Rahul Goswami, CIO - Fixed Income
The global economic environment is currently facing several challenges and uncertainties. One of the key factors influencing market movements is the impact of tariffs introduced by the Trump administration. Trade policy uncertainty, driven by recent tariff hikes, is expected to negatively impact global trade and growth. This uncertainty may lead to dislocations in trade patterns and economic growth across the world.
Global growth projections have been revised downward for most regions. This is primarily due to rising commodity prices and the anticipated impact of tariffs. Despite these challenges, the global Purchasing Managers' Index (PMI) has shown some positive signs, with the manufacturing PMI moving from contraction to expansion at 50.6.
Commodity prices have seen increases, with gold and copper prices rising in recent months. This trend is contributing to higher overall commodity price levels as compared to 2023 and 2024. The global supply chain index has also experienced increased pressure, although not yet at alarming levels. Geopolitical risks, continue to pose threats to global stability.
Inflation remains a concern, particularly in advanced economies like the UK, the US, and the Euro area, where it hovers around 2.5%. In contrast, China's Consumer Price Index (CPI) has entered deflationary territory, indicating weaker-than-expected economic recovery. In Japan, inflation remains persistently high at 3.2%. With mounting inflationary pressures, the Bank of Japan (BOJ) may consider more aggressive interest rate hikes than originally forecasted.
Central banks, including the Federal Reserve, have maintained a cautious approach, pausing policy rate changes in response to these evolving economic conditions. The Chinese economic recovery remains slow, which could help keep commodity prices in check, benefiting countries like India by maintaining a favorable trade balance.
Domestically, reservoir levels have improved compared to 2024 and the long-term average, which is expected to support water consumption and agriculture during the summer months. This improvement in water availability is likely to have a positive impact on the overall economy on the inflation outcome and rural consumption. CPI inflation has decreased from around 6% levels to 3.6% over the past few months, primarily due to lower food prices, especially perishables, which benefited from a good monsoon and improved reservoir levels.
India's merchandise trade deficit reached its lowest point since August 2021, decreasing to $14.05 billion in February from $22.9 billion in January, mainly due to a sharp drop in imports. This positive trade balance is expected to have a favorable impact on the current account for the January to March 2025 quarter. Additionally, robust debt inflows at around $3.6 billion, supported by India's inclusion in global debt indices has provided support to the rupee.
System liquidity, which was tight in February, has improved and is now in positive territory due to multiple measures such as the OMOs, VRR and the long term USD/INR Buy/Sell Swap auction conducted by the RBI. This improvement in liquidity is expected to support the short end of the yield curve.
The bond market performed well in March 2025, with the bond curve softening and spreads narrowing. The money market curve (upto 1 year) experienced an inversion at the long end due to high demand and expectations of further rate cuts. The 10-year benchmark Government Securities yield has decreased from 6.73% to 6.58% during the month of March 2025, reflecting a softer bias. The decrease was influenced by various conducive measures adopted by the RBI. With an expectation of another rate cut in April, the yield curve is expected to soften further.
In this uncertain climate, short to medium-duration investments may provide the best risk-reward balance, aligning with the accommodative monetary policy and the need to address the challenges posed by trade tariffs. The funds have been invested with optimal duration in anticipation of softer rates and improving system liquidity in future.
Monetary Policy Update
The recent announcement by the Monetary Policy Committee (MPC) indicates a shift in focus towards growth while maintaining a balanced approach to inflation. The Reserve Bank of India (RBI) has adopted an accommodative monetary policy stance, signaling potentially easier monetary conditions to stimulate the economy. Policy Rate Reduction: The MPC reduced the policy rate by 25 basis points from 6.25% to 6%, aligning with market expectations while projecting inflation at 4% and growth at 6.5% for FY2026. This dovish stance aims to support economic growth amidst a favorable inflation outlook.
Liquidity and Currency Management: The RBI emphasized its commitment to maintaining sufficient liquidity in the system and managing excessive volatility in the foreign exchange market. The Governor noted India's lower exposure to global trade as a mitigating factor against external pressures.
Outlook: RBI noted with current real interest rate of ~2% in the economy and with benign inflation outlook, it has space to stimulate the economy using monetary policy while maintaining macro stability. This might foster a conducive environment for credit flow to productive sectors, balancing growth and inflation dynamics amid global uncertainties.
Our fixed income funds have been positioned with optimal duration within the respective fund mandate scope with an aim to benefit from the anticipated dovish interest rate environment. It appears that the short to intermediate part of the yield curve might hold promise from a risk-return perspective.
Source: Bloomberg, RBI, MOSPI, Morgan Stanley
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