Global economy is seen running into turbulence as trade and geopolitical uncertainties threaten unwinding the gains of yesteryears. The World Bank, in its Global Economic Prospects (GEP, 2025) report for June 2025, forecasts global growth at 2.3% in 2025, slowest growth reading after 2008 with exception of outright recessions. Most economies are likely to witness slower growth compared to last year. India is seen resilient at 6.3% growth in 2025. The World Bank estimates developing economies having per-capita GDP levels 6% lower in 2027, compared to pre-Covid trend. With exception of China, it will take a couple of decades for developing economies to recover the economic losses of 2020s.
The GEP, 2025 notes trade borne disruptions could complicate road to global recovery, and it calls on developing economies to lower tariffs with respect to all trading partners. There remains a lot to be desired, however. The 90-days pause on Liberation Day Tariffs introduced by Trump administration will end soon with very little to show in outcome of negotiations underway between the USA and trading partners.
China has shown considerable hold on the USA, especially in rare minerals supply, which has become a key source of friction between the USA government approach to China and the USA firms sourcing business in China. Nevertheless, China’s outbound shipments to the USA have shown decline in June, after showing resilience in April and May, affirming tariffs taking toll on demand.
Geopolitical uncertainties meanwhile have risen with renewed war in West Asia bringing a new theatre of challenges. Early June 2025, Israel and the USA bombed military and nuclear research facilities of Iran to prevent the latter make nuclear bomb. The ensuing escalations threatened spike in Crude prices as strait of Hormuz accounts for significant share of crude shipments. Encouragingly, both warring parties have sounded truce, and oil prices has reverted to pre-war state.
Central banks across the world have turned accommodative, sensing deleterious effects on growth while inflation stays contained, for now. The US Federal Reserve, however, chose to defer further cuts in policy rates as it weighs inflationary effects of Trump tariffs. Meanwhile, the Trump administration push for fiscally loose “Big Beautiful Bill” has raised concerns on USA public-debt sustainability, stiffening long tenor bond yields.
The Bank of England, and the Bank of Japan also maintained pause on policy rate in its mid-June monetary policy review. Earlier, the European Central Bank chose to cut policy rate by 25 basis points while Reserve Bank of India (RBI) surprised markets by a bold 50 basis points cut in policy repo rate along with a guidance of 1 percentage point cut in cash reserve ratio, effective from September 2025. Comforted by low and benign outlook for inflation, the RBI turned full throttle on supporting growth as it eased interest rates, liquidity and regulatory costs to credit.
High frequency data paints growth momentum weakening in financial year 2025-26 so far. The RBI, however, chose to revert policy stance to “neutral” in June review, just couple of months from turning “accommodative” in April 2025. While aimed at retaining policy flexibility in an uncertain global environment, the policy stance changes along with cut in repo sowed ambiguity in markets, which interpreted it as the end of rate cut cycle. The 10-year sovereign bond yields thus surged past 6.3%, a 15 basis points rise compared to policy day-low.
Indian rupee has remained resilient against USD, though, yielded gains against the euro and the British pound, a move largely reflective of general weakening of US Dollar. India’s current account situation remains comfortable as rise in merchandise trade deficit gets largely offset by surplus on services. Strong show on remittances also helped cushion India amidst weak capital flows last year. India’s forex reserves continue to cover more than 11 months of merchandise imports.
There’s need though to remain watchful on financial and capital account as portfolio flows will likely remain weaker amidst India’s low-interest rate differential vis-à-vis the USA. The foreign direct investment, while inflows remained robust on gross basis last year, may not contribute much to finance current account deficit, as repatriation may continue to be elevated this year on Indian markets relatively high valuations offering exit for investors.
As global growth turns south, India needs to play strategically in negotiating trade deals, protecting the vulnerable without distorting fair play, plugging-in global supply chains diversifying away from China, building infrastructure to reduce logistic inefficiencies, and easing the cost of credit to fund India’s entrepreneurial aspirations ahead.
