2025-04-22 08:05
Key takeaways Escalating tariff tensions between China and the US pose heightened risks to economic growth… …but may also prompt more support for consumption, along with additional monetary and fiscal easing. With larger-than-expected external shocks, China will need to act decisively and quickly to support domestic demand. China data review (March, Q1 2025) GDP growth rose 5.4% y-o-y in Q1 with upside surprises in March’s industrial production and retail sales pointing to stronger domestic activity ahead of the recent tariff escalations. Accelerated policy support, backed by fiscal spending, alongside some improvement in consumer sentiment have likely helped, though the property sector remained a weak point. Meanwhile, frontloading of exports ahead of tariff uncertainty also provided a cushion. Industrial production was up 7.7% y-o-y in March, boosted by the strongerthan-expected exports activity from frontloading and supply chain rejigging. The ongoing domestic policy push to promote equipment upgrading, technology and Artificial Intelligence development will also remain key for supporting the manufacturing sector; equipment and Hi-Tech manufacturing production rose 10.9% and 9.7% y-o-y in Q1, respectively. Retail sales rose by 5.9% y-o-y in March, driven by increased purchases from the trade-in programmes, which have been effective in lifting sales in home appliances (up 35% y-o-y), communications goods (29% y-o-y) and autos (5.5% y-o-y). While overall autos sales were more muted compared to the other categories, this is partly due to ongoing price cuts as a result of competition. Electric Vehicle sales on the other hand have been performing strongly. Headline CPI stayed in contraction, falling by 0.1% y-o-y in March, owing to weaker food prices and softer global crude oil prices weighing down energy costs. However, Core CPI rebounded to 0.5% y-o-y supported by a modest rebound in services. Meanwhile, PPI saw a deeper fall of 2.5% y-o-y due to lower global commodity prices, overcapacity concerns and ongoing pressures in the property sector. Exports saw a broad-based increase in March, up 12.4% y-o-y, as companies sought to frontload shipments ahead of potentially higher tariffs being imposed. Meanwhile, imports continued to stay low, falling by 4.3% y-o-y, due in part to weaker global commodity prices for iron ore and crude oil which weighed on imports value. While frontloading has provided some cushion and the recent pauses in some tariffs can also help, external headwinds have clearly risen. More domestic support to counter tariffs Trade tensions continue to climb. In the recent round of escalations, President Trump sharply raised tariffs on Chinese goods to 145% (effective as of 9 April), prompting countermeasures from China which raised reciprocal tariffs on US goods to 125% (effective as of 12 April). But this may be the upper limit for tariff actions. Alongside China’s tariff announcement, it stated that it will not respond to further US tariff hikes (MOFCOM, 11 April). Meanwhile, the recent US electronics exemptions mean Chinese goods in these categories (RMB102bn or c23% of US imports from China) only face 20% tariffs, as opposed to 145%, although the exemption may only be temporary. To mitigate tariff impacts, China is strengthening diplomatic engagement globally. For example, it recently signed 45 bilateral cooperation agreements with Vietnam across areas including Artificial Intelligence, agriculture and sport (Xinhua, 14 April), while China’s Commerce Minister has held discussions with the EU, ASEAN, G20, BRICS, and Saudi Arabia on countering US tariffs. More domestic policy support Policymakers may need to provide more domestic support for economic growth to counter tariffs, including more fiscal and monetary easing, and expanded policies for consumption. Premier Li Qiang conducted a field survey in Beijing on 15 April and stressed the importance of stimulating inner circulation and boosting consumption to counter external headwinds (Stcn, 15 April). Expanded consumer goods trade-ins: These initiatives have seen robust participation since their launch last year, with over 100mn home appliance trade-ins completed (People’s Daily, 12 April). Funding has doubled this year (to RMB300bn) and more product categories are expected to be added. Guangzhou has said that residents from Hong Kong, Macau, Taiwan, and foreigners with permanent residence are eligible for trade-in subsidies (Securities Times, 12 April). Boosting service consumption: Last week, China unveiled plans to support consumption in health and sports (Xinhua, 11 April). Local governments, including Hohhot, have introduced childcare subsidy policies, with more expected to join. Two dairy producers have also launched subsidy programmes worth RMB2.8bn in April (Xinhua, 11 April). And a "Shop in China" campaign will promote consumption nationwide focusing on goods, dining, and cultural tourism (Xinhua, 14 April). Other measures in the pipeline: Policies to raise household incomes, expand public services based on