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 system is entering a generational transformation, and Trump’s trade and monetary policies may become a new Market Paradigm Shift. At its core, 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 low borrowing costs (CIP deviation close to zero), it substantially weakens export competitiveness and worsens the trade deficit.

The market’s central misconception is equating tariffs with an inflation shock. However, data from 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 countries being taxed may still bear the ultimate tax burden, rather than U.S. consumers.

Dollar appreciation offsets inflationary pressures, followed by the next monetary-policy adjustment to correct the impact on manufacturing.

Against the backdrop of the so-called Mar-a-Lago Accord, the strategic path during Trump’s term begins with tariffs, using trade policy to reshape global rules of competition, while monetary (FX) tools 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 dollar-denominated import prices rose only slightly and headline inflation remained stable. This shows that if dollar appreciation fully offsets tariffs, the countries being taxed will bear the true tax burden, while the United States will achieve Cost-Sharing in Reserve Asset Supply by increasing fiscal revenue, Through exchange-rate adjustment, the burden of tariffs is ultimately transmitted mainly through currency depreciation by 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, mainly because exchange-rate adjustments directly absorbed most of the price shock. The depreciation of the renminbi by 13.7% offset the increase of 17.9% in the effective tariff rate, so the final increase in dollar-denominated prices of Chinese imports was only 4.1%.This mechanism strengthened the Trump administration’s understanding of the real purchasing-power transmission mechanism of tariffs, making it possible that the administration would push for even more aggressive tariff policies.

The market’s biggest misjudgment of Trump’s policies is underestimating the government’s room for maneuver in 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, and 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 actively adjusted the dollar’s valuation many times in its history. Against this backdrop, the Trump team not only values tariff tools, but also expects to adjust the dollar in stages through monetary policy.

Specifically, there are two possible paths:

First, a multilateral-coordination approach, 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 lower the dollar’s value. The practical problem is that economic growth in Europe, Japan, and Country Z is currently weak, and they have no desire to actively drive their currencies higher.

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

Second, unilateral action: use tools such as IEEPA and ESF to impose a “usage fee” on U.S. Treasuries held by foreign official institutions, forcing them to adjust their reserve behavior; at the same time, coordinate operations with SOMA and the Federal Reserve to smoothly manage short-term interest rates and control the long-term yield curve, preventing large-scale foreign capital outflows and a sharp spike in long-term yields due to dollar depreciation.

Through this approach, the government could not only lower the dollar’s “excessively high” value in international trade, but also shift some of the cost of reserves to reserve buyers, thereby maintaining the dollar’s reserve-currency status while reducing its negative impact on U.S. exports.

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

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

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

2. Tariff revenue improves, increasing the U.S. Treasury’s policy flexibility

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

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

Overall, against the backdrop of the Mar-a-Lago Accord, Trump’s strategy would first rebalance trade terms through tariffs, use the resulting tariff revenue to improve the sharing of costs for supplying external reserves to the United States, then use exchange-rate policy to strengthen the dollar in the short term, and subsequently use FX Intervention and user 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 in One Article (Continued)

The core of the MLA concept is to improve the competitiveness of U.S. manufacturing through a coordinated dollar depreciation, while extending the maturity of Treasury securities held as reserve assets, thereby avoiding higher tariffs and safeguarding U.S. national security interests.

One. Origins and background

The “Mar-a-Lago Accord” (Mar-a-Lago Accord, MLA) was initially proposed as a concept 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 served as a Treasury Department official during Trump’s first term and was nominated to chair the White House Council of Economic Advisers one month after the report was published.

Trump has long been deeply dissatisfied with the United States’ huge trade deficit, viewing it as a transfer of American 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 persistently strong, cheap imported goods have weakened U.S. competitiveness and worsened trade imbalances, giving the Trump administration an incentive to seek an international agreement to address the strong-dollar problem.

The overall goal of MLA is to correct U.S. external 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 proposal, with no clearly defined official negotiations underway for an agreement.

Two. Policy content 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, lowering its trade-weighted value, thereby improving the price competitiveness of U.S. exports.

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

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

Three. Policy mechanisms and implementation methods of MLA

Its design aims to achieve both a moderate depreciation of the dollar and stability in the U.S. 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 increasing their holdings of ultra-long-term Treasuries would effectively lock in financing support for the United States, helping prevent a wave of selling in the Treasury market even as the dollar depreciates. This measure is intended to stabilize the demand curve for Treasuries and avoid surging yields or a debt crisis caused by foreign reductions in short-term bond holdings. 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 requires finding a legal foothold. For example, the administration might invoke the authority granted to the president under the International Emergency Economic Powers Act (IEEPA) to coordinate the Federal Reserve’s participation in exchange-rate intervention or debt swaps. At the same time, because central banks today are more independent, it is nearly impossible to ask them to commit to cooperating on interest rates. Therefore, MLA mainly 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. While seeking partners’ cooperation to weaken the dollar, the United States may first raise tariffs on countries with large trade surpluses to increase pressure and 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 rates for tariffs” bargain and linking adjustments in the trade and financial spheres.

