led by sectors, such as manufacturing, construction and services. Agriculture was the only bright spot as good rainfall ensured a bountiful Kharif harvest. On the demand side, private consumption demand remained robust due to rural spending, but investment growth halved given weak private investments and slowdown in Government’s infrastructure spending.

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

Going forward, factors which will support India’s growth are resilient rural consumption, revival in Government spending and easing monetary conditions. However, impact of US tariffs, tepid private investments and adverse weather conditions remain key risks for this growth outlook.

Indian economic activity improves in March: The high frequency indicators in March were better than Feb as indicators such as PV sales, power demand and digital spending recorded better growth than last month. Both manufacturing and services sector were robust. However, Two-Wheeler tractor and commercial vehicle sales continue to remain subdued.

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 be resilient 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 to some extent.

Central government finances in a comfortable position: Income tax collections surprised on the upside in FY25, but indirect collections have been sluggish. Higher-than-expected dividends from the RBI and PSUs compensated for the subdued disinvestment and corporate tax collections. Although capex picked up in the second half, it remains marginally above 11MFY24 levels. The Government is likely to meet the fiscal deficit target in FY25 as per the revised estimates.

Source: CMIE

Current account deficit widens: India’s CAD widened in the first 9 months of FY25 due to higher oil & gold imports. But the deficit was limited by falling non-oil, non-gold imports and sustained growth in services exports led by a rise in GCCs. Heightened global uncertainties and sharp dollar movements affected India’s capital account which moderated significantly during the first 9 months. India’s foreign flows remained weak, but debt flows remained buoyant supported by passive flows due to India’s entry into JP Morgan Bond index.

Source: CMIE

Retail inflation cools in FY25, likely to moderate further in FY26: CPI inflation moderated by 62bps in 11MFY25 but was not broad-based as food inflation remained elevated for most of the year. Food inflation remained persistently high in 1HFY25, propelled by increased prices of vegetables, fruits, and pulses. However, food prices fell in the 2HY25 led by vegetables. As fuel and commodity prices remained benign, core inflation remained low but has been increasing in recent months due to surge in gold prices.

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

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

Commodity prices: Low base effect and green shoots in Chinese industrial data led to rise in prices of metals, such as copper and zinc, but Chinese over-capacity and a weak global demand environment led to further correction in steel prices. Uncertainties persisted in FY25, leading to strong correction in crude prices despite sanctions on Russia. In the current environment of political and global uncertainties, central banks have increased their purchase of gold as the yellow metal is increasingly being seen as a hedge against crisis.

Source: Bloomberg; *Market prices as on March 31, 2025, ^YoY change

Summary and Conclusion

Global growth momentum has moderated across major economies, including AEs like the US and EU. USA’s new administration's policy on trade and immigration will have a bearing on growth inflation dynamics for not just the US, but for all major economies. The impact of US tariffs will have to be monitored closely and will depend on how other countries respond to tariffs imposed and whether trade war escalates from hereon.

India's growth momentum moderated sequentially in FY25, but services & agriculture sector remained robust. Going forward, growth in FY26 is expected to moderate compared to FY25 but 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. However, a difficult external environment due to trade uncertainties could dampen investment sentiments. 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. However, an escalation in geopolitical tensions and the possibility of a trade war are key risks to this growth outlook.

Looking ahead, the medium-term outlook for the Indian 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, and the likely boost to private consumption due to income tax relief and lower borrowing cost.