A Time of Rotation, Reset and Resilience
India's macro and market landscape continues to evolve meaningfully as we step into the second half of 2025. April-May has seen a powerful undercurrent of policy support and shifting market dynamics. A stronger-than-expected 50 bps repo rate cut by the RBI (third consecutive cut), coupled with a durable liquidity infusion via 100 bps CRR reduction, signals a full pivot to pro-growth policy. While the room for further easing appears limited, the MPC's neutral stance suggests a more data-dependent path ahead. Growth tailwinds are emerging just as the consumption engine is showing early signs of ignition.
The fiscal picture too remains supportive. Total capital expenditure showcased a growth of ~11% year on year and real GVA growth accelerated to 6.8%, led by double-digit construction growth. Income tax reforms, Pay Commission anticipation, and rural schemes continue to provide levers for consumption. The fiscal deficit for FY25 stood at 4.8% of GDP, aligning with revised estimates, with a targeted reduction to 4.4% this year, reflecting continued fiscal consolidation despite elevated spending.
Global Crosswinds: Tariffs, Treasuries and Tightropes
Globally, markets remain range-bound yet resilient. US equities have outperformed Indian peers this month, bolstered by easing US treasury yields and strong tech earnings. The Nasdaq remains a standout over the decade. However, policy uncertainty driven by the Trump campaign's rhetoric on trade, NATO, and immigration is creating a noisy macro backdrop.
The India-US 10Y yield spread has narrowed to an all-time low of 1.9%, reducing India's relative yield advantage. However, India's macro stability and structural bond index inclusion continue to support foreign investor interest beyond just yield differentials.
The India-UK trade agreement, with a target to double bilateral trade to $120bn by 2030, presents a significant opportunity for India. It is likely to accelerate the resolution of other trade agreements, enhance exports of goods and services, attract foreign direct investment, and increase the competitiveness of UK imports due to favourable tax incentives.
Sectoral Earnings: Normalizing, Not Collapsing
The Q4 FY25 earnings season marked a continued normalization of corporate profits. Nifty 50 earnings grew 3.7% YoY, underperforming expectations.
The leaders of FY24 are now showing signs of slowdown, with sectors like automobiles, industrials, and real estate reporting a moderation in profit growth. However, some previously underperforming sectors are now gaining traction, with metals, chemicals, and cement showing strong improvements in profitability. Telecom and pharmaceuticals have been consistent performers, demonstrating solid results in both years.
Fund Flows: Positive
On the flow front, May'25 saw strong buying from both Foreign Institution Investors and Domestic Institution Investors, with net inflows of USD 1.7 bn and USD 7.9 billion respectively. This marks the third consecutive month of FII buying, indicating the underlying optimism.
Precious Metals, Commodities & Currency: A Mixed Bag
Gold continues to hold strong, up ~12% YTD as investors hedge against geopolitical risk and central bank buying continues. Crude oil prices softened, providing relief to India's import bill and inflation outlook. INR remains stable, despite narrowing FDI and yield spreads, aided by strong forex buffers and softening US yields. Metals saw underperformance this month on the back of muted Chinese demand and softening global prices but remain cyclical plays for any global recovery.
Positioning Ahead
Despite recent volatility, mid and small caps continue to trade above their 10-year average PE multiples, even as earnings downgrades have been more pronounced in this segment. As such, we maintain our preference for large cap and asset allocation strategies, with increased scrutiny on mid/small caps. Balanced exposure, with selective participation in quality midcaps, remains key.
As we head into the monsoon season and closer to signing US trade deal, the environment will remain volatile but opportunistic. With high-frequency data firming up and macro levers turning supportive, India's medium-term outlook remains intact.
Markets are recalibrating—not collapsing. As sector leadership rotates and policy support kicks in, staying invested in quality, diversified portfolios is the best way to compound wealth. Discipline, patience, and active asset allocation will remain critical tools in this transitional market phase.
Source: Bloomberg, MOFSL, ABSLAMC Internal Research
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