March tenth, two thousand twenty-five to March fourteenth, two thousand twenty-five

I. Foundation 

resistance to change and hence greater dependability for the results shown in the past.

Understanding the Mar-a-Lago Accord in one article

The global trade and financial systems are entering a generational transformation, and Trump’s trade and monetary policies could become a new Market Paradigm Shift. Fundamentally, the dollar’s long-term overvaluation stems from inelastic demand for dollar reserve assets, while the manufacturing sector’s difficulties are attributable to the Triffin dilemma: the United States continually exports Treasury debt to supply global reserves. Although this twin-deficit model gives the United States lower borrowing costs (CIP deviation close to zero), it substantially weakens export competitiveness and exacerbates the trade deficit.

The market’s main misconception is to equate tariffs with an inflation shock. But data for 2018-2019 show that CPI & PCE inflation remained stable or even declined during the trade war. If tariff measures continue to be accompanied by exchange-rate adjustments, the ultimate tax burden may still fall on the countries being tariffed rather than on U.S. consumers.

Dollar appreciation offsets inflationary pressure, followed by further monetary-policy adjustments to correct the impact on manufacturing.

Against the backdrop of the so-called Mar-a-Lago Accord, the strategic path for Trump’s term is to lead with tariffs, use trade policy to reshape the rules of global competition, and use monetary (FX) tools to offset the structural flaw of the dollar’s long-term overvaluation.

Between 2018 and 2019, the Trump administration sharply raised tariffs, and the effective tariff rate on trade with China rose significantly. But the dollar appreciated by almost as much as the tariffs, so import prices in dollar terms rose only slightly and macroeconomic inflation remained stable. This shows that if dollar appreciation fully offsets tariffs, the countries being tariffed will bear the actual tax burden, while the United States will achieve Cost-Sharing in Reserve Asset Supply through increased fiscal revenue, Through exchange-rate adjustments, the tariff burden is ultimately transmitted mainly through currency depreciation in exporting countries, leaving consumer price pressures very low, while the U.S. Treasury gains a cost-sharing effect through increased tax revenue.

2018-2019 U.S.–China trade war: the macroeconomic impact of tariffs was smaller than the market expected, mainly because exchange-rate adjustments directly absorbed most of the price shock. The depreciation of the renminbi 13.7% offset the increase in the effective tariff rate of 17.9%, and ultimately the dollar-denominated price of Chinese imports rose by only 4.1%.This mechanism strengthened the Trump administration’s understanding of how tariffs pass through to actual purchasing power, potentially encouraging it to pursue even more aggressive tariff policies.

The market’s biggest misjudgment of Trump’s policies is that it underestimates the government’s room for maneuver in exchange-rate policy.

The market is seriously underestimating the policy tools the Trump administration could use to push for dollar adjustment. The prevailing consensus is that dollar policy depends on Federal Reserve interest rates, but the Treasury and the Fed are not completely independent of each other. The Treasury can still use IEEPA (International Emergency Economic Powers Act) to impose reserve asset charges, curb inelastic demand for U.S. Treasuries, or directly use the Exchange Stabilization Fund (ESF) to intervene in foreign exchange markets.

The market generally believes that “dollar policy cannot change,” but from the Plaza Accord (1985) to the Louvre Accord (1987), the United States has repeatedly and deliberately adjusted the dollar’s valuation. Against this backdrop, the Trump team not only places importance on tariffs, but also expects to adjust the dollar in stages through monetary policy.

Specifically, two paths are available:

First, a multilateral coordination approach, similar to the Plaza Accord in 1985 or the Louvre Accord in 1987. The Trump administration may try to advance a “Mar-a-Lago Accord” through coordinated adjustments by trading partners to lower the dollar’s valuation. The practical problem is that economic growth in Europe, Japan, and Country Z is currently weak, and they have no intention of actively pushing their own currencies higher.

If the Trump administration uses tariffs + the issue of the military security umbrella to exert negotiating pressure, it may force some allies to accept a framework for dollar adjustment, but this would be far more difficult than in the 80s.