residency, and stabilise property – a key drag on household wealth and consumer confidence – are accelerating. Property saw renewed pressure in the first 14 days of April, as new home sales in 30 major cities fell 11% y-o-y, underscoring the need for intensified policy support, including from local government funds and potential direct central government funding. Source: Wind, HSBC Source: Wind, HSBC Exporters selling locally: The Ministry of Commerce has pledged to help exporters boost domestic sales, by helping with market access, distribution channels, financial services and logistics (Xinhua, 11 April). The ministry has convened discussions with industry associations, retailers, and logistics firms, with many announcing that they would help exporters go domestic through increasing purchases. Among them, JD.com pledged RMB200bn for the cause (Cailianshe, 11 April). Source: LSEG Eikon * Past performance is not an indication of future returns Source: LSEG Eikon. As of 15 April 2025, market close https://www.hsbc.com.my/wealth/insights/market-outlook/china-in-focus/more-domestic-support-to-counter-tariffs/
2025-04-17 12:01
Key takeaways US equity markets sold off after Fed Chair Jerome Powell indicated no “Fed put” despite slower US growth outlook and market volatility triggered by tariff uncertainty. Powell reiterated the wait-and-see approach, as he expected inflation to rise and the labour market to come under pressure due to higher tariffs. We now project US GDP growth to slow to 1.6% for 2025 (down from 1.9% previously) and 1.3% for 2026 (down from 1.8% previously). On the inflation front, we have raised US CPI forecasts to 2.9% in 2025 and 3.1% in 2026. We continue to see potential headwinds from fiscal tightening and downward revisions to 2025 earnings as tariff uncertainty persists. In this challenging environment, we maintain a defensive strategy with a strong focus on multi-asset diversification, active management and long-term structural themes to mitigate market volatility. What happened? US equity markets sold off after Fed Chair Jerome Powell indicated no “Fed put” despite slower US growth outlook and market volatility triggered by tariff uncertainty. In his speech delivered at the Economic Club of Chicago, Powell cautioned that tariff-induced price rises may end up becoming more persistent, and the labour market conditions could come under pressure. In response to a media question about the “Fed put” to support financial markets, Powell said “no” to dismiss market expectations of immediate central bank intervention to boost the equity markets. Powell pushed back against any idea of disorderly market behaviour or anything that would need the central bank to step in right now. He said the financial markets remained orderly and functioning well, citing abundant reserves and healthy liquidity conditions. He reconfirmed policymakers are in no hurry to change the central bank's benchmark policy rate and said the Fed remained well positioned to wait for greater clarity before considering any policy adjustments. Regarding the tariff impact on inflation, Powell said the level of the tariff increases announced so far was significantly larger than anticipated, adding that the inflationary effects could also be more persistent. Powell noted both survey- and market-based measures of near-term inflation expectations have moved up significantly, but longer-term inflation expectations appear to remain well anchored, as market-based break evens continue to run close to 2%. Powell emphasised the need to prevent tariffs from triggering a persistent rise in inflation, ensuring that a one-time price increase does not become an ongoing inflation problem. We think this is good news for the bond market. Both the markets and the Fed expect lower rates and weaker growth by the end of 2025. The Fed’s own median projections expect two 0.25% rate cuts by end-2025. Traders are just taking that impulse further, as they brace for the possibility that the economic hit of tariffs will slow economic activity beyond policymakers’ predictions. Higher tariffs and increased global trade frictions will result in slower global growth and higher inflation in the US. We have downgraded US and global growth forecasts for both 2025 and 2026 to reflect the negative impact of tariff escalation and growing policy uncertainty under the new US administration. In the US, we have cut GDP growth forecasts to 1.6% from 1.9% for 2025 and to 1.3% from 1.8% for 2026. Our lower US growth forecasts have factored in the impact of tariffs and the policy uncertainty emanating from Washington. But we do not expect the US economy to slide into a recession as we expect the Fed to start cutting policy rate in June. On the inflation front, we have raised US CPI forecasts to 2.9% in 2025 and 3.1% in 2026. Investment implications We continue to see potential headwinds from fiscal tightening and downward revisions to 2025 earnings as tariff uncertainty persists. In this challenging environment, we maintain a defensive strategy with strong focus on multi-asset