Market Review - May 2025

The month of May started on a positive note for the global economy as US signed a trade deal with UK and agreed with China to temporarily (90 days) lower tariffs against each other. The US has indicated that more trade pacts with other countries could be signed soon, which is encouraging. US economy witnessed divergence in real vs survey data where tariff related uncertainty has dampened sentiments, but economy is holding up well as reflected in a strong labour market and decent retail sales. While Eurozone’s manufacturing PMI was recorded at 33 month high in May, it remains in contraction. Similarly, tariff related uncertainty weighed on China’s economy too, where manufacturing PMI remained in contraction for second month in a row.

Inflation moved within a narrow range and largely on expected lines across most major economies. While recent inflation print in the US were benign, inflation expectations have gone up due to tariff-related uncertainty. The US Fed, after keeping the rates unchanged, has indicated that the impact of tariffs could be inflationary, and risk to the dual mandate has increased significantly. China continues to face deflationary pressure as both consumer and producer prices are in contraction zone. The Euro strengthened against the USD as investors became increasingly wary of US fiscal and trade policies.

Q4FY25 GDP surpassed expectations: India’s GDP growth was recorded at 7.4% YoY in Q4FY25 which was above consensus expectation of ~6.8%. The growth was driven mainly by acceleration in investment demand which in turn was driven by a surge in public capex in the final quarter of the fiscal. The net exports of goods and services (exports minus imports) too contributed to higher GDP as exports growth was positive, but imports contracted during the quarter. However, both private and Government consumption decelerated compared to previous quarter. The Gross Value Added (GVA) growth of 6.8% in Q4 too was above expectations and was driven mainly by construction activities although Agriculture, Forestry and Fishing growth too remained robust. The wide gap between GVA and GDP growth was due to lower subsidy payout in Q4 as GDP = GVA + (Indirect taxes minus Subsidies).

Source- MoSPI. Note- PADO: Public Administration and Defence

Indian economic activity remained mixed in May: The PV and CV retail registrations contracted in May, but TW registrations recorded growth after two months of contractions. While manufacturing PMI moderated in May, GST collections growth surged to 16% YoY and GST collections surpassed INR 2 trillion for second consecutive month.

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 remain steady on back of strong rabi output and prospects of above normal monsoon. However, global trade uncertainties may dampen sentiment and could weigh on India’s growth.

Government finance in comfortable position: The Government was able to contain the FY25 fiscal deficit to 4.8% of GDP as per the revised estimates. The capital expenditure in FY25 exceeded revised estimates while revenue expenditure was curbed to stick to the fiscal deficit target suggesting Government’s priority to improve the quality of expenditure. The Government has maintained capex momentum in FY26YTD as well. Capex registered a growth of 61% YoY in April (March 2025: 68%). Higher than budgeted dividend by RBI is likely to keep Government finances in comfortable position in FY26.

Source- CMIE Note: YoY: Year on year growth

Trade deficit rises in April: Merchandise trade deficit rose in Apr’25 compared to the previous month as overall imports remained elevated while exports declined marginally. The imports were led by higher non-oil non-gold (NONG) imports driven by chemicals, electronics and machinery goods.

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

The trade deficit is likely to remain range-bound going forward. Further, healthy growth in services exports is likely to keep current account within manageable range. Trade deal negotiations with US will remain a key monitorable in the coming months.

Retail inflation moderates further in April, likely to remain benign: India’s CPI inflation in April was recorded at its lowest level since Jul’19 driven by driven by further moderation in food prices. Core inflation has inched up slightly due to rise in services price but remains within manageable levels.

Source: CMIE; @-CPI excluding food, fuel, petrol, diesel, gold, silver and housing

CPI inflation is likely to remain below 4% in the coming months due to favourable outlook on food inflation and favourable base effect. Commodity prices: The Organisation of Petroleum Exporting Countries (OPEC) announced two hikes in oil production, which would be undertaken in June & July 2025. Even with increased supply, Brent Crude prices rose slightly in May as global trade tensions eased after the US finalized trade agreements with both China and the UK (oil prices are down 14% in FY26YTD). Steel prices continue to decline and was recorded at its lowest level since June’16.

Source: Bloomberg; *Market prices as on May 31, 2025. ^Y-o-Y change. & - Change in FY26YTD

Summary and Conclusion

Global growth prospects today face unprecedented uncertainty due to US’ tariff policy. US growth is exhibiting early signs of cooling off and is likely to deteriorate going forward as effects of tariffs and uncertainty weigh on prospects. Domestic demand in China remains subdued and deflationary forces have gathered steam. The global growth prospects hinges on the outcome of US trade policy and in this regard trade negotiations with different countries remain a key monitorable going forward. It is encouraging that US is open to signing trade deals with different countries which will remove the air of uncertainty which is currently faced by businesses and consumers.

India’s growth momentum is exhibiting resilience. The GDP data for Q4FY25 suggests that underlying growth momentum remains robust. High frequency indicators such as GST collections suggest that the growth momentum has sustained in FY26 as well. Going forward even if growth in FY26 is expected to remain at similar levels as compared to FY25, it will still be better than most global peers. Urban consumption is likely to get a boost going forward due to income tax relief announced by the Government and monetary easing by the RBI. Rural consumption too is likely to remain steady on the back of bumper rabi harvest, prospects of above normal monsoon, falling inflation and higher real rural wage growth. India’s external sector also remains comfortable on the back of low current account deficit (due to better-than-expected services export) and adequate forex reserves. Rise in geopolitical tensions and a tariff related uncertainty 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 opportunities arising from shift in the global supply chain, bi-lateral trade deal with various countries, enhanced infrastructure investments, the potential of resurgence in private sector capex, and the likely boost to private consumption.