Second, unilateral action: use tools such as IEEPA and ESF to levy a “usage fee” on U.S. Treasuries held by foreign official entities, forcing them to adjust their reserve behavior. At the same time, coordinate operations with SOMA and the Fed to manage short-term interest rates smoothly and control the long end of the yield curve, preventing a large-scale outflow of foreign capital and a sharp rise in long-term yields due to dollar depreciation.

Through this approach, the government can not only reduce the dollar’s “excessively high” value in international trade, but also shift some reserve costs to reserve holders, thereby weakening the adverse impact on U.S. exports while maintaining the dollar’s reserve-currency status.

At the same time, tariffs themselves as a negotiating lever; their role is reflected not only in increasing fiscal revenue, but also in being reflected in forcing policy concessions from rival countries by raising import costs For example, during the campaign, Trump proposed raising tariffs on major countries to 60% and setting them at 10% or higher for other countries. Although such an extreme proposal risks triggering market volatility, its costs can be passed on gradually within a framework of phased implementation and “forward guidance.”

The market generally assumes that tariffs and dollar policy are independent, but the Trump administration’s core strategy is tariffs first, followed by currency adjustment. Market pricing needs to account for the following paths:

1. Short-term dollar strength (Tariff-Driven USD Strength)

2. Improvement in tariff revenue, increased policy flexibility for the U.S. Treasury

3. If global capital flows are constrained, the Treasury launches FX intervention

4. The path of dollar adjustment depends on the degree of Fed cooperation

Overall, against the backdrop of “Mar-a-Lago,”The Trump strategy is to first rebalance trade terms through tariffs, use tariff revenue to improve the sharing of costs for supplying reserves to the rest of the world, then use exchange-rate policy to strengthen the dollar in the short term, and subsequently use FX Intervention and usage-fee policies on external debt to adjust reserve behavior. Ultimately, a series of gradual measures would bring about a comprehensive restructuring of the trade and financial systems.

The pace of policy adjustments will determine the main source of market volatility over the next 6-12 months.

2025.03.10

Understanding the “Mar-a-Lago Accord” in one article (continued)

The core of the MLA concept is to enhance the competitiveness of U.S. manufacturing through a coordinated depreciation of the dollar, while extending the maturities of U.S. Treasury reserve assets to avoid higher tariffs and safeguard U.S. national security interests.

I. Origins and background

The “Mar-a-Lago Accord” (Mar-a-Lago Accord, MLA) was originally a concept proposed by economic advisers to the Trump team. Stephen Miran, a former senior adviser to the Treasury Department during the Trump administration, published a report in 2024 11 outlining in detail a plan to reshape the global trading system and envisioning a multilateral monetary arrangement similar to a “New Plaza Accord.” Miran had served as a Treasury official during Trump’s first term. One month after the report was published, he was nominated to chair the Council of Economic Advisers.

Trump has long been deeply dissatisfied with the United States’ enormous trade deficit, viewing it as a transfer of American wealth overseas. He has promised to bring a “golden age” of manufacturing and exports to the United States. But because the dollar exchange rate has remained persistently strong, cheap imported goods have weakened U.S. competitiveness and exacerbated trade imbalances. The Trump administration therefore has an incentive to seek an international agreement to address the strong dollar problem

The overall objective of MLA is to correct the United States’ external economic imbalances by weakening the dollar, revitalizing manufacturing and exports, and reducing the economic burden the United States bears within the global system.

At present, MLA remains at the stage of concept and discussion and is not an officially announced policy. In other words, MLA is currently an unofficial policy proposal, and no clear official negotiations on an agreement are under way.

II. Policy measures of MLA

The policy objectives of the “Mar-a-Lago Accord” are broader than those of the Plaza Accord of 1985. Its core measures include:

1) Dollar depreciation: coordinate major economies to achieve an orderly depreciation of the dollar, reducing its trade-weighted value thereby enhancing the price competitiveness of U.S. exports.

2) Debt restructuring: substantially adjust the structure of U.S. federal debt to reduce interest costs and extend debt maturities.U.S. Treasury maturity adjustment is intended to reduce market disruption caused by reserve-asset sales and ensure that the dollar-depreciation policy can be implemented. MLA Supporters believe the United States can use tariff policy and military power to induce other countries to support dollar depreciation and adjustments to U.S. Treasury maturities.

