March tenth, two thousand twenty-five to March thirteenth, 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 may 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 U.S. low borrowing costs (CIP deviation is close to zero), it materially weakens export competitiveness and exacerbates the trade deficit.

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

Dollar appreciation offsets inflationary pressure, and the next monetary-policy adjustment can then correct the impact on manufacturing.

Against the backdrop of the so-called “Mar-a-Lago Accord,” the strategic path during Trump’s term starts with tariffs, using trade policy to reshape the rules of global competition while using 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 effective rates on trade with China climbed significantly. But the dollar appreciated by almost as much as the tariffs, so import prices in dollar terms rose only slightly and overall inflation remained stable. This suggests that if dollar appreciation fully offsets the tariffs, the countries being taxed would bear the true burden, while the United States would increase fiscal revenue through Cost-Sharing in Reserve Asset Supply, Through the exchange-rate adjustment mechanism, the tariff burden is ultimately transmitted mainly through currency depreciation in exporting countries, keeping pressure on consumer prices very low, while the U.S. Treasury gains a cost-sharing effect through increased tax revenue.

During the 2018-2019 U.S.–China trade war, the macroeconomic impact of tariffs was smaller than the market expected. The main reason was that exchange-rate adjustments directly absorbed most of the price shock. Renminbi depreciation of 13.7% offset the increase in the effective tariff rate of 17.9%, so the final rise in dollar-denominated prices of Chinese imports was only 4.1%.This mechanism strengthened the Trump administration’s understanding of how tariffs transmit through actual purchasing power, which may lead it to pursue even more aggressive tariff policies.

The market’s biggest misjudgment of Trump’s policies is underestimating the government’s room to maneuver on exchange-rate policy.

The market is seriously underestimating the policy tools the Trump administration could use to adjust the dollar. The prevailing consensus is that dollar policy depends on Federal Reserve interest rates, but the Treasury and the Fed are not completely independent. The Treasury can still use IEEPA (International Emergency Economic Powers Act) to impose reserve asset charges and 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 actively adjusted the dollar’s valuation several times in its history. Against this backdrop, the Trump team values tariff tools and also expects to adjust the dollar in stages through monetary policy.

Specifically, there are two possible paths:

The first is a multilateral coordination plan, similar to the Plaza Accord of 1985 or the Louvre Accord of 1987. The Trump administration may try to advance a “Mar-a-Lago Accord” through coordinated adjustments by trading partners to push down the dollar’s value. 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 currencies higher.

If the Trump administration uses tariffs + the military umbrella issue apply 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.

The second is unilateral action: use tools such as IEEPA and ESF to impose a “usage fee” on U.S. Treasuries held by foreign official entities, forcing them to adjust their reserve behavior. At the same time, coordinate with SOMA and the Federal Reserve to manage short-term rates smoothly and control the long-term 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 could not only reduce the dollar’s “excessively high” value in international trade, but also shift some reserve costs to reserve buyers. This would maintain the dollar’s reserve status while weakening its negative impact on U.S. exports.

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

Markets generally assume that tariffs and dollar policy are independent, but the Trump administration’s core strategy is tariffs first, followed by currency adjustments. Market pricing needs to account for the following path:

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

2. Improved tariff revenue increases the U.S. Treasury’s policy flexibility

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

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

Overall, in the context of Mar-a-Lago, Trump’s strategy will first rebalance trade terms through tariffs, use the resulting tariff revenue to improve the sharing of costs for supplying U.S. external reserves, then use exchange-rate policy to strengthen the dollar in the short term, and subsequently use FX Intervention and fees on external debt to adjust reserve behavior, ultimately restructuring the trade and financial systems as a whole through a series of gradual measures.

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 (Part Two)

The core of the MLA concept is to improve the competitiveness of U.S. manufacturing through a coordinated depreciation of the dollar, while extending the maturity of Treasury securities held as 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 Trump’s team. Stephen Miran, a former senior adviser to the Treasury Department in the Trump administration, published a report in 2024 11 outlining a plan to reshape the global trading system and envisioning a multilateral monetary arrangement similar to the “New Plaza Accord.” Miran served as a Treasury official during Trump’s first term and was nominated as chair of the White House Council of Economic Advisers one month after the report was published.

Trump has long been deeply dissatisfied with the United States’ enormous trade deficit, viewing it as a transfer of U.S. wealth overseas. He has promised a “golden age” of manufacturing and exports for the United States. But because the dollar’s exchange rate has remained strong for a long time, low prices for imported goods have weakened U.S. competitiveness and exacerbated the trade imbalance, giving the Trump administration an incentive to seek an international agreement to address the strong dollar.

