Global economy is heading towards a weaker growth year with trade and war borne uncertainties putting a drag on global demand. The IMF in its latest update of World Economic Outlook paints a grim outlook for global GDP growth (2.8% and 3.0% in 2025 and 2026 respectively vs 3.3% growth in 2024) sounding caution for world leaders to not scale back global cooperation at this critical juncture. Global inflation decline meanwhile is seen slower than earlier, as tariffs raise cost of imports, limiting headroom for monetary accommodation.
Meanwhile, investors have heaved a sigh of relief with the Donald Trump administration deferring the ‘Liberation Day‘ tariffs imposed on the USA trading partners, offering a 90-day window to negotiate trade deals bilaterally. Nevertheless, the USA attitude remains belligerent with respect to China, the partner with which it runs the largest trade deficit (USD 295 billion in 2024). China, in the interim, has opted to meet the US provocation with reciprocal tariffs, taking the effective tariff rates to 145%. The two largest economies of the world choosing to engage in a trade war is unnerving for the global markets, which for now remain resilient in the hope that better senses will prevail, and both parties can reach an amicable solution.
The USA, having seen 0.3% contraction in GDP during January-March 2025 on annual basis, posted robust jobs data, with non-farm payrolls at 1.77 lakhs for April 2025, stronger than anticipated; allaying fears of tariff induced uncertainties leading to recession. China, however, witnessed a contraction in manufacturing activity as per Purchasing Manager’s Index data (49.0 in April 2025, a sixteen-month low), reflecting tariffs taking a toll on its economic activity.
In India, a gruesome terror incident in Pahalgam, Jammu & Kashmir, claiming 26 innocent lives, has raised the spectre of a full-blown war with Pakistan, though responses so far have been measured. Both nations have shut their international borders, and closed skies for aircraft originating from the enemy’s territory, in effect, increasing the cost of travel or logistics internationally. India has banned all imports originating or transiting via Pakistan. The disruption is less consequential for India as Pakistan accounts for less than 0.0001 percent of India’s import basket.
However, for Pakistan, India remains a key source of essential supplies such as pharma products. Besides, the suspension of Indus Water Treaty that controlled the flow of water in India’s north-western rivers, largely flowing through Pakistan, has potential to reset bilateral relations on an enduring basis.
Moving forward, early results of listed companies signal demand moderated in the fourth quarter of financial year (FY) 2024-25, which in an uncertain global backdrop, reinforces the case for supportive policies. India’s high frequency indicators encouragingly posted robust growth prints for April 2025. India’s PMI for manufacturing, noted at a ten-month high of 58.2, signals solid rate of expansion in factory activity. India’s PMI for Services also, noted at 59.1, affirms solid beginning of new financial year for the economy. GST collections noted at robust Rs 2.37 lakh crore in April 2025, an increase of 12.6% from the corresponding month last year.
Bank credit growth however slowed to 10.3% year-on-year for the week ended April 18th, 2025, underscoring the need for easier credit conditions to support growth. The IMF has also revised down India’s GDP growth forecast to 6.2% for FY2025-26, and modest uptick to 6.3% in FY2026-27, on higher trade uncertainties.
Retail inflation prints, meanwhile, moderated further to 3.3% in March 2025, taking the FY2024-25 inflation average to 4.6%, a six-year low. Easing inflation pressure is supporting the case for accommodative monetary policy. The RBI has brought system liquidity in comfortable surplus zone, creating enabling conditions for transmission of cumulative 50 basis point rate cuts in 2025 so far. Yields on 10-year government securities have eased below 6.4%, setting a stage for lowering borrowing costs in the economy.
Government finances are seen stable with the RBI expected offering a bumper dividend for financial year 2024-25 too. With foreign investors returning to buy Indian assets, Rupee has witnessed sharp recovery, from 87 to 84 per USD), of late, especially with USD weakening against global currencies. Forex reserves have recovered to USD 688 billion, providing 11 months cover to merchandise imports. With crude oil prices seen softening in 2025 on lower global demand, India’s current account balances will be less of worry, going forward.
Overall, India’s macroeconomic health score remains in good shape. There is need though to remain vigilant to geopolitical risks, which may escalate quickly, undermining hard earned macro stability in the year ahead.