3) Coordination of tariffs and trade policy: tariffs are viewed as leverage to apply pressure and induce cooperation from other countries. The “Mar-a-Lago Accord” may differ from traditional multilateral agreements, leaning more toward unilateral U.S. measures If a country is unwilling to cooperate in adjusting exchange rates or debt structures, the United States will threaten to impose additional tariffs or reduce its security commitments to force it to join the agreement.

III. Policy mechanisms and implementation methods of MLA

The design aims to achieve both a moderate depreciation of the dollar and stability in the U.S. Treasury market, avoiding financial turmoil.

On the one hand, convert other countries’ remaining dollar reserves into ultra-long-term U.S. Treasury bonds and hold them over the long term. Foreign central banks increasing their allocations to ultra-long-term U.S. Treasuries would amount to locking in financing support for the United States, ensuring that the U.S. Treasury market does not face a wave of selling even as the dollar depreciates. This measure aims to stabilize the demand curve for U.S. Treasuries and avoid a surge in yields or a debt crisis caused by foreign reductions in short-term bonds. It is intended to stabilize the demand curve for U.S. Treasuries and avoid a surge in yields or a debt crisis caused by foreign reductions in short-term bonds. If countries are willing to exchange short-term debt for long-term debt, upward pressure on interest rates in the U.S. Treasury market will ease, and the Treasury yield curve can remain stable even as the dollar depreciates.

On the other hand, implementing MLA would require finding a legal entry point, for example by potentially invoking the authority granted to the president under the International Emergency Economic Powers Act (IEEPA) to coordinate actions for the Fed to participate in foreign exchange intervention or debt swaps. At the same time, because central banks today are more independent, it is almost impossible to require them to commit to cooperating on interest rates. Therefore, MLA mainly focuses on exchange-rate and debt instruments, without directly prescribing an interest-rate path。

On trade policy, the United States may continue to use tariffs as a bargaining chip. In seeking partners’ cooperation to lower the dollar, the United States may first increase tariff pressure on countries with large trade surpluses to make an agreement more urgent. At the same time, if an agreement is reached, the United States could gradually reduce the tariffs imposed earlier in return, creating an exchange of “currency adjustment for tariff relief” and thereby linking adjustments in trade and finance.

On fiscal policy, the U.S. government needs to reduce unnecessary fiscal burdens and use the resulting room to subsidize manufacturing or cut taxes, complementing dollar depreciation to boost domestic industries. For example, by requiring allies to share more defense costs, the United States could cut some defense spending and redirect resources to the domestic economy. Meanwhile, issuing ultra-long-term zero-coupon bonds requires the Treasury to adjust its Treasury issuance strategy(breaking with the traditional principle of “regular and predictable” issuance); this change requires the support of the fiscal policy framework and the backing or acquiescence of Congress.

On monetary policy, the Fed will still publicly maintain its mandate to stabilize prices and employment and will not directly participate in an exchange-rate agreement. Operationally, however, if rapid dollar depreciation causes a short-term rise in inflation, the Fed will need to decide whether to tolerate a one-time jump in the price level or raise interest rates to contain it. If it views imported inflation as temporary, the Fed may hold steady; otherwise, it may tighten monetary policy to offset it, directly affecting the extent to which the MLA objective is achieved.

The Fed’s stance is therefore one of the key complementary factors determining whether MLA succeeds. To secure the Fed’s cooperation, the Treasury may coordinate informally with it on policy to ensure that financial conditions do not get out of control as the dollar is weakened.

IV.Market impact of MLA

The exchange rate of the dollar will be affected first, and the dollar is expected to weaken against major currencies.Under the agreement framework, central banks’ sales of dollar reserves and efforts to push up their own currencies would directly cause the dollar to fall. In addition, if the United States uses political pressure to force other countries to accept appreciation of their currencies, the market will price in this signal in advance.

Large currency swings could also trigger inflows and outflows of speculative capital. If emerging markets are forced to reduce their use of the dollar, their currencies may fluctuate sharply in the short term, and capital flows may also shift. In managing foreign exchange reserves, central banks may reassess the share of dollar assets. If they expect the dollar to remain weak over the long term or even the returns on U.S. Treasuries to be constrained, some countries may increase their non-dollar reserves, such as gold to diversify risk. This could further weaken the appeal of the dollar as a reserve currency.

