Macros of Market.

 Global Macro

The International Monetary Fund (IMF) has held its 2024 and 2025 global growth forecasts at 3.2%, yet regional differences persist. Growth projections for the United States have improved, while expectations for China and Europe continue to trend downwards. The moderation in labor demand, evidenced by a deceleration in wage growth and reduced job vacancies, particularly in the U.S., signals that economic pressures are mounting. Globally, monetary tightening has largely been the norm, though fiscal policies in the U.S., U.K., France, Germany, and Japan are leaning toward expansion to address local challenges

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In a major political development, Donald Trump has won a second term as U.S. President, capturing all swing states and the popular vote, with Republicans gaining control of both the Senate and the House. With a strong mandate, Trump is expected to advance an agenda including high tariffs, stricter immigration policies, and tax cuts. Proposed tariff hikes of 60% on China and 10% on other nations have raised questions about the potential effects on international trade and supply chains, though the likelihood of full implementation remains uncertain.

The U.S. economy has shown resilience, with Q3 GDP growth at 2.8%, primarily driven by consumer spending. Inflation remains in check, with core CPI running at an annualized rate of 3-3.5% and core PCE at 2.5-3%. While payroll growth dipped in October due to weather and labor disruptions, the Federal Reserve responded with a 25-basis-point rate cut and is likely to moderate the pace of future cuts as the economy stabilizes. In Europe, GDP growth has exceeded forecasts, and with inflation under control, the European Central Bank (ECB) has space to continue rate cuts despite potential U.S. trade tariffs.

China’s GDP growth reached 4.6%, yet the full-year outlook lags at under 5% as the property market cools. The government’s late-September stimulus measures have spurred some demand for secondary homes, though the sustainability of this boost remains to be seen.

India Macro

India's economy continues to grow at a healthy pace, albeit slightly slower than in previous years. High-frequency indicators in recent months have been mixed, with industrial production contracting and credit growth slowing, while tax revenues and fuel consumption indicate continued growth. Rural demand showed improvement in the first half of FY25, while urban demand remained flat. With growth expected to reach 6.5-6.75% for FY25, India remains on track to be the fastest-growing major economy, though slightly below the RBI’s 7.2% forecast.

The impact of Trump’s policies on India appears manageable. While India faces potential trade risks due to its surplus with the U.S. and its inclusion on the U.S. Treasury’s currency monitoring list, it also stands to benefit as companies look to diversify away from China. With favorable geopolitical positioning and established rapport between Prime Minister Modi and President Trump, India is likely to remain resilient and may benefit from U.S.-China trade tensions.

India’s inflation experienced an uptick in September and October, driven by base effects and weather-related food price increases. However, disinflationary trends are expected to resume in November, and the Reserve Bank of India (RBI) has signaled it will wait for temporary inflationary pressures to subside rather than adjust policy reactively. On the fiscal front, the government remains in a favorable position, with the fiscal deficit through H1FY25 at only 29% of the annual budget, driven by robust tax collections. This fiscal discipline, along with strong domestic demand for government bonds, is helping to support India’s bond market.

Fixed Income Outlook

The RBI’s recent communications reflect a balanced stance, noting growth moderation while remaining cautious on inflation. October’s monetary policy decision was a status quo on rates, though the policy stance shifted to neutral, hinting at future rate cuts. With inflationary pressures easing and growth showing some signs of slowing, the RBI may begin a rate-cutting cycle in February, targeting up to 75 basis points by the end of the year.

Trump’s election victory initially spurred a “Trump trade” effect in global markets, leading to a rise in U.S. Treasury yields and the dollar. The immediate post-election period saw a 16-basis-point rally in U.S. yields, with moderate effects on Indian yields and the INR, which remained resilient compared to other emerging market currencies. Foreign Institutional Investor (FII) outflows from Indian markets were managed by the RBI, which intervened to mitigate currency volatility. As global trade policies take shape under Trump, India’s markets are expected to exhibit relative stability.

Liquidity in India is expected to stay close to neutral, supporting the short end of the yield curve. The government’s fiscal prudence and moderate supply of government bonds set a favorable stage for fixed-income investors, with 10-year bond yields likely to trend towards 6.50% in 2025. This outlook is driven by anticipated RBI rate cuts, easing inflation, and a controlled fiscal environment.

Investment Strategy

While the anticipated rate cuts have been pushed out, investors may begin to extend duration by moving into short-term funds such as corporate bond funds and Banking & PSU funds. For shorter-term investors, there is value in extending duration up one bucket, particularly from the 3-month to 1-year segment, to take advantage of the yield curve’s favorable positioning. As the RBI's policies and global trends evolve, this approach balances risk with the potential for attractive returns.