The overarching goal of MLA is to correct the United States’ external economic imbalances by weakening the dollar, revive manufacturing and exports, and reduce the economic burden the United States bears in the global system.

At present, MLA remains at the stage of speculation and discussion and has not been formally announced as policy. In other words, MLA is currently an unofficial policy concept, and no clear official negotiations on an agreement are underway.

Second, the policy content of MLA

The policy goals 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 improving the price competitiveness of U.S. exports.

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

3) Coordination of tariff and trade policy: tariffs are seen as leverage to exert pressure and induce other countries to cooperate. The “Mar-a-Lago Accord” may differ from traditional multilateral agreements, and lean more toward unilateral U.S. measures If a country is unwilling to cooperate on exchange-rate or debt-structure adjustments, the United States will threaten to impose additional tariffs or reduce its security commitments to force it to join the agreement.

Third, the policy mechanisms and implementation methods of MLA

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

On the one hand, Convert other countries’ remaining dollar reserves into ultra-long-term U.S. Treasury securities and hold them for the long term. Foreign central banks’ increased allocations to ultra-long-term Treasuries would amount to locking in financing support for the United States, ensuring that the Treasury market does not face a wave of selling even as the dollar depreciates. This move is intended to stabilize the demand curve for Treasuries and prevent yields from surging or a debt crisis from erupting as foreign holders reduce their holdings of short-term bonds. If countries are willing to exchange short-term debt for long-term debt, upward pressure on interest rates in the 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 point of entry, for example by potentially invoking the authority granted to the president by the International Emergency Economic Powers Act (IEEPA) to coordinate the Federal Reserve’s participation in foreign-exchange intervention or debt swaps. At the same time, because central banks today are more independent, it is almost impossible to ask them to commit to cooperating on interest rates. Therefore, MLA mainly focuses on exchange-rate and debt tools and does not directly prescribe 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 heighten the urgency of reaching an agreement. If an agreement is reached, the United States could gradually reduce the tariffs it had previously imposed in return, creating an exchange of “exchange rates for tariffs” and linking adjustments in the trade and financial sectors.

On fiscal policy, the U.S. government needs to reduce unnecessary fiscal burdens and use the resulting headroom to subsidize manufacturing or cut taxes, complementing dollar depreciation to boost domestic industries. For example, by requiring allies to bear a greater share of military spending, 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 support from the fiscal policy framework and backing or acquiescence from Congress.

On monetary policy, the Federal Reserve will outwardly continue to uphold its mandate of price stability and employment and will not become directly involved in an exchange-rate agreement. Operationally, however, if a rapid depreciation of the dollar causes a short-term rise in inflation, the Federal Reserve must decide whether to tolerate a one-time jump in the price level or raise interest rates to contain it. If imported inflation is viewed as temporary, the Federal Reserve may hold steady; otherwise, it may tighten monetary policy to offset it, directly affecting the extent to which MLA’s goals are achieved.

Therefore, the Fed’s stance is in practice one of the key supporting factors determining the success or failure of MLA. To secure the Fed’s cooperation, the Treasury may coordinate with it informally on policy to ensure that financial conditions do not get out of control as the dollar is weakened.

Fourth, MLA market impact

The dollar exchange rate will be affected first, with the dollar expected to weaken against major currencies.Under the agreement’s 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 could fluctuate sharply in the short term and capital flows could 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 Treasury returns to be constrained, some countries may increase their holdings of gold and other non-dollar reserves to diversify risk. This could further weaken the dollar’s appeal as a reserve currency.

The impact of MLA on interest rates is two-sided.

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 Federal Reserve determines that this increase in inflation is not temporary, the expected path in the U.S. interest-rate market (such as the OIS curve) will shift upward. Markets will expect a higher federal funds rate to curb 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:By issuing ultra-long-term U.S. Treasury securities, lower long-term yields and reduce the cost of government financing.In an extreme case, short-term rates could rise due to higher inflation expectations while long-term rates fall with the agreement’s support, causing the curve to flatten or even undergo a bull twist (long rates down, short rates up).

The interest-rate swap market would also reflect similar expectations:Long-term Swap rates could fall (because expectations for long-term risk-free rates are lower), 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 up long-term rates instead and offsetting the dampening effect of official purchases. In this case, the interest-rate market could see unusual volatility: implied volatility would rise, and interest-rate futures and options prices could adjust sharply.