The impact of MLA on interest rates cuts both ways.

On the one hand, dollar depreciation tends to push up U.S. inflation expectations because higher prices for imported goods will feed through into inflationary pressure. If the Fed determines that this rise in inflation is not temporary, the expected path in U.S. interest-rate markets (such as the OIS curve) will shift upward. The market will expect higher federal funds rates to contain inflation, and forward-rate pricing on the OIS curve will also rise.

On the other hand, MLA is designed to push down long-term interest rates:issue ultra-long-term U.S. Treasuries to lower long-term yields and reduce fiscal financing costs.In an extreme case, short-term rates could rise because of higher inflation expectations while long-term rates fall with the support of the agreement, causing the curve to flatten or even undergo a bull twist (long rates down, short rates up).

The interest-rate swap market will also reflect similar expectations:Long-term Swap rates may fall (because of lower expectations for long-term risk-free rates), while short-term Swap rates rise with expectations of Fed tightening, flattening the Swap curve.

It should be noted that if the market questions the creditworthiness of U.S. Treasuries (viewing a debt swap as a disguised default), the risk premium demanded by investors will rise, potentially pushing long-term rates higher instead and offsetting the suppressive effect of official buying. In this case, the interest-rate market could see unusual volatility: implied volatility may rise, and interest-rate futures and options prices may adjust sharply.

In addition, if official entities are forced to hold low-yield U.S. Treasuries, their participation in the primary market for new issues may decline, leaving other investors to fill the gap. If this gap leads to insufficient auction demand, the United States may have to raise the interest rates on newly issued Treasuries to attract buyers, in turn increasing fiscal interest costs.

The effects of debt swaps (bond exchanges) also include the following: some Treasuries that previously circulated in the market would be “cancelled” onto central-bank balance sheets; the pool of deliverable and reference securities in the bond derivatives market (such as Treasury futures and IRS) would change, potentially triggering shifts in pricing benchmarks and adjustments to trading strategies. These microstructure effects increase the complexity and potential risks of implementing MLA.

Therefore, The U.S. Treasury market’s response to MLA will depend on international confidence and cooperation:If countries cooperate well and market confidence does not collapse, long-term U.S. Treasury yields will fall and debt sustainability will improve. But if the market questions the reliability of U.S. policy, a wave of selling and a surge in yields could have the opposite effect and undermine global financial stability.

At present, however, there is reason to doubt whether foreign-exchange reserve managers would be willing to convert their U.S. Treasury reserves into Treasuries with longer maturities.Another question is how foreign-exchange reserve managers can provide dollar liquidity to support appreciation of their own currencies without selling U.S. Treasuries.

In addition, implementation details remain decisive, including the scale of official U.S. Treasury sales (to drive dollar depreciation) and whether debt swaps would be mandatory or voluntary. Even if foreign-exchange reserve managers in other countries agree to the arrangement, demand for long-term U.S. Treasuries from the nonofficial sector (private investors) remains uncertain.

Large exchange-rate and interest-rate movements will be transmitted through multiple channels to asset markets such as equities and commodities. For U.S. equities, a weaker dollar generally benefits export-oriented companies and multinationals because foreign profits translate into more dollars, while improved international competitiveness of U.S. goods can drive sales growth. As a result, export-oriented sectors such as manufacturing and technology may benefit, and their share prices may remain relatively resilient.However, higher import costs could also erode the margins of some companies that rely on imported inputs, such as those in retail and apparel, and investors may reprice these companies.

Uncertainty about the interest-rate environment will affect equity valuations. If the Fed allows inflation to rise but keeps financing conditions accommodative by suppressing long-term rates, lower real interest rates would support equities. But if inflation gets out of control and causes rates to rise across the board, equities could face downward valuation pressure. Overall, Markets may be highly volatile at first: before policy is settled, investors’ risk appetite may decline, prompting short-term reactions such as selling equities and buying safe-haven assets. Once policy becomes clear, capital will be allocated according to the new exchange-rate and interest-rate landscape.