diversification, active management and long-term structural themes to mitigate market volatility. We continue to look for short-term USD weakness and US equity market underperformance compared to Europe and Asia. As investors rotate away from USD assets, we are bearish on USD. Gold should continue to benefit. On the equity front, we maintain a neutral stance and continue to take a defensive sector stance in the West and focus on quality and large caps. We think rotation flows will support German and Eurozone stocks and have upgraded Europe ex-UK equities to overweight. We maintain our overweight on Asia ex-Japan equities despite very high two-way US-China tariffs. Chinese equities only derive 3% of earnings from US exports and we expect more domestic stimulus. We further intensify our focus on domestically oriented companies. We have downgraded Japanese stocks to neutral due to the country’s high exposure to US exports and the strong JPY. HSBC’s new macroeconomic forecasts Source: HSBC Global Research forecasts, HSBC Global Private Banking and Wealth as at 17 April 2025. Forecasts are subject to change. On fixed income, US Treasuries have temporary lost their appeal as a safe haven, especially longer-dated bonds, but they represent some value for long-term investors. The first signs of an economically damaging slowdown in global trade are already emerging and the Fed may be forced to acknowledge the risk to growth and employment. We believe this should support DM government bonds and we focus on 7-10-year maturities. We favour UK gilts, Eurozone sovereign, Eurozone and UK IG bonds. We remain neutral on DM and EM credit as credit spreads may remain choppy with some potential for overshooting. Despite our new forecasts for weaker US growth, we do not expect any shift in Fed policy. The financial markets should not expect a “Fed put” to come to the rescue amid market volatility. We continue to expect the Fed to deliver three rate cuts this year, beginning in June. The three rate cuts would be 0.25% in each quarter, leaving the Fed funds rate at 3.75% by year-end. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/powell-signals-no-fed-put-despite-slower-growth-and-market-volatility/
2025-04-14 12:01
Key takeaways Ongoing US policy uncertainty has created a bifurcated USD, leading us to rethink our USD framework… …which now consists of cyclical, political, and structural drivers… …and sees the DXY facing some downward pressures. Our trifactor framework, resting on US growth vis-à-vis the rest of the world, relative yields and risk appetite, which has helped us decide whether the USD will strengthen or not, is not working (the right pie in Chart 1). Currently, USD yields are still higher than for other currencies, along with slowing global growth and intensifying risk aversion, but the USD has been weakening. We notice that there is a bifurcated USD whereby it is struggling versus other core G10 currencies (i.e., EUR, JPY, and CHF) but coping versus many smaller G10 and emerging market ones. This points to the risk aversion channel via US policy uncertainty dominating (Chart 2). Source: HSBC Global FX Research Source: Bloomberg, HSBC Most recently, US President Donald Trump’s decision on 9 April to limit reciprocal tariffs to 10% for 90 days to allow for negotiations provoked a big reaction in equity markets globally, but the impact on FX has been more modest and short-lived. A blanket import tariff of 10% is still significant, while the 100%+ tariffs between China and US are stratospheric. Negotiations may offer an escape, but it is worth noting that the phase 1 trade deal between the US and China came 21 months after US President Trump first raised tariffs. Now the US is also trying to negotiate with 70+ trading partners in 90 days. The clock is ticking. All this led us to circle back to another framework to think about the USD, which we used in US President Trump’s first year in 2017. It was helpful to assess the USD against its cyclical, political, and structural drivers (see the left pie in Chart 1). Back then, the USD struggled as global growth was accelerating, US policy uncertainty lingered, and questions about the USD’s structural outlook surfaced amid Trump’s tax cut proposals. In some ways, history is rhyming. Currently, the USD’s cyclical backdrop is less supportive in isolation, but the global outlook argues against being overly negative on the currency. US policy uncertainty is high and is weighing on the US Dollar Index (DXY) via risk aversion. There are questions about its structural properties. After considering the US current account position, fiscal risks and holdings of US securities, we think that the structural discussion around the USD is louder, and the tail risk is higher. Putting these together tells us that the DXY will likely be in a softer position over the coming quarters. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/usd-to-soften-in-the-quarters-ahead/
2025-04-14 12:01
