Global Macro
Global growth is solid, but slowing a bit, as we enter 5th year after the pandemic lows. There are divergences in the growth rates in various parts of the world. US is growing well led by a healthy consumption and solid job market. However, growth is a worry in Europe and China as domestic demand remains weak. Inflation, globally, has been coming down for last couple of years and still stabilizing. Next year, we expect additional progress to be made on lowering inflation. On the policy front, central banks have begun cutting rates while fiscal policies remain unusually loose for current levels of growth and employment.

In 2025, the policies of the new US administration are expected to play a key role in shaping the macro. The key policy changes expected are Tariffs, Tax cuts, regulatory easing and immigration. Trump is also a big proponent of lower energy prices so crude prices should remain benign. On an aggregate, the balance of risks suggest that thrust of policy measures will be positive for US growth but may have negative impact on world growth. It may also turn out to be inflationary, but it would depend on the quantum of tariffs, and the response from the trade partners. As a result, various central banks and governments are expected to have divergent reactions. US may see slowdown in the rate cuts. Europe and China may see continued monetary easing and some additional fiscal measures to absorb the shock from the Trump policies.

Indian Macro
India GDP data for 2QFY25 came at 5.4%, which was much below market expectations of 6.5%. Consumption data continues to remain lackluster at 5.7%; whereas investments, which has been doing well, also slowed down to 5.4%. Government capex is running very slow vis-à-vis the target. It is one of the contributors to the slowdown in investments, we expect government capex to pick up from here. On the GVA front, Industry growth deteriorated to 3.6%. High frequency indicators like GST collection, 2-wheeler sales, PMIs etc. which showed weakness in July-Sep quarter are showing signs of improvement in Oct-Nov data. Other indicators like Credit growth, PV sales, power generation etc. continue to show weakness. Overall, datapoints suggest some uptick from 2nd quarter but there is still slack in the economy. We expect FY25 GDP growth to be about 6.3%.

Oct Headline CPI surprised with a 6.21% print, due to a big uptick in food prices. Core inflation remained benign at 3.67%, 11th consecutive month of below 4% number. CPI prints should come down as winter crop arrivals would lead to a cooling off in vegetable prices. We expect CPI to average around 4.5% in CY25.

RBI Policy and Market Outlook
RBI kept the policy rates unchanged and cut the CRR rate by 50 bps to inject 1.16 lakh crs of liquidity in the system. The forecasts for both GDP and Inflation moved in the wrong direction. FY25 GDP forecast has been decreased from 7.2% to 6.6% and FY25 Inflation increased from 4.5% to 4.8%. We believe that the revised GDP number is also optimistic and further downside surprises are possible. As inflation is expected to be benign, going forward, growth outcomes will significantly influence the direction of policy.

Change in stance to neutral in the Oct policy, CRR cut in the Dec policy and weaker GDP numbers have created the necessary environment for rate cuts. We believe that we should get 75-100 bps of rate cuts in this cycle. We remain overweight on duration and are targeting a move to 6.5% on the 10Y over the next 6 months.

For 2025, we believe investors should add duration through short-term funds (Short term fund, corporate bond fund, and Banking & PSU fund). Actively managed duration funds should continue to do well this year. Investors who want to benefit from index inclusion related inflows into Indian Government Bonds should invest in our actively managed Gilt fund and our passively managed Index funds / ETFs investing in GSecs. 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 which can be a good addition given elevated spreads.

Sources: Reserve Bank of India, World Bank, International Monetary Fund, Bloomberg, CEIC

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