Market Review
September was the month when the full impact of 50% tariff on Indian exports to US took effect. The US continues to expand the scope of its tariff regime to cover additional sectors raising uncertainty on the global trade front. While US Q2 GDP growth was further revised upwards, internals suggest fading domestic demand momentum. Moreover, the labour data continues to suggest weakness in the economy. Manufacturing PMI in China remained in contraction mode for sixth consecutive month driven by fall in export orders. While Eurozone manufacturing PMI slipped back to contraction in September, services PMI was recorded at an eighth month high.
Inflation remained within a narrow range and largely on expected lines across most major economies. However, the impact of tariff pass through was visible in US inflation data. The Fed cut rates by 25bps in September citing weakness in labour data and has suggested that it will remain data dependent going forward. The median dot plot however, suggests two more rate cuts in this calendar year.
High frequency indicators remained encouraging in Sep: Pace of TW and PV registrations improved in Sep and GST collections growth too was recorded at a 4-month high. Although both manufacturing and services PMI moderated in Sep compared to Aug, they still indicate robust business activity. However, power demand moderated in Sep and has remained tepid in recent months.
Going forward, urban demand is likely to get a boost from income and proposed GST tax relief and easing monetary conditions while rural demand too is likely to remain steady on back of strong rabi output and above normal monsoon. However, global trade uncertainties and higher US tariff on Indian imports are likely to hurt growth in the near term.
Tax collections under pressure: Gross tax revenue growth in the first five months of this fiscal has been sluggish driven by poor growth in both direct tax and indirect tax collections. Total expenditure growth in first 5 months of this fiscal has been strong as Government front loaded capital expenditure. Consequently, fiscal deficit has widened to 38% of BE in the first 5 months compared to 26% of BE during the same period last year.
Trade deficit moderated in Aug: Merchandise trade deficit moderated slightly in Aug'25 compared to the previous month led mainly by reduction in net oil imports even as net gold and non-oil non-gold (NONG) imports were higher.
The trade deficit is likely to face headwinds due to higher tariff imposition. However, healthy growth in services exports is likely to keep current account within manageable range.
Retail inflation remains benign: India's CPI inflation in August was recorded at 2.1% YoY compared to 1.6% YoY in July as Food & Beverages inflation remained flat in August compared to contraction in July. Core-Core (which excludes food, fuel, petrol, diesel, gold, silver and housing) however rose by 20bps.
CPI inflation is likely to remain below 4% in the coming months due to favourable outlook on food inflation and favourable base effect
Commodity prices: Oil prices settled lower as OPEC+ announced another oil output increase for November. China's tightening of zinc and copper supply led to rally in the prices of the industrial metals, but lackluster economic data globally led to steel prices cooling down.
Summary and Conclusion:
Global growth prospects today face unprecedented uncertainty due to US' trade and tariff policy. US growth is exhibiting early signs of slowdown with softness in labour market now visible in data. This is likely to deteriorate going forward as effects of tariffs and uncertainty weigh on prospects. Domestic demand in China remains subdued and deflationary forces have gathered steam. Global growth prospects will depend on how imposition of higher tariffs by US plays out in the medium term.
India's growth momentum is exhibiting signs of resilience as evident from strong Q1 GDP data and recent high frequency indicators. However, as India faces one of the highest tariffs by US on its exports, growth is likely to take a hit in the second half of this fiscal. The Government has realised this and has embarked on major reform overhaul for the country starting with lowering of GST rates to boost consumption. Going forward urban consumption is likely to get a boost due to income tax relief and GST rate cuts announced by the Government and monetary easing by the RBI. Rural consumption too is likely to remain steady on the back above normal monsoon, falling inflation and higher real rural wage growth. India's external sector also remains comfortable on the back of low current account deficit and adequate forex reserves. Rise in geopolitical tensions and tariff related uncertainty are key near-term risks.
Looking ahead, the medium-term outlook for India's economy seems optimistic, in our view. This optimism is driven by bi-lateral trade deals with various countries, Governments renewed efforts for structural reforms, enhanced infrastructure investments, and the likely boost to private consumption.