As for other assets, precious metals and commodities are expected to rise. Dollar depreciation usually pushes up the prices of dollar-denominated commodities, while gold combines its roles as an inflation hedge and a safe haven, making it even more attractive to investors. Moreover, MLA itself includes a revaluation of gold, which amounts to the authorities wanting a higher gold price to bolster asset values; this expectation will stimulate the gold market.

In overseas markets, a weaker dollar usually benefits emerging markets (because their dollar-denominated debt burden is reduced). However, if global risk aversion rises and capital leaves the United States for other countries, some countries may face capital inflows and appreciation of their own currencies, which would instead weaken their export competitiveness and weigh on equities.

At the macroeconomic level, implementing MLA would have a significant impact on the United States and the global economy.

First, imported inflation will be directly triggered by dollar depreciation— Higher prices for imported goods and raw materials will push up the domestic price level in the United States. However, if wages subsequently rise (because a manufacturing boom drives the labor market), the negative impact of inflation on consumption may be partly offset.

Second, The trade balance is expected to improve significantly. A weaker dollar will curb imports and stimulate exports, creating an opportunity for the United States' longstanding, massive trade deficit to narrow or even reverse. Historical experience shows that exchange-rate adjustments have a lagged effect on trade volumes, but MLA if paired with measures such as tariff relief, the trade balance could improve faster. As exports grow and imports are replaced, U.S. manufacturing output and investment may recover, providing a positive boost to GDP.

Furthermore, Investment and capital flows will also be reallocated. U.S. domestic manufacturing and export industries will attract more investment in a fairer exchange-rate environment, and companies may increase spending on equipment and facilities to expand capacity. At the same time, if the agreement stabilizes long-term interest rates and strengthens U.S. debt sustainability, the government will also have room to increase public investment (such as in infrastructure), further boosting aggregate demand. However, it is important to be alert to the possibility that if international investors develop doubts about U.S. policy, some capital may flow out of the United States.

Overall, If MLA proceeds smoothly and avoids financial turmoil, the U.S. economy will take on a new shape over the medium term: “high inflation, low deficits, strong manufacturing”. However, if implementation goes awry or countries retaliate, it could trigger a chain reaction in the global economy, including escalating trade conflicts, runaway global inflation, or even a new recession. Therefore, MLA's impact on the macroeconomy is highly uncertain and depends on the degree of cooperation among the parties and the calibration of policy measures.

For the world, the United States’ weakening of the dollar and reshaping of the financial order could mark a new turning point in the “post-Bretton Woods system”: global trade and capital-flow patterns will shift, and countries may be forced to accelerate self-sufficiency and diversify their reserves to adapt to a new era in which the dollar is no longer “in a league of its own.”

2025.03.12

Five downturn cycles of 1990 since USDJPY

USDJPY has fallen 7% since its peak in 7. Looking back at the five USDJPY downturn cycles since 1990, we can see that this currency pair typically falls 18% to 47% from its peak over 16 to 60 months:

The current macroeconomic backdrop shares similarities with several historical periods when the yen’s trading regime shifted, These periods were usually accompanied by Federal Reserve rate-cutting cycles, slower U.S. economic growth, and foreign-exchange intervention. What is different this time is that the U.S. economy remains resilient for now, but how long that will last remains to be seen.

According to data from Japan’s Ministry of Finance, as of 1, Japanese investors have been net sellers of overseas bonds over the past three months, mainly through banks and life insurers. Although the scale remains modest compared with 2022-2023, it could have a significant impact on further yen appreciation in the future. This also means that related currency-pair trades such as EURJPY, CHFJPY, and GBPJPY still have room to move lower.

Based on publicly disclosed information, Japan’s 1.7 trillion-dollar pension fund has maintained a target allocation to domestic bonds of 25% since 2020, when the yield on 10-year Japanese government bonds (JGB) was close to 0%. This target allocation is part of a five-year plan and is expected to be reviewed in 4 this year. The yield on 10-year JGB has now risen to 1.4%, a level last reached in 2011, when the pension fund’s allocation to domestic bonds exceeded 60%.

