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Monsoon risks to India, global monetary shifts ahead
We maintain projections of FY27 India growth at 6.7% of GDP, slowing from trend given volatile geopolitics and effects on the El-Nino on domestic rains as well as imported agri-products – with inflation likely to average around 4.9% for the year and the current account above 1% of GDP – though with the financial account remaining a larger problem reflecting different neutral rates for internal and external balance. We also do not see the Fed as hawkish, contrary to market understanding, but see potential leadership shifts in the ECB driving a hawkish shift. Potential for Chinese monetary easing might also exist.
West Asia, Monsoon near-term risks, but fiscal might be part of longer balance
The West Asia conflict has resumed, coming at the time of risks to growth also from the weak monsoon so far, while inflation also appears to be rising . These suggest FY26 GDP growth at 6.7% YoY and inflation around 4.9%. Current account trends indicate a print close to 1.4% of GDP, with a potential slowdown in remittances given FCNR schemes. However, the capital and financial account remains the proximate issue, with steady outflows given differences in costs of capital. FCNR flows are so far slow, but steps will likely limit the BOP deficit at the cost of raising future deficits with forwards maturing. With interest rates for internal balance now much lower than those for external balance, de-facto tightening is the norm – unless rates for internal balance can be raised by increased quantity or quality of government spending. With this, we continue to see the INR at 97 by year end and 100 by Jun’27, with the 10y G-sec likely to be fairly priced somewhere above 7.00%.
Fed not hawkish, but ECB might be, some Chinese easing possible
There is a tendency for US data to slow in H2, which coupled with inflation prints will likely follow through on our initial expectation that Fed hawkishness was a feint. In contrast, personnel changes at the ECB can support interest rates even as political machinations suppress growth. For the UK, politics on fiscal, market access and EU relations are the biggest drivers of the future. On China, there might be space for monetary easing ahead given weak data and already high fiscal support. For Japan, the impossible trinity can be managed by intervention and investment policy shifts, potentially long enough for the JPY to not be geopolitically relevant. Within all these, we continue to see fiscal dominance as a driver of market movements, resulting in a pecking order of currencies and steeper rates curves, in a universe of low availability of savings.
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