Summary:
Global economic activity remains in expansionary territory, with improving PMI trends and strong services sector momentum across major economies. Commodity markets have rallied sharply due to strong demand and geopolitical tensions, while food inflation continues to moderate. In India, the RBI maintained policy rates at 5.25% with a neutral stance, while slightly revising inflation projections upward due to base effects. Growth expectations have improved modestly, supported by new trade agreements and improving global demand.
Overall, the macro environment suggests stable growth, manageable inflation, and supportive global demand, though liquidity conditions and bond yields remain areas to watch.
Global Growth Trends
Global economic activity remains resilient.
Manufacturing and services PMIs improved in January after a temporary slowdown in November and December, indicating a renewed expansion in global activity.
Key highlights:
- Services sector hiring strengthened in India, the US, the UK, and Japan.
- New manufacturing orders are rising faster than inventories, suggesting upcoming increases in production and raw material demand.
- Corporations and exporters have largely adjusted to the current global tariff environment, reducing uncertainty.
Economic surprise indices in the US and Eurozone also indicate that economic data continues to outperform expectations.
Commodity Markets
Commodities saw a broad-based rally, with January recording one of the strongest increases in the past 25 years.
Drivers included:
- Strong global economic activity
- Geopolitical tensions
- Weakness in the US dollar
Precious metals such as gold and silver surged as tensions emerged between the US and European nations regarding Greenland and concerns over potential reductions in US dollar reserves.
Industrial metals like copper and aluminium remain in short supply due to rising demand from AI, technology infrastructure, and electrification trends.
Energy Markets
Energy prices also moved higher due to geopolitical and weather-related factors.
Key drivers included:
- Rising tensions between the US and Iran
- Extremely cold winter conditions in Europe
- Declining European natural gas inventories
These factors pushed up both oil and natural gas prices, contributing to the broader commodity rally.
Food Inflation
While commodity prices rose, global food prices continued to decline.
The UN Food Price Index fell for the fifth consecutive month, with declines in:
- Dairy products
- Sugar
- Meat
These declines offset price increases in cereals and vegetable oils.
For India, this trend is positive since food inflation plays a significant role in overall CPI dynamics.
Global Bond Markets
Bond yields moved higher across most developed markets.
The rise was driven primarily by Japan’s long-term bond yields, which increased after the new Japanese government proposed tax cuts on food items, raising concerns about fiscal stability.
Because the Japanese yen is widely used in global carry trades, movements in Japanese bond yields influenced bond markets globally, pushing up yields in the US and the UK.
Emerging markets showed mixed trends:
- Brazil, Mexico, and China: Bond yields declined due to lower inflation.
- India: Yields moved slightly higher amid fiscal deficit funding concerns ahead of the budget.
India Monetary Policy
The RBI Monetary Policy Committee (MPC) kept policy rates unchanged at 5.25%, maintaining a neutral policy stance.
Voting details:
- Rate decision: Unanimous
- Policy stance: 5–1 vote for neutral stance
One member suggested shifting toward an accommodative stance.
The RBI’s approach indicates a preference to monitor inflation dynamics before considering further policy moves.
Inflation Outlook
The RBI marginally revised its inflation forecasts upward.
Revisions include:
- FY26 Q4 inflation increased from 2.9% to 3.2%
- FY27 projections saw small upward revisions
The increase is largely attributed to base effects, as inflation was unusually low in the previous year.
Despite the revision, inflation remains close to the RBI’s 4% target, suggesting the central bank remains comfortable with the current trajectory.
CPI Basket Revision
A new CPI series will be introduced based on the 2024 Household Consumer Expenditure Survey.
Expected changes include:
- Lower weightage for cereals
- Higher weightage for protein-rich foods and dairy
- Increased weightage for core inflation components
Because of these changes, the RBI will provide full-year inflation projections in April after assessing the new CPI structure.
Growth Outlook
India’s growth outlook has improved modestly.
Key developments supporting growth include:
- Resolution of US–India trade tensions, reducing tariffs significantly
- Signing of a Free Trade Agreement with the European Union
- Existing trade agreements with the UK and Australia
These agreements create a larger integrated trade network for India and are expected to support economic activity.
The RBI revised its FY27 growth projections slightly upward, reflecting improved trade prospects and global demand.
Liquidity and Money Markets
Markets were expecting the RBI to introduce liquidity measures or CRR cuts, but no such steps were announced.
Liquidity conditions remain tight:
- 1-year CD rates increased to around 7.2%
- This rise reflects seasonal credit demand and tight money market conditions.
Despite policy rates falling significantly in the past year, short-term market rates remain relatively elevated.
Risks
Key risks to monitor include:
- Persistent liquidity tightness in money markets
- Rising global bond yields
- Geopolitical tensions affecting energy prices
- Fiscal concerns in global economies
Opportunities
Several macro factors remain supportive:
- Strong global economic momentum
- Rising manufacturing demand
- Stable inflation outlook in India
- Expanding global trade partnerships
These factors could support sustained economic growth and stable financial markets.
Closing View
For India, the macro environment appears stable with moderate inflation, steady growth prospects, and expanding trade relationships.
While liquidity conditions remain tight in the short term, the broader outlook suggests a balanced macro environment with manageable inflation and improving growth drivers.
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