The current allocation to foreign bonds is 24%, compared with only 9% in 2011. Given that the yield spread between U.S. Treasuries and JGB remains elevated at around 3%, a higher allocation to foreign bonds is still reasonable. But as the Bank of Japan (BoJ) raises rates and the Federal Reserve cuts rates, the spread may narrow, This will prompt the pension fund to shift back from foreign bonds to domestic bonds.

Since 7 USDJPY peaked last year, the Bank of Japan’s policy rate has been raised by 40bp, while the yield on 10-year JGB has risen by 28bp. Subsequently, The JGB yield curve will flatten further, as Japan’s government debt burden (255% of GDP) is suppressing yields at the long end.

Japan’s Ministry of Finance data show that the government’s current annual interest payments amount to 9.7 trillion yen, equivalent to 1.6% of GDP, a sharp increase from 1.2% in 2023. As JGB yields rise, fiscal deficit pressures may increase further. Japan’s government debt currently has an average maturity of 9 years and 7 months (2024 Ministry of Finance Debt Management Report).

Until new incremental buyers (such as domestic pension funds, life insurers, and banks) are found, the BoJ will face constraints in reducing its JGB purchases and will find it difficult to tighten policy significantly.

Black: Japan Ministry of Finance interest payments as a share of GDP; blue: JGB yield on 10-year bonds

Historically, shifts in the yen’s regime have often been accompanied by a flattening of the JGB yield curve, and this time will be no different.

2025.03.11

AI Spending vs. GDP: Why is the market so exuberant while the macro data fail to keep up?

Over the past two years, annualized revenue for publicly listed companies related to AI Infra has grown by more than $340B, and it could approach $580B by the end of 2025.But in U.S. GDP accounts, actual annualized investment in AI-related categories has increased by only $42B, a striking gap. On the surface, AI is a high-growth market theme, and share-price performance is rising too, but the macro data show that it has barely boosted actual GDP.

Looking at the breakdown, much of the nominal revenue growth of listed companies reflects rising costs (especially semiconductors) and overseas revenue. Neither boosts actual GDP in the United States. Margin expansion ($30B) and overseas revenue ($130B) account for about half of the surge in AI spending.

BEA (Bureau of Economic Analysis) methodology for calculating GDP is also a key reason for the underestimation. Semiconductor purchases in GDP accounting are classified as intermediate inputs (Intermediate Input) because they are usually embedded in final products and resold, rather than recorded as capital investment. Over the past two years, the domestic semiconductor supply chain in the United States has grown by $35B, but this has barely appeared in GDP statistics. Similarly, spending on Cloud Services used for AI training and inference is also are mainly counted as intermediate inputs rather than fixed investment (Fixed Investment), which means that even the rapid growth of cloud computing companies will not be clearly reflected in GDP growth.

This explains why AI spending is booming at the market level while the macro data lag—the key lies in the statistical definitions and how capital expenditure is classified.With a more reasonable adjustment, the actual contribution of AI investment to GDP may be underestimated by $100B.

In 25, as AI investment expands into Data Centers, Servers & Networking, and Utility Infrastructure, a larger share of this spending is more likely to be counted as actual investment, potentially providing some support for GDP growth.

But a more realistic issue is that, unless the way U.S. national accounts are calculated changes, semiconductor- and Cloud-related investment will continue to be treated as intermediate inputs and “ignored” by the statistical system. In other words, Even if AI industry momentum continues to build, the response in GDP data may still be “below expectations,” which could skew future policy discussions and market interpretations.

2025.03.11

II. Insights 

Our Viewpoints and ideas on market.

India trade can look

Last year, we completed the full upswing trade in India, and since Notes240930 India Is the China Trade Pair After the post, the Indian market has fallen from its peak back to the starting point before we entered the trade last year.

The last time we discussed India was in 12, and since the fundamentals had not changed, we did not publish an update. We do not keep posting when nothing has changed.

One key point is that the Sensex 30 has not fallen below its 200-DMA since 2023 4. If the index breaks below 200-DMA, downside risks may increase. This is similar to what happened in 2022, when the Sensex 30 corrected about 15% from its high and stayed below 200-DMA for 3-4 months.

India’s decline since 10 is linked to its second-quarter earnings performance. Third-quarter results and updates will begin in the first week of 1, and the 2026 fiscal-year budget meeting will take place on 2 1. These are the main upcoming catalysts for the Indian market. From the perspective of pricing power, if 2.1 has not fallen below 200 dma beforehand, the next rally may be worth anticipating.

