2025-12-12 12:54:22 pm | Source: SBI Capital Markets
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EcoCapsule Dec'25:Domestic Harriers Unleashed On External Barriers by SBI Capital Markets
Executive Summary
Global growth outlook appears steady and solid with the big economies leading from the front
The IMF expects the global economy to grow at a similar pace in CY26 vs. CY25, with stable growth expected for big economies such as the US, China, and India. The US has shown resilience with high frequency job market indicators printing promising numbers and AI/data centre boom crystallising. China is consolidating its economic progress with supply side rationalisation and is likely to aim for a 5% y/y real GDP growth in CY26. India remains a standout, likely to clock beyond 7% y/y real GDP growth in FY26, aided by a confluence of domestic consumption and government intent.
An extended period of benign energy inflation globally could unravel in the coming months
Brent crude and thermal coal prices have been subdued based on the continuous threat of global slowdown and gradual supply increases. The tide could be turning, with natural gas prices at a 3-year high in the US. With the world’s increased dependence on US LNG through trade deals and winter approaching, gas and power prices could approach new highs in Europe unless Russian supplies are restored. Spillover effects, besides steady demand from China and India amidst uncertain supply from the Urals could prop up the crude markets. Adding a low base of CY25 to the mix, and energy, which played a deflationary role till now could show up in Central Bank calculations again.
External frontiers remain clouded for India, though policymakers appear unfazed
Current account deficit remained in check in H1 at 0.8% of nominal GDP. With Q4 generally being a good quarter for inflows, CAD should be manageable in FY26. Notwithstanding this and generous forex buffers of ~USD 700 bn, the INR depreciated to below Rs. 90/USD. INR has depreciated at a time when the DXY has not gained, keeping the CNY relatively strong – this offers relief for exporters in a time of tariff turmoil. The RBI too has condoned this depreciation given its net short position is yet to unwind sustainably, and given ample room remains on the inflation front.
Monetary policy beyond rates: liquidity to guide the yield curve corridor and shape
The RBI’s surprise repo rate cut has ensured that future actions are not outside the realms of possibility. However, the successful transmission to the lending/deposit rates, which has appreciably occurred this cycle, is only possible with adequate liquidity. Recognising this, the RBI has decided to inject durable liquidity through a mix of OMO purchases and forex swaps. The aim is, however, to water the greenshoots of credit growth and not generate short-term fizz, hence the a gradual reshaping of the yield curve to reduce tenor premium could also ensue, with VRRR operations at the short end.
A curated policy mix is revolutionising industry and credit growth, with much awaited private capex set to trickle in
Industry credit grew at the highest pace in 3 years in Oct’25, with further acceleration in MSME offtake augmented by large industries such as mining, pharmaceuticals, metals, petro-chemicals and electronics. Notably, robust infrastructure offtake was supported by capex revival in power sector and a surge in ports. The rate cut will help interest rate sensitive sectors such as renewables and real estate and sustain the momentum through CY26. Whether these greenshoots will blossom into a healthy bout of private capex remains to be seen, though light corporate balance sheets, moderate spreads, and stable yields on Union G-secs provide the necessary ingredients.
Above views are of the author and not of the website kindly read disclaimer
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