In February, proposed tariff changes by the US added volatility to global equity markets, while a slowdown in private capex in India raised concerns about growth sustainability. The market is currently trying to gauge future growth, with a 7% projection next year seen as a favourable scenario.
The US Federal Reserve isn't favouring aggressive rate cuts at the moment, but if economic data suggests a slowdown, they may shift to more rate cuts, which could initially lead to a market dip but eventually lead to a recovery. Similar patterns were observed after the 2022 inflation correction, where the market rebounded after a few months.
In February, the Union Budget, earnings results, and US tariff policies were major events affecting equity markets. The tariffs disrupted global logistics, production, and manufacturing. March will be key in determining if all proposed tariffs are imposed, which could shape global policies. Domestically, activity will pick up as India approaches Q4 results, despite tight liquidity from FII selling.
While volatility is a constant in markets, India's strong macroeconomic fundamentals, including a controlled fiscal deficit, low corporate leverage, and a stable banking system, suggest the country can weather the current challenges.
Indian equity markets have experienced a correction, particularly in the overvalued mid-cap and small-cap sectors. This, combined with a global slowdown and FII selling, has affected domestic investors. Despite global uncertainties, a U-shaped recovery is expected, with stability likely emerging by March. India's structural story remains intact, and while challenges exist, they are temporary.
Debt Market Outlook
We think RBI/MPC has taken the right step to be forward-looking as far as aligning CPI inflation towards the target rate of 4% and starting the rate-easing process from February 2025.
We expect one more rate cut of 25bps to bring repo rate at 6.00% along with comfortable liquidity in the next quarter. RBI will cut rates at a shallow rate aiming to maintain a balanced growth-inflation dynamics while being cautious on external sectors like US Trade & Tariff policies, hawkish stance from the FED and continued capital outflows.
We do expect an additional effective easing of 25bps through the liquidity channel once a 25bps rate cut in April 2025 has been delivered, but we do not expect the RBI to cut the repo rate beyond 50bps, so that the central bank can maintain the lower repo rate of 6.0% for a longer period, thereby providing stability to the economy.
Source: RBI, Bloomberg, CCIL, MOSPI (as on 28th February 2025)