On fiscal policy, the U.S. government needs to reduce unnecessary fiscal burdens and use the resulting fiscal space to subsidize manufacturing or cut taxes, complementing dollar depreciation to boost domestic industries. For example, by requiring allies to shoulder more military spending, the United States could cut some defense spending and redirect resources to the domestic economy. At the same time, issuing ultra-long-term zero-coupon bonds requires the Treasury Department 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 the backing or acquiescence of Congress.

On monetary policy, the Federal Reserve will outwardly continue to uphold its mandates of price stability and employment and will not become directly involved in an exchange-rate agreement. Operationally, however, if a rapid dollar depreciation causes a short-term rise in inflation, the Federal Reserve will have 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 Federal Reserve 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 supporting factors determining whether MLA succeeds. To secure the Federal Reserve’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.

Four, MLA market impact

The exchange rate of the dollar will be affected first, and the dollar is expected to weaken against major currencies.Under the agreement’s framework, central banks’ sales of dollar reserves and efforts to strengthen 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 that signal in advance.

Sharp currency fluctuations 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 also shift. In managing foreign-exchange reserves, central banks may reassess the share of dollar assets. If they expect the dollar to weaken over the long term or even Treasury returns 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.

MLA has a two-sided effect on interest rates.

On the one hand, dollar depreciation tends to push up U.S. inflation expectations, because higher prices for imported goods will feed into inflationary pressure. If the Federal Reserve concludes that this rise in inflation is not temporary, the expected path of U.S. interest rates (such as the OIS curve) will shift upward. The market will expect higher federal funds rates 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 bonds, it would lower long-term yields and reduce the cost of government financing.In an extreme case, short-term rates could rise as inflation expectations increase, while long-term rates fall with support from the agreement. The curve could flatten or even undergo a bull twist (long rates falling, short rates rising).

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

It is important to note that if the market questions the creditworthiness of U.S. Treasuries (viewing a debt swap as a form of disguised default), the risk premium demanded by investors could rise, pushing long-term rates higher instead and offsetting the suppressive effect of official-sector purchases. In this situation, the interest-rate market could see unusual volatility: implied volatility could rise, and interest-rate futures and options prices could adjust sharply.

In addition, if official institutions are forced to hold low-yielding Treasuries, they may participate less in the new-issuance market, leaving other investors to fill the gap. If these gaps lead to insufficient demand at auctions, the United States may have to raise the interest rates on new Treasury issuance to attract buyers, in turn increasing government interest costs.

The effects of debt swaps (bond exchanges) also include the removal of some Treasury securities that were previously circulating in the market, placing them on central-bank balance sheets. The deliverable and reference-security pools in the bond derivatives market (such as Treasury futures and IRS) would also 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 rates will fall and debt sustainability will improve. But if the market questions the reliability of U.S. policy, a wave of selling and surging yields could have the opposite effect and disrupt global financial stability.

At present, however, there is reason to doubt 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 can provide dollar liquidity to support appreciation of their own currencies without selling Treasuries.

In addition, implementation details remain decisive, including the scale of official Treasury sales (to drive dollar depreciation) and whether debt swaps would be compulsory or voluntary. Even if foreign-exchange reserve managers in other countries agree to the arrangement, demand for long-term Treasuries from the non-official 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 export-oriented companies and multinationals because overseas profits translate into more dollars, while improved international price competitiveness for 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 them accordingly.

Uncertainty about the interest-rate environment will also affect equity valuations. If the Federal Reserve tolerates rising inflation 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 rates rise across the board, equities could face downward valuation pressure. Overall, Markets could be highly volatile at first: before policy uncertainty is resolved, investors’ risk appetite may fall, prompting a short-term reaction of selling stocks and buying safe-haven assets. Once the policy outlook becomes clear, capital will be reallocated based on 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. Gold, meanwhile, 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, meaning the authorities would want gold prices to rise and strengthen their assets; this expectation will stimulate the gold market.

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

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

First, Dollar depreciation will directly trigger imported inflation—higher prices for imported goods and raw materials will push up domestic price levels in the United States. However, if wages subsequently rise (because a manufacturing boom boosts the labor market), this may partly offset inflation’s negative effect on consumption.

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’ long-standing, huge trade deficit 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, the trade account may improve more quickly. As exports grow and import substitution takes hold, U.S. manufacturing output and investment may recover, providing a positive boost to GDP.

Furthermore, Investment and capital flows will also be reshuffled. 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 have room to increase public investment (such as infrastructure), further boosting aggregate demand. However, it is important to watch for the possibility that international investors could lose confidence in U.S. policy and that some capital could leave the country.

Overall, if MLA proceeds smoothly and avoids financial turmoil, the U.S. economy could enter a new medium-term phase of “high inflation, low deficits, and strong manufacturing”. However, if implementation is mishandled or other countries retaliate, it could trigger a chain reaction in the global economy, including escalating trade conflicts, out-of-control global inflation, or even a new recession. The macroeconomic impact of MLA is therefore 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 might be forced to accelerate self-sufficiency and diversify their reserves to adapt to a new era in which the dollar is no longer the undisputed leader.

