Rahul Goswami, CIO - Fixed Income
Tariff tantrums have led to lower global growth expectations. The IMF revised its global growth forecast downward by 50 basis points from 3.3% to 2.8%. Similarly, India's growth forecast for the financial year 2026 has also been revised downwards from 6.5% to 6.2%. Global manufacturing PMI has softened compared to the previous month, indicating a slight contraction in global manufacturing activity. Considering tariffs are generally inflationary we may see economies like the US experiencing higher inflation. Recently, the Personal Consumption Expenditure (PCE) inflation in the US increased by around 50 basis points to 3%, and CPI inflation may follow this trajectory. Although inflation has been relatively flat in recent months, it may rise in advanced economies. In emerging markets, inflation remained relatively flat, due to deflationary trend witnessed in China.
Other drivers of inflation, such as the global supply chain index and geopolitical risk indicator, have softened. After significant action in the Middle East last quarter, the region is relatively peaceful, except for some action in Yemen. US-Iran talks for a nuclear treaty have also reduced geopolitical risks. However, trade-related uncertainty remains high due to tariffs and will continue to impact currencies, equities, and bonds until resolved. The 90-day reprieve on tariffs that will end in July, may provide a clearer picture of tariff talks and likely reduce uncertainty.
Global growth concerns have led to softer yields and commodity prices, except for gold, which performed well in April 2025. Unresolved tariff issues may continue to weaken China's manufacturing sector, potentially lowering oil prices further and softening overall commodity prices. Lower commodity prices, including oil, could benefit India's trade and current account balances.
Global policy rates have seen cuts in most advanced economies, except Japan. The euro area has cut rates by 175 basis points over past 10 months starting from Jun 2024, with an expectation of another rate cut in Jun 2025. In the US, with rising inflation and faltering growth, we may see stagflation, making it a tricky situation for the US Fed to cut rates. China's economic recovery is slow, with PMI figures falling back into contraction territory and CPI remaining in deflationary territory. Growth expectations have been revised downwards, indicating continued weakness in the manufacturing sector. In Japan, the 10-year bond yield has decreased slightly, and the yen has strengthened due to a weaker dollar. Despite a slight drop from the 4%-mark, Japan's CPI remains high at 3.6%, putting pressure on the Bank of Japan to consider raising rates further.
India's CPI inflation has been benign at around 3.3% easing the job of RBI to ease rates further and release liquidity into the system. Healthy reservoir levels and a normal monsoon projection by IMD further support this outlook, suggesting that inflation may remain within a manageable range due to lower food inflation.
RBI's recent policy rate cut of 25 basis points and a shift to an accommodative stance have been well-received by the market, leading to improved performance of duration funds. The money market curve has steepened due to ample liquidity, and the G-sec curve has continued to shift downwards.
Since March 2025, we have increased duration across our various fixed income portfolios and have maintained them at similar levels in April. Supported by high liquidity and expected rate cuts, the current portfolio positioning is further strengthened by the RBI's anticipated May dividend declaration, which is expected to boost core liquidity and support the yield curve. We plan to maintain the current duration until there is a change in market conditions or outlook. The current portfolio strategy aims to capitalize on the softer yield environment and potential rate cuts.
Source: Bloomberg, RBI, MOSPI, US Federal Reserve, ECB, Bank of Japan
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