Outlook for the Month of July’25

Economy Review

The key events in the month were –

1. Domestic Factors –

a) RBI Monetary Policy – RBI in its June’25 monetary policy reduced the repo rate by 50bps to 5.50% and also changed the stance from accommodative to neutral. It also reduced the CRR by 100bps to 3% in 4 traches of 25 bps between September and November’25.

b) India’s Current Account – India’s Q4FY25 current account swung into a surplus of 1.3% of GDP ($13.5 bn), after the 1.1% deficit in Q3, propelled by services exports and remittances.

c) Trade Deficit – India’s trade deficit in May’25 narrowed to $21.9bn from $26.4bn in April’25, due to reduction in oil import bill.

d) GST collections – GST collections was up by 6.2% yoy to Rs 1.85 tn in June’25.

e) Manufacturing PMI – India’s manufacturing PMI rose to a 14 month high in June’25 to 58.4 Vs 57.6 in May’25.

2. Global Factors –

a) Federal Reserve – The US FED kept the policy rates unchanged from 4.25-4.50%.

b) US Tariffs – The US decided to hike tariffs on steel and aluminum imports from 25% to 50%.

c) Crude Oil – Brent crude oil prices rose to at ~$69/bbl, up 8% during the month due geopolitical issues in Middle East.

Domestic Macro Economic Data

Inflation – India’s CPI Inflation in May’25 moderated to 2.8% from 3.2% last month due to lower food inflation. India’s WPI inflation softened to 0.4% in May’25 from 0.9% April’25 driven by lower food and fuel prices.

Outlook for Equities
Nifty rose 3.1% in June’25, its fourth straight monthly gain. Mid-cap and small-cap indices outperformed large-caps and were up 4.0% and 6.7%, respectively. Market sentiments were boosted post the ceasefire between Iran and Isreal, RBI’s 50 bps rate cut and easing liquidity.

The US FED kept key rates unchanged at 4.25-4.50%. On the domestic front, Q4FY25 current account swung into a surplus of 1.3% of GDP ($13.5 bn), after the 1.1% deficit in Q3. RBI in its June’25 monetary policy reduce the repo rate by 50bps to 5.50% and also changed the stance from accommodative to neutral. It also reduced the CRR by 100bps to 3%. FIIs bought equities worth $2.3bn and DIIs bought $8.5bn of equities in the month of June’25.

We expect an economic revival to play out in the second half of this calendar year due to normal monsoon and consumption boost. We expect Nifty earnings to grow at ~12-13% CAGR over the medium term. Nifty is currently trading at ~20x FY27e P/E. Investors can continue to invest in equities from a medium to long-term perspective.

Outlook for Debt

In the June’25 monetary policy RBI MPC cut repo rate cut by 50bps to 5.50% from 6.00%. Five members voted for a 50bps rate cut and one member voted for a 25bps rate cut. The MPC decided to change the stance from “accommodative” to “neutral”. Additionally MPC mentioned that under the current circumstances, monetary policy is left with very limited space to support growth. RBI MPC decidedly stated that they are front loading the rate cuts. RBI delivered a surprise on three fronts, by cutting key repo rate by 50 bps, CRR cut by 100bps and changing stance back to neutral from accommodative. RBI had changed the stance to accommodative only in the previous April MPC. These measures caused reason for much surprise in the market and also raised questions on whether future policy actions will be towards rate cuts or pause. Current policy discourse and assessment has taken on the meaning that after 100 bps of rate cuts done from February’25 till June’25 RBI MPC will in high likelihood remain on a pause for few more meetings.

The RBI MPC minutes besides indicating the push for growth, also leaned on the need for quick transmission. While it is unlikely that the RBI will act in the next 1-2 policies, the governor, in his recent media interactions, has hinted at some policy space opening up if inflation outlook turns out to be below RBI projections. All members agreed to shift the stance back to neutral from accommodative. Limited space for further easing seems to be the primary reason for this stance change. However announcement of a Variable rate reverse repo auction in June’25 end took market by surprise as it led to liquidity being reduced in the system. Despite the same banking system liquidity continues to be in comfortable surplus.

Goods trade deficit in May’25 narrowed from April’25 levels to $21.9 bn. Exports in May’25 decreased due to lower oil exports. WPI inflation for May’25 was at 0.4% YoY. May’25 CPI inflation moderated to 2.8%, food inflation eased to led by sharp price declines of fruits, pulses, cereals and spices. Core inflation inched up to 4.2%. Monsoon after starting early saw cumulative rainfall at 10% above long-term average till 27th June’25. On a cumulative basis, rainfall was above-normal in north, and west, central and south India while below normal in east India.

Fed FOMC kept the policy rate unchanged at 4.25-4.5% given expectations of acceleration in goods inflation in the near term due to reciprocal tariffs. The political pressure on Fed to decrease rates has led to market anticipating a rate cut in July. Bank of England kept their benchmark policy rates unchanged despite softening labor market indications and weakening growth. Bank of Japan kept their policy rates unchanged at 0.5%, while it would slow the cuts to government bond purchases from April’26. The ECB reduced interest rates by 25 bps on the back of a benign inflation trajectory. The escalating geopolitical risks in Middle East led to a ~13% surge in crude oil prices when Brent oil touched $80/bbl but easing in those tensions has led oil again towards $69/bbl.

Markets in the near term await further measures on liquidity from RBI and future trajectory of headline CPI numbers. Additionally, progress of monsoon, conclusion of negotiations on trade deals, oil prices, FPI flows and currency movements are also crucial. Benchmark 10 year Gsec closed at 6.32% on 30th June’25 hardening by 10 bps during the month. 10 year Gsec yield is likely to be in a range of 6.15%-6.35% in the near term. Spread of 10 year Gsec with corporate bonds is nearly 60 bps and likely to remain between 55-65 bps.