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EXECUTIVE SUMMARY

As of Jul’25, the global financial landscape reflects a mix of resilient equity markets, persistent geopolitical tensions, and shifting monetary policy. US equities continued their strong run, with both the Nasdaq and S&P 500 hitting record highs. This momentum is supported by market adjustment to the interim tariff regime and a rebound in global manufacturing PMIs amid supply chain diversification. Investor focus remains on the upcoming 9 Jul’25 tariff decision, with a TACO-style extension seen as the base case. The US has finalised initial trade agreements with China, the UK, and Vietnam, with hopes for one with India soon. These deals are expected to soften global spillovers.

DXY weakness and currency volatility more broadly are driving investors to explore alternative assets. Gold, cryptocurrencies, and stablecoins are gaining favour as perceived hedges along with EUR, GBP etc., offering diversification amid uncertain monetary paths and geopolitical flux. The rising appeal of these alternatives signals a broader shift in investor behaviour, especially as traditional safe havens become entangled in policy and trade risks.

Geopolitical risks beyond traditional financial arenas are increasingly shaping market dynamics, with recent tensions in Iran injecting fresh volatility into crude oil prices. While global supply disruptions have been limited so far, buffered by spare capacity in other producing regions and higher non-OPEC+ exports. However, the risk of escalation—and potential disruption of critical shipping lanes—remains a key overhang for global energy markets and the broader inflation trajectory.

India’s economic outlook remains mixed. Advance tax collections rose just 3.9% y/y (1 Apr– 19 Jun’25), hinting at subdued nominal GDP growth. Industrial output weakened, with the IIP hitting a 9-month low in May’25, led by sharp declines in electricity and mining due to monsoon disruptions. That said, early kharif sowing trends are encouraging, supported by healthy rainfall and reservoir levels. Additionally, the RBI’s large dividend is set to bolster fiscal space, enabling higher public spending or debt reduction—potentially supporting growth and reinforcing investor confidence in fiscal management.

RBI has adopted a more accommodative monetary stance, maintaining surplus liquidity to support growth and credit flow. The recent extension of market hours is a strategic move to deepen financial markets and enhance efficiency for participants. However, these measures come amid a slowdown in credit growth, which has slipped into single digits—despite improved rate transmission and relaxed norms across asset classes. While the latest RBI’s FSR highlights systemic strength, the divergence with on-ground credit trends is notable. As seen in the early 2000s, monetary easing alone may not be sufficient to reignite credit momentum, underscoring the need for complementary demand-side catalysts

While policy rates continue to transmit through the banking system, the bond market appears to have priced in a pause to the rate cut cycle. G-sec yields have firmed, and the yield curve is now at its steepest in years. As previously highlighted in EcoCapsule, corporate spreads have widened, reflecting rising risk aversion across credit segments and a growing preference for shorter-duration instruments amid lingering uncertainty

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