Market Overview – June 2025

Global economic prospects are weakening, with substantial barriers to trade, tighter financial conditions, diminishing confidence and heightened policy uncertainty projected to have adverse impacts on growth. The global growth is projected to slow from 3.3% in 2024 to 2.9% in both 2025 and 2026 mainly led by USA where the GDP growth is projected to decline from 2.8% in 2024 to 1.6% in 2025 and 1.5% in 2026.

Further, inflation rate in the US is hovering at around 2.7% vs Fed’s target of 2%. Fed Chair Jerome Powell noted in their July meeting that tariff price increases were just beginning to show up and that inflation readings likely would move higher in the near term. Hence, as expected, the Federal Reserve made no change in policy at the July meeting keeping the rates unchanged at 4.25% to 4.5%, where it has been since December 2024. However, there were two dissenting votes — one from Fed Governor Christopher Waller and one from Fed Governor Michelle Bowman, which is a sign that support for lower rates may be broadening. Further, Fed Chairman in his Jackson Hole speech on 22nd August 2025, hinted that a potential rate cut could occur during their Sept meeting.

18 years later, S&P upgrades India’s rating with a stable outlook, saying US tariff impacts are manageable. Further, 1st quarter has seen the front loading of Govt. Capex with a growth of 61% and 39% in April and May. There is a momentum in ordering and a significant pick up in defense expenditure. RBI has cut the repo rate by 100 bps and has plans to reduce CRR by 100 bps in a gradual manner. This move should help improve the liquidity in the system and credit growth, which was at just 9.5% in Q1’26.

Inflation: The RBI’s decision to keep the repo rate unchanged in their August meeting reflects a cautious yet flexible approach amid falling inflation and global uncertainties. With CPI at a 77-month low and FY26 inflation forecast cut to 3.1%, the RBI may be waiting to assess the full impact of earlier rate cuts before acting further. It also reflects prudence amid external risks such as unpredictable future US tariffs, which could weigh on India’s exports.

Indian markets have been lackluster over the past year (Nifty flat Y-o-Y) and underperformed several global peers. This is primarily attributed to earnings weakness compounded further by a series of geopolitical and macro headwinds. In response, the RBI and the government have adopted a whatever it-takes approach to revive domestic consumption and stimulate growth.

While the Indian equity markets initially responded positively to the regulatory efforts staging a sharp recovery in Q1’26 despite navigating multiple headwinds during the period, they have turned cautious again (down 4% since June 2025) reflecting concerns over US tariff announcements, heightened global geopolitical volatility, subdued Q1’26 results and reversal of FII flows.

During the quarter, topline growth for most of the companies stayed in low single digits, indicating that the domestic consumption recovery remains slow. Despite sluggish demand, India Inc’s profitability showed resilience in Q1’26, supported by improved operational efficiency and lower input costs.

While sectors linked to domestic consumption like Cement, Capital Goods, Retail, Real Estate, Telecom, Power and Oil & Gas performed better during the June quarter; sectors like IT, Consumer, Banking & Finance, Chemicals and Automobiles etc. were under pressure.

Both the RBI and GOI have adopted several growth-stimulating measures over the past few quarters, which should now begin to yield results. Since Q3’25, the RBI has infused significant liquidity (>INR10 trillion) whereas the repo rate and CRR have been cut by 100 bps and 150 bps respectively. The GOI, on its part, had earlier provided a budgetary stimulus of INR 1 trillion through personal income tax foregone which coupled with PM’s Independence Day announcement of second-generation GST reforms, is expected to significantly boost consumption. In addition, good monsoon so far along with positive commentaries from FMCG and other agri related companies regarding pick up in rural demand in Q1’26 should provide further support to growth.

Overall, we believe these announcements can collectively improve market sentiments and set the stage for an upmove after a muted performance over the past 12 months. With growth expected to improve from H2’26 and low base effect from last year, we feel earnings can surprise positively. Hence, we may look at reducing some of our exposures in large-caps and shift to existing/new bets in the small and mid-caps which we feel can benefit from the above developments. 

We would like to end the update with the following quote: