Outlook for the Month of December’25

Economy Review

The key events in the month were –

Domestic Factors –

a) GDP – India's real GDP experienced a significant rise of 8.2% YOY in 2QFY26, driven by strong performances in the services and manufacturing sectors.

b) CAD – The current account deficit widened to $12.3 bn, 1.3% of GDP as the goods trade deficit worsened to $87 bn. The net invisible surplus increased to $75 bn, led by the software services surplus at $44 bn and remittances at $36 bn.

c) Trade Deficit – India’s trade deficit widens to an all time high in October’25 to $42bn, led by high gold imports.

d) Manufacturing PMI – India’s Manufacturing PMI falls to a nine month low in November’25 to 56.6.

e) RBI Policy – In the December’25 monetary policy RBI has cut the repo rate by 25bps to 5.25% and announced liquidity infusion measures of Rs 1tn OMO and a 3 year $5bn FX swap. The rate cut was an unanimous decision while the stance was maintained at neutral.

f) Bihar Elections – The ruling NDA government secured a sweeping majority in the Bihar Assembly elections, winning 202 seats out of 243.

Global Factors –

a) Federal Reserve – The US FED has reduced the key policy rates by 25bps to 3.75-4.00%.

b) US Tariffs – India and US are discussing a trade deal, this will help remove the uncertainty of tariffs.

c) Crude Oil – Brent crude oil prices moderated to $64/bbl as expectations of a Russia-Ukraine peace agreement gained momentum, raising hopes for a potential boost in global oil supply.

Domestic Macro Economic Data

Inflation – India’s CPI inflation moderated to the lowest levels of 0.25% in October’25 due to sustained deflationary pressure in the food category. India’s WPI inflation came down to -1.2% in October’25 Vs 0.1% in September’25.

Outlook for Equities
The Indian market jumped to record high levels in November’25, supported by rate-cut hopes, India US trade deal negotiation and decent Q2FY26 results season with more upgrades than downgrades. The Nifty gained 1.9% during the month. The mid-cap index also made similar gains but the small-cap index underperformed and declined 3%.

The US FED has reduced the key policy rates by 25bps to 3.75-4.00%. Brent crude oil prices moderated to $64/bbl as expectations of a Russia-Ukraine peace agreement gained momentum. On the domestic front, India's real GDP experienced a significant rise of 8.2% YOY in 2QFY26, driven by strong performances in the services and manufacturing sectors. The current account deficit widened to $12.3 bn, 1.3% of GDP as the goods trade deficit worsened to $87 bn. In the December’25 monetary policy RBI has cut the repo rate by 25bps to 5.25% and announced liquidity infusion measures. Meanwhile, FIIs bought $0.4bn worth of equities whereas DIIs bought $8.7bn of equities in November’25.

Nifty is currently trading at ~20x FY27e P/E at its 10 year average. We expect Nifty earnings to grow at 12-13% CAGR over FY25-27. Investors can continue to invest in equities from a medium to long-term perspective.

Outlook for Debt
RBI MPC gave a dovish guidance as they cut repo rate by 25 bps to 5.25% and announced OMO purchases of Rs 1tn and FX buy sell swap of $ 5bn. Governor spoke of inflation being at a benign 2.2% and growth at 8.0% in H1:2025-26 presenting a rare goldilocks period. MPC not only cut rates but remained focused on transmission by providing support to durable system liquidity through OMO purchases and FX buy-sell swap. Governor reiterated that RBI would continue to provide sufficient liquidity to the system while not targeting any particular level. In the press conference he replied that there could be no speculation on further policy space, they will take it policy by policy and concentrate on transmission. “If the scope and need opens up” as stated by RBI Governor there is likelihood of another rate cut by RBI in the forthcoming policies.

November’25 month saw release of a strong GDP print. A benign deflator of 0.5% and favorable base effects lifted real GDP growth to 8.2% in Q2FY26, even as nominal GDP growth at 8.7% was above expectations. Goods trade deficit widened sharply to $41.7 bn in October’25. Imports rose driven by gold imports and electronics. Services trade surplus in October’25, at $19.9 bn, was higher than the upwardly revised print of September’25. INR remained under pressure through the month to weaken beyond 90/$.

October’25 CPI inflation eased to 0.25% due to a 5% yoy deflation in food and some impact of GST rate cuts across sectors. Food prices contracted, led by a decline in fruits, vegetables, pulses and oils. Core inflation edged up to 4.4%. WPI inflation for October’25 was at -1.2% on year. IIP growth slowed to 0.4% YoY in Oct’25 mainly due to lower working days because of a number of festivals in the month.

US government shutdown ended after 43 days of limbo, the longest ever US government shutdown. Mixed economic data and dovish comments by few FOMC members has led to the probability of December rate cut surge to 89% compared to ~40% a month ago. Meanwhile, Japanese bonds and FX markets witnessed significant sell-off last week after the government announced price relief fiscal stimulus worth $112 bn. DXY index strengthened to trade above 100-mark for three consecutive days but has fallen back towards 99.20. Brent prices reacted to chances of a peace deal between Russian and Ukraine and closing of Venezuela air space declining 3% during the month.

In the near term, markets await impact of RBI MPC guidance and reactions post open market operations as well as FX buy-sell swap. Liquidity and rupee movement will also be closely tracked along with CPI data. Progress on trade deal and tax collections trajectory is another indicator to watch. In global markets, FOMC meeting and BOJ rate setting meeting will be crucial for the month along with data on employment and inflation from US. 10 year Gsec closed at 6.51% on 28th November’25 higher by 4 bps during the month. 10 year Gsec yield in the near term is likely to be in a range of 6.40%-6.60%. Spread of 10 year Gsec with corporate bond is near 55 bps and is likely to be in a range of 50-60 bps.