The Nifty declined in February, falling 5.9% while Midcap and smallcap corrected sharply falling 10.8% and 13.1%, respectively. Sector-wise, all sectors ended in red, with capital goods, PSU & realty declining 14.4%, 13.5% and 13.4%, respectively. Global markets were mixed with Hang Seng emerging as the top-performing index, gaining 13.4% in the month, followed by Germany (+3.8%) and Mexico (+3%). Indonesia, Thailand and Japan declined 11.8%, 8.4% and 6.1%, respectively. The key reasons for the selloff in India were: (1) heightened level of news flow and uncertainty about trade tariffs imposed by the US President, (2) soft December quarter earnings for Indian companies (3) continued selling pressure in Emerging markets (including India). FPIs sold US$4 bn of Indian equities in the secondary market, whereas DIIs bought US$ 7.5 bn. Selling pressure was also observed in the domestic non-institutional segment.

Other key developments during the month were: (1) RBI started off a rate-cut cycle with a 25-bps cut to reduce the repo rate to 6.25% after being on a pause for 24 months; (2) BJP won the Delhi legislative assembly elections with 48 out of 70 seats, marking its return to power in the capital after 27 years; and (3) recently the RBI reduced risk weights for bank financing to NBFCs and microfinance loans which is likely to improve funding support to these sectors. (4) Crude Oil was down 4.6% as street anticipated end to war. High-frequency data for February was mixed. PMI Manufacturing at 56.3 was slightly weak MoM, while PMI Services improved to 61.1. Commercial vehicle registrations were down 2.3% yoy but diesel consumption remains healthy at mid-single digit growth. Banking sector (non-food) credit growth remained stable at 11.3% as on 7 Feb’25 vs 11.4% in Jan’25 (vs 11.1% in Dec’24). Within consumption, urban demand remained subdued. In contrast, rural consumption held up better. Early indicators for February suggest in-line MoM growth, with rising bank deposits balancing weak retail auto sales registrations (PV’s down 4.7% yoy and 2W down 2.6% yoy).

Q3FY25 Earnings season: : Q3FY25 results for BSE500, and Nifty companies were muted, though with some sequential improvement. PAT growth was 7.1%/5% YoY for BSE500/Nifty, driven by stable sales growth and a modest EBITDA margin expansion of 18bps. This indicates earnings may be bottoming out and showing early signs of recovery. The weak single-digit growth is an improvement over the contraction in Q2FY25. Discretionary, Energy, Materials, Telecom, and Real Estate outperformed while Industrials, Staples, and Financials were weak.

Though overall market conditions continue to exhibit volatility, developments of the last few weeks incrementally point to a coordinated effort by the Govt and the Central bank to revive domestic growth. Starting with a slew of liquidity injection measures by the RBI, followed by the Union Budget that sought to balance and revive growth, the start of the rate cut cycle and regulatory easing – all have been targeted to energize the growth environment. This however seems to have been ignored by the market at large. On the other hand, the global discourse has dominated investor attention. While it has been our view that the Indian markets may see back-ended performance in 2025, the sheer intensity of the market correction and the general sentiment seems to suggest that incremental value is starting to emerge in the market sooner than we had originally envisaged.

With much of the market constituents, particularly the growth pockets of the market having been meted with similar treatment, we think investment options have opened across the market spectrum from a medium-term standpoint. We would advise investors to take advantage of the improved risk-reward in the market and use this phase of the market to incrementally build their equity allocations in line with their risk appetite.

Global volatility remained elevated as US’s tariff policy unfolded & many countries took counter measures. US’s economy remained healthy as reflected in incoming data prints on jobs market & sticky inflation. However, US’s treasury yields rallied by 30-35 bps as market priced in more policy rate cuts amidst policy led disruptions. Even as Dollar index remained range bound, INR came under pressure along with other Emerging market currencies & depreciated from 86.62 to 87.51, despite heavy intervention from RBI. Banking liquidity remained deficit, though to a lesser extent as RBI took various liquidity measures including Open Market purchase operations of G-Sec (OMO) and forex (Fx) swap. As expected, MPC delivered its first rate cut of 25 bps with domestic growth-inflation dynamics turning favorable. Nonetheless, domestic G-Sec yields inched up marginally by 2-4 bps as currency remained under pressure & tight liquidity. Corporate bond yields hardened even more due to large quantum of new issuances.

Outlook

Global market remains on the edge as US has started taking tariff policy measures against few countries. Such measures are expected against more countries including India thereby keeping the tensions high. Geo-political tensions have also flared up. Response function of countries may vary and thus may add to the overall volatility in financial markets and currency. US’s further rate cut expectations are changing rapidly as incoming data suggests healthy economy but at the same time policy disruptions may increase the risks to growth.

Against the global uncertainty, Indian fixed income market is expected to remain largely resilient, though it may face knee-jerk reactions. Central Government’s clearly articulated fiscal consolidation path over next few years remains a structural driver for domestic fixed income market. Foreign investors continued to invest in domestic fixed income market for the 3rd consecutive month with inclusion in global debt indices, even as the equity segment has seen big outflows.

On monetary policy front also, MPC has kickstarted the rate cut cycle with 25 bps after almost 5 years. Last 2 months headline inflation has come lower than market expectations with sharp decline in food prices and as core inflation remains well anchored below 4%. Inflation is expected to remain under control and closer to RBI’s projected 4.2% for FY26. 3QFY25 GDP growth has recovered to an extent over the previous quarter but the risks factor remains high amidst global policy flux, posing challenge to RBI’s projected GDP growth of 6.7% for FY26. In the absence of any global or weather-related inflation shock, we expect RBI to turn its focus on growth support with another 25 bps rate cut in forthcoming April 2025 policy. The new MPC’s more flexible approach to inflation trajectory under the inflation targeting framework provides room for further rate cuts, however it may depend upon the global factors.

Even with favorable demand-supply dynamics for G-Sec and a 25 bps rate cut, domestic yields have not rallied much. Deficit banking liquidity since December 2024 due to RBI’s heavy Fx intervention & currency pressures have acted as a big resistance to yields decline. Under the new Governor, RBI has seen a marked shift in Fx management & overall liquidity management. Since December’24, RBI has conducted / announced various durable liquidity measures like Fx sell/buy swap of USD 25 bn and OMO of ~Rs 2.4 lakh crore. While all these measures have helped reduce the deficit, any meaningful improvement is expected only after RBI’s dividend to Govt in May 2025. We expect RBI to use OMOs as a major liquidity tool to inject durable liquidity and also to neutralize any major Fx intervention.

Overall, risk-reward remains favorable at current juncture as healthy domestic demand-supply dynamics & expectations of further rate cuts and RBI’s OMOs will help in bringing the market yields down and likely generate capital gains. However, it will be critical to position appropriately on G-Sec & Corporate bonds yield curve. Even as G-Sec yield curve has bear steepened against our expectations, we believe demand drivers in longer end remain intact and will play out over next few months. 1HFY26 G-Sec borrowing calendar to be announced by March end will be critical and we expect relatively lesser supply in longer end. Corporate bond yield curve on the other hand, is inverted and is also expected to flatten but with short end 1- 5 yr yields coming lower more rapidly as the banking liquidity improves post May 2025. Any uptick in yields due to still evolving global factors should be seen as an opportunity to build further exposure. Active fund management is critical as uncertainties may emanate from domestic inflation and global backdrop which may influence various yield curve segments differently.