Key takeaways The US has announced a 10% baseline tariff effective from 5 April, along with individual reciprocal tariffs of up to 49% on some economies from 9 April. US tariffs are rising in a way that FX markets deem to be a concern. With US tariff plans known, the FX focus will likely switch to retaliation measures by others and how the US and global economy evolves. In the lead up to, and on, 2 April 2025, i.e., “Liberation Day”, US President Donald Trump announced the US will: (1) implement a 10% baseline tariff on all imports effective from 5 April, (2) subsequently implement higher individual reciprocal duties on partners the US has the largest trade deficits with (see the table below) effective from 9 April, and (3) impose a 25% tariff on imports of automobiles effective from 3 April, along with a 25% tariff on imports of autos parts that will take effect by 3 May. For Canada and Mexico, the White House said that existing fentanyl/migration International Emergency Economic Powers Act (IEEPA) orders remain in effect and are unaffected by the latest announcements. United States–Mexico–Canada Agreement (USMCA) compliant goods will continue to see a 0% tariff, non-USMCA compliant goods will see a 25% tariff, and non-USMCA compliant energy and potash will see a 10% tariff. Source: The White House As for FX markets, we believe there was truly little priced into exchange rates given the range of outcomes and how the US Dollar Index (DXY) was largely moving in line with its yield differential (Chart 1, overleaf). The DXY dropped by c0.7% to 103.1 (Bloomberg, 3 April 2025 at 9:45am HKT) and we believe the main FX driver is likely to come through the risk channel (Chart 2, overleaf). In a “risk off” environment, “safe haven” currencies are likely to outperform “risk on” currencies. Source: Bloomberg, HSBC Note: Correlation is computed based on weekly changes in the period from 2014 to 2025. Source: Bloomberg, HSBC One important issue for the broad USD, which could take a few weeks, if not longer, to decipher, relates to US and global growth. The path of each will determine whether the USD can strengthen further, becomes bifurcated or stages a continued fall across the board. So, we need to be mindful of currencies that are more closely linked to the US economy (Chart 3), and how others could perform as the market anticipates the path for global growth. Relative performance may also hinge on how (or if) countries retaliate, how long it takes to negotiate an exit from US tariffs, and how their economy is placed to weather the tariff damage in the meantime. Source: Bloomberg, HSBC The tariff plan announced for Asia is also arguably more punitive than expected − all except Singapore face more than 10% reciprocal tariffs, ranging from 24% to 46%. We expect Asian currencies to come under depreciation pressure as a result. USD-CNY fixing rate is relatively steady at 7.1889 today, and as the trading is allowed within 2% of the fixing rate, the trading band range is 7.0451 to 7.3327 (Bloomberg, 3 April 2025). We believe the Chinese authorities have their own motivations for keeping USD-RMB reasonably stable, but some moderate and gradual adjustment may still be warranted to alleviate the impact on exporters. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/fx-liberation-day-10-baseline-tariff-and-more/
2025-04-14 07:04
Key takeaways Central banking is not the easiest of jobs even in relatively stable times. And the current environment is anything but stable. Market volatility has jumped in recent weeks as investors struggle to assess the impact of the US administration’s trade policies. Credit spreads are an important leading indicator for the macro cycle, and perhaps the best single variable to give investors a handle on recession risk. Asian stock markets sold off sharply last week but pared some losses following the US administration’s partial tariff reprieve. Chart of the week – Sticky bond yields A week after announcing ‘reciprocal tariffs’ on trade partners, the US administration has applied the brakes. A 90-day pause sees universal tariffs of 10% for all countries, except China. Higher tariffs for certain sectors remain in place. After days of market declines there has been a big relief rally for stocks. So, what happens next? Markets are still spinning around, with ultra-high policy uncertainty meaning that volatility will remain elevated. Last week’s initial sell-off saw a combination of falling stocks and sticky bond yields, with the market factoring in a ‘stagflation lite’ situation. Specifically, the bigger-than-expected ‘tariff shock’ dragged the growth outlook lower and pushed short-term inflation expectations higher. Recession risk rose materially. Despite the interim reprieve, uncertainty still reigns. US growth continues to slow and trade policy will still raise inflation. For now, the Fed remains in reactive mode – waiting for bad news on the economy. For markets, it means that bond yields are still sticky, and the term premium is elevated. Meanwhile, international stocks are still outperforming year-to-date. With ‘policy puts’ more evident in Europe and China, the case for global