Global Outlook
The global economic landscape has shifted in recent weeks. In the United States, softer economic data, fiscal restraint, and aggressive tariffs have clouded the growth outlook, leading analysts to downgrade their 2025 GDP growth projections to below 2%. The appointment of Mr. Trump has brought about a sea change in German and EU fiscal priorities, with both promising substantial increases in defence spending. This shift has resulted in the outperformance of US Treasuries versus Bunds, EU equities over US equities, and a sharp correction in the Dollar Index.

US CPI inflation data came in below consensus, with headline inflation at 22 basis points (bps) and core inflation at 23 bps. Food prices were surprisingly flat, while energy prices saw an increase due to strong piped gas and electricity inflation. Core goods inflation was close to estimates, with used cars and apparel showing notable changes. The impact of tariffs on inflation is yet to be fully seen and is expected to flow through over the next couple of quarters.

Tariffs already in place are well above all analyst expectations. Most expected it to be a negotiating tactic but these tariffs have quadrupled the earlier effective tariff rate with more to come (Pharma / auto / semis and reciprocal tariffs). Assuming no changes in the composition of imports by locality of origin, it is estimated that the overall effective tariff rate for total US imports now stands at 10.1%, up from 2.4% in 2024. Even if the tariffs on Canada and Mexico currently in place are reversed later, we are looking at a big increase in effective tariff rates which should show up in inflation over the next couple of quarters. Global growth will suffer as trade policy uncertainty clouds investment decisions.

Domestic Outlook
3Q GDP growth came in line with expectations rebounding to 6.2% y-y, suggesting troughing of growth in 2Q at 5.6%. The key positive in number was pickup in both government and private consumption growth. However, investments moderated. On the GVA side also growth stood at 6.2% y-y. Agriculture growth was strong at 5.6% y-y reflecting the good Kharif output. Industrial growth picked up but was still weakish at 4.5%. The key component manufacturing growth stood at anaemic 3.5% y-y. Construction growth also moderated but remained strong at 7%.

Services growth picked up moderately to 7.4% with pickup in trade hotel transport which reflects the informal sector. The other two major components, viz, financial services and PADS were broadly unchanged. With deflator normalising to 3.5% the difference between real and nominal growth increased, and nominal growth stood at 9.9% after dipping to 8.3% in 2Q. Besides the 3Q number, CSO also released revised annual growth numbers with sharp revisions in FY23 (7.0 to 7.6%) and FY24 (8.2% to 9.2%), respectively.

High frequency India growth indicators remained broadly stable in February with PMI manufacturing and services at 56.3 and 59, respectively. The growth decline in 1H FY25 was led by extraordinarily sharp fiscal contraction, and tight monetary policy, both of which have turned. Government spending has picked up and RBI has taken a series of steps to ease liquidity and has also done a 25bp repo rate cut. We believe that growth has troughed in Sep-24 quarter at 5.4% and will continue to towards trend level of 6.5%.

In India, headline CPI inflation for February 2025 came in at 3.6% y-y, a seven-month low, compared to market expectations of 3.95% y-y. This was led by declines in prices of vegetables, eggs, and pulses, while prices of cereals, fruits, and sugar increased sequentially. Core inflation increased to 4.1% y-y, largely due to a rise in gold prices. The Reserve Bank of India (RBI)'s expectation of headline inflation average at 4.4% is likely to be higher by about 50 bps v/s actuals leaving room for RBI to cut rates and / or change in stance in April while being watchful of global and FX dynamics at play more near to the policy.

RBI has announced another INR 1.8trn in March of liquidity infusion via - [1] 3Y FX swap of USD 10bn to be held on 24th March and [2] OMO of INR 1.0 tn in two equal tranches to be held on 12 March and 18 March. The timing of the liquidity infusion measures coincides with the tax outflow of March, ensuring that there is no sudden tightness in liquidity at the fiscal year-end. RBI with the above has implemented enough measures to improve systemic and durable liquidity and has loosened its stance on regulations (deferral of LCR implementation by banks, etc.).

INR saw some weakness in the last few months owing with continued pressure from FII selling in Indian equity markets and RBI allowing some correction in earlier over-valuation. We believe that over-valuation has corrected now, and would thus expect USD-INR to stabilise, especially with the decline in DXY.

Investment Recommendations

In the current favourable environment for interest rates, investors are advised to add duration through short-term funds, corporate bond funds, and Banking & PSU funds. Tactical calls can be taken through Government Securities Funds, and ultra-short-term investors should look to invest in money market, ultra-short-term funds, and low-duration funds. Investors having allocation of 1 month+ should look to allocate to Aditya Birla Sun Life CRISIL IBX 3 to 6 Months Financial Services Debt Index Fund and in our NFO of Aditya Birla Sun Life CRISIL IBX 9 to 12 Months Financial Services Debt Index Fund.

References: ABSLAMC Research, RBI, CSO, MOSPI

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