—— Weekly Wrap 241229

We do not casually call a downtrend a bottom, but at this point we are indeed starting to look again, India’s relative appeal in Asia is increasing. Although slower global trade and tariff risks are potential headwinds, the resilience of domestic demand in India and the unfolding policy easing make it could indeed have a supported swing higher in the current market cycle.

At the macro level, India’s goods exports as a share of GDP are the lowest in Asia, while its services exports are not only defensive but are also steadily gaining market share, giving the country a stronger hedge as global demand cools, put simply, At this point, investing in India is essentially a risk-hedging trade, while China has shifted from a risk-hedging trade to a growth trade.。

Government capital expenditure is recovering at an accelerating pace; Q4 central and state government capex growth has stabilized at 9%, and now The main missing piece is still the recovery in private capex.

Growth Slowdown: A Policy-Induced Drag, Not a Structural Breakdown

India’s current growth slowdown is driven mainly by fiscal recalibration and monetary tightening, rather than structural imbalances. Government spending in India contracted significantly over the past few months; fiscal spending contracted -6% during the election period, and the recovery in capital expenditure after the election was slower than expected. Added to this, RBI’s tightening of interest rates and liquidity has constrained credit expansion.

This is a policy-induced deceleration rather than a cyclical growth stall, and the shift in policy from tightening to easing will bring a more sustainable rebound.

The Indian government accelerated capital spending in 12 and 1, and capital expenditure in the 26 fiscal-year budget plan is expected to grow 10.1%. Public investment remains central to policy, and the central government has already provided additional funds to local governments. The overall capex allocation for fiscal year 2026 is up 17.4%, providing support for the next stage of recovery during the easing phase.

Meanwhile, RBI is shifting from a tightening to an easing bias, including in policy rates, liquidity management, and regulatory relaxation. The market expects RBI may act in April, especially if the recovery is not strong enough.

With USD strengthening, RBI tightened liquidity for a time, but since 12 last year it has adopted a more flexible foreign-exchange policy and released liquidity into the banking system through various tools. The current 14-day WACR has fallen 43bps from its level at the end of last year, below the repo rate, indicating that RBI is indeed taking action to actively manage liquidity conditions.Recently, RBI has also been easing regulatory requirements for the NBFC sector, for example by reducing banks’ risk weights on NBFC loans and reversing 25%. This will encourage credit flows and lower borrowing costs.

Food inflation has fallen from a high of 10.9% in 10 last year to 6% in 1, bringing CPI down to 4.3% (a 5-month low). High-frequency food-price trends indicate further downside room in 2 -3, which will raise real incomes and drive a recovery in private consumption.

Compared with goods exports, India’s services exports have also been more resilient.Since 12 last year, India’s services-export growth has doubled, exceeding the growth rate of goods exports over the same period by 41%. More importantly, India is gaining global market share: its share of global services exports rose from 3.9% in 2020 to 4.4% in 2024. Against the current backdrop of weak external demand, India’s export mix provides a stronger growth buffer amid weak external demand.

India does face tariff risks, especially the possibility that the United States may impose additional tariffs on Indian pharmaceutical products (2.8% of total exports, GDP 0.3%). But the impact of slower trade on India is relatively limited compared with other regions. The greater risk may be that policy uncertainty keeps private spending from recovering.

Overall, India’s macroeconomic environment is shifting from a period of policy tightening to one of easing. Although the external environment remains challenging, domestic demand and strong services exports are providing a solid hedge.Given the government’s capex expansion, monetary-policy easing, and the potential expansion of consumption, it indeed makes sense to take a look; we are watching.

2025.03.13

Positioning the market:

Last year, we completed the full upswing trade in India, and since Notes240930 India Is the China Trade Pair After the post, the Indian market has fallen from its peak back to the starting point before we entered the trade last year.

III. Market Pulse 

Our latest Comments on the economic and market environment

Note: All content in this article is for reference only, does not constitute investment advice, and is not a basis for any laws, regulations, or regulatory policies. Investors should not use or rely on this information as a basis for decision-making.