2025.03.12

Five downturn cycles of USDJPY since 1990

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

The current macroeconomic backdrop resembles several past periods when trading patterns in the yen 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, though how long that will last remains to be seen.

Data from Japan’s Ministry of Finance show that, as of 1, Japanese investors have been net sellers of foreign bonds over the past three months, mainly through banks and life insurers. Although the scale remains modest compared with 2022-2023, it could have an important impact on further yen appreciation in the future. This also means there is still room for further declines in related currency-pair trades such as EURJPY, CHFJPY, and GBPJPY.

According to publicly disclosed information, Japan’s 1.7 trillion pension fund has maintained a target allocation of 25% to domestic bonds 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%; the last time it reached this level was 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 reasonable. However, as the Bank of Japan (BoJ) raises rates and the Federal Reserve cuts them, the spread may narrow, This will prompt the pension fund to shift from foreign bonds back to domestic bonds.

Since 7 last peaked in USDJPY of last year, the Bank of Japan’s policy rate has risen by 40bp, while the yield on 10-year JGB has increased by 28bp. Subsequent The JGB yield curve is likely to flatten further, as Japan’s government debt burden, at 255% of GDP, is weighing on 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. The average maturity of Japanese government debt is currently 9 years and 7 months (2024 Ministry of Finance Debt Management Report).

Until new incremental buyers are found, such as domestic pension funds, life insurers, and banks, the BoJ will be constrained in reducing its JGB purchases and will find it difficult to tighten policy substantially.

Black: Japanese Ministry of Finance interest payments as a share of GDP; blue: 10-year JGB 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 enthusiastic while the macro data lag?

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

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

BEA (Bureau of Economic Analysis) measurement of GDP is also a key factor behind the understatement. Semiconductor purchases are recorded in GDP accounts classified as intermediate inputs (Intermediate Input), because they are typically embedded in final products and then resold, rather than recorded as capital investment. Over the past two years, the U.S. domestic semiconductor supply chain has expanded by $35B, but this has barely appeared in GDP statistics. Similarly, spending on Cloud Services for AI training and inference is also mostly counted as intermediate inputs rather than fixed investment (Fixed Investment), meaning that even with rapid growth in cloud computing companies, the growth of GDP will still not be clearly reflected.

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

In 25, as AI investment expands into Data Centers, Servers & Networking, and Utility Infrastructure, a greater share of this spending is likely to count as real investment, potentially providing some support to GDP growth.

A more practical issue, however, is that unless the U.S. national accounts methodology is revised, semiconductor- and Cloud-related investment will continue to be treated as intermediate inputs and “ignored” by the statistical system. In other words, Even if enthusiasm for the AI sector 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.

Indian trades can look

Last year, we completed the full upward trading swing in India, 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 it 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 risks may increase. The situation is similar to 2022, when the Sensex 30 fell about 15% from its peak and remained below 200-DMA for 3-4 months.

India’s ongoing 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 be held on 2 1. These are the main upcoming catalysts for the Indian market. From a pricing-power perspective, if 2.1 has not fallen below 200 dma before then, 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 slowing global trade and tariff risks pose potential headwinds, the resilience of domestic demand and the unfolding policy easing give India a real chance of a supported cyclical advance in the current market cycle.It could indeed see a supported cyclical advance 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 it a stronger hedge as global demand cools, in a word, At this point, an India trade is really a risk-hedging trade; China has shifted from a risk-hedging trade to a growth trade.。

Government capital expenditure is recovering at an accelerating pace, Q4; capex growth by the central and state governments has stabilized at 9%, and now The main missing piece, though, is a 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 has contracted significantly over the past few months; fiscal spending contracted -6% during the election period, and the recovery in capital expenditure after the election has been slower than expected. This has been compounded by RBI’s tightening of rates and liquidity, which 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 provided additional grants to local governments; combined capex allocation for fiscal year 2026 is growing 17.4%, supporting the next stage of recovery during the easing phase.

On the other hand, RBI is shifting from a tightening to an easing bias, including in policy rates, liquidity management, and regulatory relaxation. Markets expect RBI may act in April, especially if the recovery is not strong enough.

With USD strengthening, RBI had tightened liquidity for a time, but since 12 of 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 the end of last year and is below the repo rate, indicating that RBI is indeed taking action to actively manage liquidity conditions.Recently, RBI has also eased regulatory requirements for the NBFC sector, for example by reducing the risk weights on banks’ NBFC loans by 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 show further room for decline in 2 -3, which will lift 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, the growth rate of India’s services exports has doubled, exceeding the growth rate of goods exports over the same period by 41%. More importantly, India is gaining global market share, with its share of global services exports rising from 3.9% in 2020 to 4.4% in 2024. At present, Against a backdrop of weak external demand, this export mix provides India with a meaningful growth buffer.

India does face tariff risks, particularly the possibility that the U.S. will impose tariffs on Indian pharmaceutical products (2.8% of total exports, GDP 0.3%). But the impact of a slowdown in India’s trade is relatively limited compared with other regions. The greater risk may be that policy uncertainty prevents 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 substantial hedge.Given the government’s capex expansion, monetary easing, and potential expansion in consumption, we can indeed start looking; we are looking at it.

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, 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 their decisions.