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* In Jun’24, funding momentum surged, with capital market activity reaching an exciting peak. Equity markets soared to new heights, fueled by a wave of IPOs and record growth in equity mutual fund flows. Corporate bond issuance also showed improvement and is expected to expand further, with the 10-year G-Sec yield projected to remain consistently below 7%. Additionally, lower G-Sec supply and increased FPI inflows from index inclusion are preventing crowding-out

* Bank credit continued to grow at a strong pace of over 15% y/y (as of mid-Jun’24). We expect 13-15% y/y growth in bank credit in FY25, with green-shoots in smaller industrial sectors complementing the personal & services growth. Growth in funding has been enabled by reforms such as reducing face value of debt securities, easing norms around debt issuance and unlisted InVITs, and borrowing norms for AIFs by SEBI, besides countercyclical norms introduced by the RBI

* The surge in funding is presaged on a triple balance sheet advantage of steady Union fiscal consolidation, capitalized & clean bank books, and a debt-light India Inc. For FY25, the path of fiscal consolidation for the Union is expected to remain in order, boosted by momentum seen in advanced tax collections and slim T-bill borrowing calendar released (Rs. 2.6 trn in Q2FY25, down 33% from Q2FY24A), with a generous RBI dividend offsetting creases in revenue expenditure

* While this means the Union could achieve the conditions required for rating upgrade, State deficits needs close monitoring. Increased borrowings of SGS (planned Rs. 2.6 trn in Q2FY25 vs. actual Rs. 1.9 trn in Q2FY24), demands for special packages by multiple states, and early trends from state Budgets suggesting a increase in social welfare spending are all early signs of an era of largesse amidst upcoming polls

* Economic activity has been supportive, with high frequency indicators in Jun’24, including Fastag revenues (up 11% y/y), railway freight (up 10%) showing muscle. Even so, headline inflation remains in check, helped by an ebbing core. With scanty rainfall impacting vegetable prices and spike in telecom tariffs, upcoming inflation data could print a tad high. Subsequent relief is expected as monsoons have made up lost ground in Jul’24, and now are above normal levels

* In the US, a flat m/m PCE inflation reading and cooling labour markets have kept the markets hopeful of 2 rate cuts despite the FOMC dot plot penciling in just 1 cut in CY24. Notably, the next big challenge may be from fiscal exuberance, which continued in Jun’24, leading to US Fed Chair Mr. Powell pressing on Washington to cut deficit ‘sooner than later.’ The IMF chirped on similar lines slamming against chronic deficits and record debt levels

* China remains free of inflation but is struggling to stimulate demand. Expectations of loose policy drove 10Y G-sec yields to 2.18% (lowest since records began in 2002). With China being hit by oppressive tariffs (such as on EVs by Europe), the successful stoking of domestic demand will remain critical to its fortunes

* Now, attention will be focused on the Union Budget. We expect fiscal prudence will be maintained amidst measures to boost rural consumption. We anticipate an increased emphasis on rural housing and PLI scheme for employment-focused industries, renewable sector, and MSMEs. Success in the coming years will largely hinge on strategic allocation of funds across sectors, akin to positioning fielders on a bouncy pitch

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