Recent developments in the global tariff war indicate significant de-escalation between U.S. and China from near trade embargo since early April. Both nations agreed to a 90-day truce, reducing tariffs on each other's goods to 30% and 10% by US and China, respectively. The escalation in tariff war in early April, has severely unsettled markets and dented confidence and would have likely resulted in severe global slowdown. The truce is expected to provide relief to markets and economic agents hit not only by tariffs but also uncertainty regarding the same. While the worst is most likely behind us, we believe that next 2-3 months will be period of intense negotiations and volatility, not only with respect to US trade with China but also with other major economies, including India.

Last fortnight saw significant increase in tensions and clashes between Army and Airforce of India and Pakistan following terror attack in Pahalgam. The same resulted in high volatility in markets. However, clashes has stopped now and ceasefire is in place and market volatility has also normalised. In other important development, we are witnessing some easing of tension between Russia and Ukraine, and ceasefire is in sight.

With the thaw in global tariff war and India-Pakistan tensions, focus has once again turned to domestic economy. High frequency India growth indicators remained mixed in months of March-April suggesting a stable growth momentum: India PMI remains one of the highest in the world with composite PMI at 59.7 (mfg: 58.2 and services 58.7). This is significantly above almost all major economies. Bank credit and deposit growth, index of industrial production, and fuel and energy consumption were moderate and stable, while indirect tax collection was decent suggesting a stable GDP growth. We expect the aggressive monetary easing by RBI to be growth positive, even as we are closing following the development in global tariff war front. Absent a major global growth shock we expect India to grow ~6.5% in this fiscal year.

Headline CPI Inflation for Apr-25 declined further to 3.16%, which is lowest reading since July 2019 and 84bp lower than RBI's 4% inflation target. The decline was due to further decline in food inflation which came at 2.14%, reversing the high food inflation trend of 2024. Besides the decline in volatile component of food inflation, like vegetables, recent months' data is showing decline in sticky component of food inflation as well, suggestive of longer-term food inflation moderation. RBI Core inflation remained at 4.1%, higher than overall inflation due to high Gold price. Our preferred measure of core-core inflation, which does not include gold, remained benign and below RBI target of 4% at 3.37%. We had earlier pointed out in our communication that food prices have gone up significantly in the last few years and a terms of trade adjustment was due, which is playing out currently. Indian Meteorological Department has forecasted monsoon rainfall to be good in 2025, which augurs well for food inflation going ahead as well. RBI has forecasted inflation to average 4% in this fiscal and we agree with that forecast.

With inflation below RBI's target of 4% for the third consecutive month, and expected to remain benign, RBI is expected to remain in accommodative mode and support growth. Repo rate has already been cut twice by 25bps each and now stands at 6.0%, and the stance has been changed to accommodative. We expect at least another 50bp of rate cut in this cycle. Besides the 50bp rate cut, RBI has also been very aggressive in easing liquidity with total easing (till May end) at INR 8.7tn including INR5.3 tn of OMO purchases of Government securities. Liquidity has already turned into surplus, and RBI Governor Malhotra has stated that that they are looking to keep liquidity in “sufficient surplus”. The communication by RBI is also dovish and suggestive that with inflation now under control, RBI has given precedence to pushing growth.

After witnessing sharp overperformance followed by underperformance VS EM basket, INR has now returned to median performance against EM basket. The current account continues to be benign and we expect to have seen a surplus in current account in Jan-Mar quarter. The pressure which INR had witnessed was on account of capital outflows in equities, which has not only abated in last one month, but India has also received capital inflows of US$5.86 bn in equities. With recent thaw in global tariff, we expect equity inflow to support capital account. Overall, Indian growth is expected to be better than EM peers and with crude prices having corrected, we expect INR to behave mostly in sync with EM peers.

In the beginning of the year, we have given call of Indian 10 year to decline to 6.25%. Indian bond yield has indeed fallen significantly and has recently touched 6.25%. Most of the decline so far has happened in sovereign yields especially up to 10 years segment. However, the corporate bond spread is elevated and with our expectation of monetary policy to remain easy we see good opportunity for investors in corporate bond space and believe that 2–3-year corporate bonds is the sweet spot for investors in risk-adjusted basis. While rates have come off from high but there is ample scope for spread assets to cool further as interplay of liquidity and further rate cut is spread out in banking system.

Accordingly, our strongest recommendation would be short-term funds (Short term fund, corporate bond fund, and Banking & PSU fund) either directly or via our Debt Plus Arbitrage FoF which is more tax efficient. Actively managed duration funds should continue to do well this year. Ultra short-term investors should look to invest in money market, ultra-short-term funds & low duration funds. We have also launched 100% AAA sectoral target maturity funds as well as 3-6M and 9-12M constant maturity sectoral index funds which can be a good addition to investor portfolios for short term deployment.

Source: CEIC, Bloomberg, RBI

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