Summary:
India faces near-term growth pressure from tariffs, currency weakness, and fiscal strain, but GST reform promises medium-term consumption support. We remain neutral on equities with a defensive tilt, and in fixed income prefer short-tenor high-grade bonds over the pressured long end
Global Economy
- Global growth remains steady despite tariff tensions and mild slowdown in the Eurozone.
- US-China relations have improved, which is positive for global trade and sentiment.
- Inflation remains moderate; global yields are stable with scope for mild easing.
- Global demand impact from US tariffs is limited as costs are being shared by importers/exporters.
Domestic Economy
- India’s growth outlook remains strong, supported by robust consumption and government capex.
- Manufacturing and infrastructure output continue to grow at double digits.
- Trade deficit widened due to high festive gold imports, while exports diversified away from the US toward China and UAE.
- Tax revenues are growing slower (2.8% vs 12.5% expected) due to GST cuts and lower nominal GDP growth (8–8.5%).
- Fiscal deficit expected to stay on target, though government may trim revenue expenditure in H2.
- Credit growth improved to 11.3%, supported by strong consumption; loan-to-deposit ratio at 80%.
Investment Outlook
- Lower inflation and stable liquidity point to a “lower for longer” rate environment.
- One small rate cut possible in December, but space for further easing is limited.
- Yield curve is steepening: short-to-medium term (2–5 yrs) looks attractive.
- Prefer moderate duration, short-term, and corporate bond funds with high credit quality.
- Selective exposure to strong NBFCs and top-rated corporates recommended.
Risks
- Weak tax collection could restrict government spending.
- Global tariff uncertainty and slower exports may weigh on short-term growth.
- Fiscal headwinds may pressure longer-duration bonds.
- External shocks (e.g., US slowdown) could affect yields and sentiment.
Opportunities
- Stable growth + low inflation + easy liquidity = supportive backdrop for debt investors.
- Diversified export base cushions India from global disruptions.
- Lower corporate bond supply and strong liquidity can compress credit spreads, benefiting quality issuers.
- Short and moderate-duration funds offer better risk-adjusted carry.
Policy Watch
- RBI expected to maintain an accommodative stance; one more rate cut possible in Dec 2025.
- Fiscal prudence to continue with focus on maintaining the deficit target.
- Government capex remains on track despite slower revenue growth.
Key Takeaways
- Stay positioned in short-to-moderate duration and high-quality corporate bonds.
- Expect stable yields, healthy liquidity, and limited volatility ahead.
- Long-duration exposure best avoided due to fiscal and global uncertainties.