In addition, if official institutions are forced to hold low-yielding Treasuries, their participation in the primary market for new issues may decline, leaving other investors to fill the gap. If those gaps result in insufficient auction demand, the United States may have to raise yields 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 Treasury securities previously circulating in the market are “retired” onto central-bank balance sheets; the pool of deliverable and reference securities in the bond derivatives market (such as Treasury futures and IRS) will change, potentially triggering shifts in pricing benchmarks and trading strategies. These microstructure effects increase the complexity and potential risks of implementing MLA.

Therefore, The 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 Treasury yields will fall and debt sustainability will improve. But if the market questions the reliability of U.S. policy, a backlash in the form of a wave of selling and a surge in yields may emerge, undermining global financial stability.

Under current conditions, however, there is doubt as to whether foreign-exchange reserve managers would be willing to convert their Treasury holdings into Treasuries with longer maturities.Another question is how foreign-exchange reserve managers could provide dollar liquidity to support appreciation of their own currencies without selling Treasuries.

Beyond that, implementation details remain decisive, including the scale of official 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 Treasuries from the nonofficial sector (private investors) remains uncertain.

Large movements in exchange rates and interest rates will be transmitted through multiple channels to asset markets such as equities and commodities. For U.S. equities, a weaker dollar generally benefits exporters and multinational companies because overseas profits translate into more dollars, while improved international price 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 firm.However, higher import costs could also erode the margins of companies that rely on imported inputs, such as those in retail and apparel, and investors may reprice them accordingly.

Uncertainty about the interest-rate environment will affect equity valuations. If the Federal Reserve allows inflation to rise but keeps financing conditions accommodative by suppressing long-term rates, lower real rates would support equities. But if runaway inflation causes rates to rise across the board, equities could face downward valuation pressure. Overall, Markets may be highly volatile initially: before policy details are settled, investors’ risk appetite may decline, potentially prompting a short-term reaction of selling equities and buying safe-haven assets; once the policy becomes clear, capital will be allocated again according to the new exchange-rate and interest-rate landscape.

As for other assets, Precious metals and commodities are expected to rise. Dollar depreciation typically pushes up the prices of dollar-denominated commodities. Gold, which serves both as an inflation hedge and a safe haven, is even more likely to attract inflows. Moreover, MLA itself includes a revaluation of gold, meaning the authorities would want higher gold prices to increase the value of their assets; this expectation will stimulate the gold market.

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

At the macroeconomic level, implementation of MLA would have a significant impact on the U.S. and global economies alike.

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

Second, the trade balance is expected to improve significantly. A weaker dollar would restrain imports and stimulate exports, giving the United States’ long-standing, huge trade deficit a chance to narrow or even reverse. Historical experience shows that exchange-rate adjustments affect trade volumes with a lag, but MLA, if accompanied by measures such as tariff reductions, could improve the trade account more quickly. As exports grow and import substitution increases, U.S. manufacturing output and investment may recover, providing a positive boost to GDP.

Furthermore, investment and capital flows will also be rearranged. Domestic U.S. 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 should be kept in mind that if international investors become doubtful about U.S. policy, some capital may flow out of the United States.

Overall, if MLA proceeds smoothly and financial disorder is avoided, the U.S. economy may present a new medium-term picture of “high inflation, low deficits, strong manufacturing”. However, if implementation is mishandled or countries retaliate, it could trigger a chain reaction in the global economy, including an escalation of trade conflicts, runaway global inflation, or even a new recession. Therefore, MLA’s macroeconomic impact is highly uncertain and depends on the degree of cooperation among all parties and the calibration of policy adjustments.

For the world, U.S. efforts to weaken the dollar and reshape the financial order could mark a new turning point in the “post-Bretton Woods system”: global trade and capital-flow patterns would 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 “the only star.”

2025.03.12

Five downward cycles of USDJPY since 1990

USDJPY has fallen 7% from its peak in 7; looking back at the five downward cycles of USDJPY since 1990, the currency pair has typically fallen 18% to 47% from its peak over a period of 16 to 60 months:

The current macroeconomic backdrop resembles several historical periods when the yen’s trading regime shifted, These periods were typically 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, although how long that will continue 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 this 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.

According to publicly disclosed information, Japan’s 1.7 trillion pension fund has kept its target allocation to domestic bonds at 25% since 2020, when the yield on 10-year Japanese government bonds (JGB) was near 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 domestic bond allocation exceeded 60%.

The current allocation to foreign bonds is 24%, compared with just 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 justified. But as the Bank of Japan (BoJ) raises rates and the Federal Reserve cuts them, the spread may narrow, This would prompt the pension fund to shift from foreign bonds back to domestic bonds.

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

According to Japan’s Ministry of Finance, current annual government 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, pressure on the fiscal deficit may increase further. Japan’s government debt currently has an average maturity of 9 years and 7 months (2024 MoF Debt Management Report).