investors to rotate to Europe, Australia, Asia, and the Far East (EAFE) and to emerging markets still looks good. Market Spotlight Flight to quality Uncertainty and volatility are set to be a feature, not a bug, of investment markets in the near term. For investors considering ways of building portfolio resilience without sacrificing growth, one strategy is to focus on ‘quality’. Quality is a stock market factor – and a proven long-term portfolio diversifier – that can defend against downside risk but still benefit from market upswings. Under the hood, it captures exposure to firms with strong profitability, consistent financial performance, and the safety of robust financial health. These traits help it deliver through-the-cycle performance. It pays off because quality stocks tend to be undervalued by the market. Meanwhile, investors often bid up the prices of lower quality firms that promise lottery-like returns, but which have a habit of underperforming in a downturn. Some multi-asset insights show that quality delivers its strongest active returns when the economic outlook begins to cool – making it a potentially useful defensive strategy in portfolios. Faced with elevated volatility, investors should pay attention to diversification and selectivity in asset allocation. The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management, Bloomberg. Data as at 7.30am UK time 11 April 2025. Lens on… Fed biding its time Central banking is not the easiest of jobs even in relatively stable times. And the current environment is anything but stable. Market volatility has jumped in recent weeks as investors struggle to assess the impact of the US administration’s trade policies. The Fed must consider not only the impact of the trade policies themselves but also the resulting market volatility on the economy. However, to do this, it must also consider the starting point. Recent data show the economy ended Q1 with the labour market in relatively good health while the downtrend in inflation has been slow and bumpy. This favours the Fed biding its time and seeing where trade policy settles. However, it doesn’t mean the Fed will sit on its hands indefinitely. Continued uncertainty around trade policy, current market volatility and recent survey and consumer data point to a slowdown. Given slowdowns can intensify rapidly, we see the Fed reacting to softer activity data and easing policy gradually from mid-year. Credit conditions Credit spreads are an important leading indicator for the macro cycle, and perhaps the best single variable to give investors a handle on recession risk. That’s important given that policy uncertainty and tariffs have raised worries over the prospect of stagflation and recession. Spreads have risen sharply recently – with US high yield seeing the most significant price adjustment. But they are not extreme versus long run history. That makes sense. The ingredients for a dramatic rise in default rates aren’t present today, even if defaults are likely to creep up. That’s because private sector’s balance sheets remain strong, corporate profits look fine for now, and the maturity wall isn’t too steep. Some credit specialists note that the absolute repricing at this stage is in line with what we have seen in recent event-driven corrections that are normally caused by a shock. Among them the tariff-driven growth scare in 2018/19, rate hikes in 2022, and the regional bank crisis in 2023 – none of which led to a recession. Asia stock check Asian stock markets sold off sharply last week but pared some losses following the US administration’s partial tariff reprieve. Export-oriented markets like Taiwan, Korea, and Japan have faced a particularly choppy time. In mainland China, initial price declines were followed by a mild rebound supported by sentiment that the market is still underpinned by a ‘policy put’. In India, which cut rates by 0.25% last week, the impact on stocks was more moderate given its more limited foreign trade exposure. Near-term, some Asia investment specialists think heightened trade uncertainty and the unpredictable impact on the macro outlook will weigh on sentiment. While Asian consensus profit forecasts have trended higher since mid-Q1, the implementation of tariffs could cause downgrade pressure once their impact is clearer. Those with higher overseas trade and revenue exposure to tariffs and counter-tariffs could be particularly vulnerable. Despite this, Asian markets continue to trade at a material discount to developed markets. And while FX volatility and growth concerns have risen, many EM Asian central banks look well-positioned to ease policy amid a benign inflation outlook. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 11 April 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 11 April 2025. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Market review Risk assets traded in a volatile fashion amid continued global trade uncertainty, with the US dollar falling against major currencies. US Treasuries weakened, and the US yield curve “bear steepened” following benign US core CPI data. Meanwhile, US IG and HY corporate spreads continued to widen. Among developed markets, US equities rebounded in choppy trading, while the Russell 2000 underperformed. European stock markets experienced broad-based weakness, as Japan’s Nikkei 225 pared losses after heavy sell-offs earlier last week. EM equities lagged developed markets. Other Asian stock markets remained on the defensive, with the Hang Seng leading the losses upon returning from a holiday-shortened week. In Latin America, equity market movements in Brazil and Mexico were more moderate. In commodities, oil fell, while copper and gold rallied. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/sticky-bond-yields/
