Global Growth – Sluggish: IMF has cut global growth outlook by an enormous 50 bps for 2025 to 2.8% in its latest April outlook, from 3.3% in its Jan outlook. The main reason for downgrade is high level of trade and policy uncertainty due to tariff flip-flop by Trump. Growth of US is expected to slow to 1.8%, down sharply by 0.9% from the 2.7% projected in Jan. Developed economies are expected to grow by 1.4%, down by 0.5% from Jan estimate whereas China’s growth estimate has been cut by 0.6% to 4.0%.
Further, Federal Reserve kept interest rates unchanged during its May FOMC meeting as inflation is above target and Trump policies are likely to result in higher prices. The policy stance was dovish with expectations of two rate cuts in 2025, up from one projected in January.
For FY26, RBI has lowered its growth projections to 6.5% from 6.7% earlier due to escalation of trade and tariff tensions and the resultant global uncertainty. Although the dampening global economic outlook could impact India’s economic growth, the domestic growth engines continue to be very strong. This can be seen from Q4’25 GDP of 7.4% which was significantly above expectations, mainly led by strong performance from the core sectors.
Also, expectation of improved performance by rural economy along with normal monsoon forecast for the 2nd consecutive season is positive and will help in keeping food prices under check. Further, RBI has already announced 2 successive rate cuts and changed the policy stance to accommodative in addition to providing ample long-term liquidity (INR 900 billion). All of this suggests that RBI could provide further growth impulse by way of policy action if need arises.
Indian market witnessed a bounce back from Mar’25 onwards as Nifty 50 went up by 12%, and Mid and Smallcap went up by 20% and 22% respectively since Feb’25 low. Multiple factors contributed to this rally: a) Q4FY25 earnings season on an expected line, b) Positive bilateral trade developments, c) Reduction of geopolitical tensions with neighbouring countries, d) Strong macro setup for FY26, and e) Positive flows supported by improving risk appetite. Overall, the breadth of the market has improved significantly in the last 3 months.
Due to the weak US Dollar Index, India’s rising appeal in global supply chains amid tariff-related uncertainty and strong economic position, FII sentiment towards Indian equities continued its positive momentum with May being 3rd straight month of positive inflows (to the tune of ~20000 Cr), highest in the last 8 months whereas DII flows continued to remain strong and consistent.
Indian Inc. in Q4FY25, around 3300 listed entities, reported top line growth of 5% while EBIDTA grew by around 12%. Further, it is pertinent to mention that operating margin during the same period improved by 19 bpd to 15.03% in Q4’25 from 14.84% in Q3’25.
Largecap companies posted a 16 percent rise in net profit, driven by a 6.1% revenue increase. While midcap firms saw profit growth of 12.6 percent whereas smallcaps lagged with a muted 4.8% rise.
The Q4FY25 earnings season has been broadly positive, with a majority of BSE 500 companies outperforming expectations. However, a key highlight during the quarter was the growing divergence between domestically focused businesses and those reliant on global markets.
While sectors linked to domestic consumption like Metals, OMCs, Automobiles, FMCG, Healthcare, Realty and Capital Goods stood out during the march quarter. By contrast, export-heavy segments like IT services and chemicals remained under pressure.
At a broad level, we note that valuations are higher versus pre-pandemic levels despite (1) significantly elevated risks to global growth and inflation, (2) higher global interest and bond yields versus pre-pandemic levels and (3) domestic growth and profitability challenges for most sectors in the short term. However, we believe that valuations may continue to remain high vs past averages due to a) structural and secular surge in domestic equity inflows, b) FII flows coming back due to lack of alternatives in EMs and c) India remains an attractive proposition considering the global tariff threats and overall global uncertainty.
The trend based on Q4’25 earnings reinforces the structural strength of India’s domestic economy. However, with valuations stretched in parts and global demand uncertain, we believe the markets may need to sail through another couple of months smoothly before they try and move higher. Hence, we feel a bottom-up, selective, fundamental-driven strategy remains the prudent way forward.
We would like to end the update with the following quote:
“For an investor who knows what he is doing, volatility creates opportunity.”
– John Train