Until new incremental buyers are found, such as domestic pension funds, life insurers, and banks, the BoJ faces constraints on reducing its JGB purchases and cannot tighten policy substantially.

Black: Japan MoF interest payments as a share of GDP; blue: JGB-year 10 yield

Historically, shifts in the yen 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 euphoric while the macro data fail to keep up?

Over the past two years, annualized revenue at publicly listed companies related to AI Infra has grown by more than $340B, and is expected to 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 strikingly large gap. On the surface, AI is a high-growth market theme, and share prices are rising, but the macro data show that its boost to actual GDP is negligible.

Breaking it down, a large share of publicly listed companies’ nominal revenue growth reflects rising costs (especially semiconductors) and overseas revenue; neither boosts actual U.S. GDP. Margin expansion ($30B) and overseas revenue ($130B) account for roughly half of the surge in AI spending.

One of the key factors behind the underestimation is the calculation method used by BEA (Bureau of Economic Analysis) for GDP. Semiconductor purchases are treated in GDP accounting are classified as intermediate inputs because they are typically embedded in finished products and resold, rather than counted as capital investment Over the past two years, the U.S. domestic semiconductor supply chain 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 mostly counted as intermediate inputs rather than fixed investment, meaning that even rapid growth at cloud computing companies will not be clearly reflected in GDP growth.

This explains why AI spending is booming at the market level while macro data lag behind—the core issue is the statistical framework and how capital spending is classified.With a more reasonable adjustment, AI investment’s actual contribution to GDP may be understated by $100B.

In 25, as AI investment expands into Data Centers, Servers & Networking, and Utility Infrastructure, this spending is more likely to be counted as actual investment and may provide 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 remain “invisible” to the statistical system. In other words, Even if enthusiasm for the AI industry continues to build, the response in GDP data may still be “below expectations,” potentially distorting future policy discussions and market interpretations.

2025.03.11

II. Insights 

Our Viewpoints and ideas on market.

India trades can look

Last year, we captured the full upswing 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 we did not update our view because the fundamentals had not changed; we do not keep posting about things that have not 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 risk may increase. As in 2022, when the Sensex 30 pulled back about 15% from its peak and stayed below 200-DMA for 3-4 months.

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

—— Weekly Wrap 241229

We do not casually call a downtrend a bottom, but at this point we are indeed beginning to look again, India’s relative appeal in Asia is increasing. Although slower global trade and tariff risks are potential drags, the resilience of domestic demand in India and the unfolding policy easing could indeed support a rally during 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, in a nutshell, At this point, investing in India is really a risk-hedging trade; China has shifted from a risk-hedging trade to a growth trade.。

Government capital spending is accelerating its recovery, Q4; capex growth by the central and state governments has stabilized at 9%, and now The main shortfall, however, is 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 has contracted significantly over the past few months; fiscal spending contracted during the election period by -6%, while the recovery in capital spending after the election was slower than expected. At the same time, RBI’s tightening of rates and liquidity has constrained credit growth.

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 spending in the 26 fiscal-year budget plan is expected to grow by 10.1%. Public investment remains central to policy, and the central government has already provided additional allocations to local governments. Combined capex allocation for fiscal year 2026 is growing 17.4%, providing support for the next phase of recovery during the easing cycle.

Meanwhile, RBI is shifting from a tightening to an easing bias, including on policy rates, liquidity management, and regulatory easing. Markets expect RBI may act in April, especially if the recovery is insufficient.

With USD strengthening, RBI tightened liquidity for a time, but has adopted a more flexible foreign-exchange policy since 12 last year and released liquidity into the banking system through various tools. Currently, WACR for 14-day has fallen by 43bps from the end of last year, below the repo rate, indicating RBI is indeed taking action and actively managing liquidity conditions.Recently, RBI has also eased regulatory requirements for the NBFC sector, for example by reducing the risk-weight adjustment 25% on banks’ NBFC loans. This will promote credit flows and lower borrowing costs.

Food inflation fell 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 are also more resilient.Since 12 last year, India’s services export growth has doubled, exceeding goods export growth 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. Currently, Against a backdrop of weak external demand, this composition of India’s exports provides a stronger growth buffer.

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

Overall, India’s macro 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 substantial hedge.Given the expansion of government capex, monetary policy easing, and the potential expansion in consumption, we can indeed look at it; we have been watching.

2025.03.13

III. Market Pulse 

Our latest Comments on the economic and market environment

Note: All content in this article is for reference only and does not constitute investment advice, nor does it serve as a basis for any laws, regulations, or regulatory policies. Investors should not use or rely on this information as a basis for decision-making.