2025-04-11 07:04
Key takeaways RBI cut the policy repo rate by 25bp to 6.0%, and changed stance from neutral to accommodative; it also gave implicit assurance of lasting surplus liquidity, and further rate easing. Inflation forecast was cut with the RBI saying that inflation is durably aligning with target; growth forecasts were also trimmed, and we believe can be cut more. We expect another 25bp rate cut in June and August, taking the policy rate to 5.5%, which is our estimate of neutral. In line with our expectation, the RBI cut the policy repo rate by 25bp, taking it to 6.0%.This was a unanimous decision across all six MPC members. It also changed its stance from neutral to accommodative, which we believe clearly signals further rate cuts (more below). The backdrop of this policy meeting was complex.The USA has recently announced a 26% tariff on India. We calculate that India’s GDP growth could take a direct 0.5ppt hit in FY26. The indirect and second-order negative impact could also be meaningful. But heightened volatility in global financial markets suggest that steps to support growth at this juncture should be carefully calibrated and remain focused on preserving macro stability alongside. We believe, the RBI signalled very clearly that it is focused on supporting growth. Certain points stood out to us: One, we think the RBI gave a double assurance that more rate cuts are coming. It changed stance and also cut growth/inflation forecasts, both steps signalling more easing. Two, it clarified that the accommodative stance only refers to policy rate, and not liquidity. This to us means that rate easing will happen on its own right, and not be substituted by liquidity easing. Three, on liquidity, the governor reiterated that the RBI “is committed to provide sufficient system liquidity”. In the press conference he even suggested that around 1% of deposits in liquidity could be available on tap. It is well known that liquidity has swung from deficit in January to a clear surplus. And this surplus is likely to continue, and even get a shot in the arm when RBI dividend is paid out in May. Four, on inflation, the governor said that “there is now a greater confidence of a durable alignment of headline inflation with the target of 4 per cent over a 12-month horizon”. The RBI lowered the FY26 inflation forecast from 4.2% to 4.0% on the back of a “durable softening of food inflation”. We have not seen such confidence on durability for the last few years. Five, on growth, the FY26 forecast was lowered from 6.7% to 6.5%. The governor said that quantification of trade war impact is tough at this point. In fact, in a supporting publication, we clearly noticed that the world growth forecast for 2025 hasn’t yet beenlowered much (3.1% versus 3.3% previously). This means there is likelihood of further growth forecast cuts in subsequent meetings. Six, it reiterated strong external accounts. This is important, because it provides some room to ease, even if external volatility is high. Another way to look at it is to say that the USDINR had gone close to 88 in the recent past, but has pulled back since then. Even if it weakens from current levels (of 86.6 as we write), for some distance, it will only go to levels seen recently, and may not be immediately disruptive. Having said the above, the RBI tried to strike a balance, lest expectations of rate easing become excessive.The RBI revealed its inflation forecast for FY27 at an above-target 4.3%, and growth too, at a higher 6.7% (compared to FY26). This message, that inflation over time can breach the 4% target, should help keep a check on expectations of extreme rate cuts. What next? With growth falling below potential, and inflation below target in FY26, we expect further easing. We are calling for a 25bp rate cut in the June and August meetings, taking the policy rate to 5.5%, which is our estimate of neutral. If growth expectations continue to remain weak, policy rate may even dip below neutral, though that’s not our central forecast. Finally, several reviews are going on, for example the RBI’s liquidity framework and the economic capital framework. These will need to be watched carefully for incremental information over the foreseeable future. https://www.hsbc.com.my/wealth/insights/market-outlook/india-economics/focuses-on-growth-support-amid-tariff-storm/
