2026-08-21 12:03
Key takeaways Services inflation remains unusually subdued keeping the headline low, even as goods inflation has taken off. Services exports are containing external imbalances despite a sharp rise in goods imports; growth, too, may become more services-led. If these services buffers weaken, the case for rate hikes will only strengthen; we continue to expect two hikes in FY27. India’s headline macro picture seems to have shrugged off the energy crisis. Growth remains high, inflation remains low, and the current account (c/a) deficit surprisingly contained. But we argue in this report that this is largely because India is being “saved by services”. And that’s where some key risks now sit. On growth, tailwinds from GST cuts, front-loading of manufacturing, and the opening of an exports window (following tariff cuts) have kept growth strong. But with the risk of a post-front-loading lull and weaker agriculture (if El Niño strengthens), the services sector will increasingly determine where growth lands. The bigger message, though, is risk. Services are currently acting as macro shock absorbers, and not letting strong growth spill over into inflation and external balances. What if those buffers weaken? Headline inflation is “well behaved” at 4.4% in July, close to the RBI’s 4% target, despite strong activity, a 15% real exchange rate depreciation, and higher commodities. Underneath, however, goods inflation is already averaging 5.4%, and could rise further. The reason headline inflation stays contained is that services inflation is at just 2.5%. But this rather low number does not meet our smell test. The strong correlation between growth and service inflation has broken recently in the data. If it normalises, headline CPI could rise. External balances tell a similar story. The headline c/a deficit is only 0.3% of GDP in the June quarter, but within it, the goods trade deficit is widening quickly. Interestingly, it is not as much led by oil and gold, as it is led by higher electronics and other core imports. For now, rising services exports is offsetting this rise. Yet services exports have already grown at a softer pace, and AI-related uncertainty is an added risk. How long can it offset a rising goods deficit? The risk assessment is sharpened by a tougher global backdrop (high oil, elevated global yields) and changes in India’s flows picture once the subsidised foreign currency non-resident (FCNR), external commercial borrowing (ECB) and bank borrowing window closes. Against this backdrop, if services inflation rises and/or services exports weaken, rate hikes may become the much needed “bitter pill” to cool demand that is feeding goods inflation and strong core imports. The RBI explicitly flagged persistence and pass-through risks in the just-released RBI Minutes. Our forecast remains two hikes in FY27, taking the repo rate to 5.75%. Energy shock? Where? Oil prices have stayed high for much of this year. But we can’t really see that in India’s macroeconomic numbers. Growth remains high, inflation remains low, and the c/a deficit surprisingly contained. Headline numbers across the board feel more goldilocks than crisis. But we want to dig deeper here. What’s making everything look rosy? Where do the key risks lie? We ask three questions, pertaining to growth, inflation, and trade balances. And we find some new and unexpected answers. Let’s start. How strong is growth? Growth prints have been remarkably strong. We believe the positive tailwinds from both fiscal and monetary policy easing have helped tremendously. Recall the 125bp repo rate cut, liquidity turning to surplus, and the GST tax rate cuts of 2025. In addition, there was help available from the front loading of manufacturing by producers nervous about energy availability down the line (see exhibit 1), and a sharp rise in core exports (following the rapid fall in the US tariffs imposed on India, see exhibit 2). Bank credit growth shot up across sectors (see exhibit 3). And it wasn’t just a case of substitution from non-bank to bank sources of funding (especially for NBFCs). Alongside some substitution, the overall flow-of-funds to the commercial sector showed a big rise (see exhibit 4). In fact, our 100-indicators of growth database points towards a GDP print of 7-7.5% for the June quarter, which was at the heart of the energy crisis (following 7.8% in the previous quarter). But like for every other data source in India, holes can be poked. It can be argued that a lot of the credit growth was driven by factors such as the new government credit guarantee scheme for small firms, the rise in working capital needs spurred by higher commodity prices, and the proliferation of gold loan growth (which can sometimes be seen as an indicator of stress). More broadly, if frontloading of manufacturing has spurred growth, it can be followed by a lull. And agricultural growth could be weaker if the El Niño strengthens into year-end. All said, it is worth asking whether growth will remain strong? Our sense is that services growth, making up the remaining c55% of GDP, will determine growth dynamics to a large extent hereon. Rising banking sector liquidity tends to support financial services. Global Capability Centres have been a strong driver of software services. Oil prices matter for trade and transport services. And the government’s fiscal spending drives public services. How some of these perform may eventually determine whether growth remains strong. But this is not the only reason we are discussing services. Their growing impact is not just on growth but also macro stability. How low is inflation? Strong growth should stoke inflation. But despite strong GDP prints, a 15% depreciation in the real exchange rate (since early 2025), and higher commodity prices, inflation remains well behaved at 4.4% in July (close to the RBI’s 4% inflation target). We peel the onion and find some divergent trends. We carefully create a goods (c67% weight) and a service (c33% weight) series within CPI. Thereafter we break down the CPI basket into three broadly equally sized parts – food, non-food goods, and services. And this is when divergences stare at us. Food and non-food goods inflation is already averaging 5.4% y-o-y in July. And given high WPI (9.8% in July) and output PPI inflation (9.6% in July) and their eventual pass-through to CPI, these numbers will likely rise from here. It’s services inflation that remains remarkably low at 2.5%, pulling the headline down to 4.4% (see exhibits 5 and 6). Though to be fair, it has risen by 0.5ppt in three months. The problem here is that it is not very intuitive to us why services inflation is so low. Two points explain our concerns. When we moved from the old to the new CPI series, services inflation should have risen given free education and health services had been removed. Instead, services inflation fell (from 3.1% in December 2025 in the old series, to 1.9% in January 2026 in the new series). Strong growth should stoke inflation, and particularly services inflation where price pressures can’t be imported away. But our analysis shows that “excess” growth and services are no longer strongly correlated as in the past (see exhibits 7 and 8). That relationship is broken. And this, we believe, is the main risk to inflation. Low services inflation data is keeping headline contained. If it rises from here, reflecting growth better, headline inflation numbers could rise quickly. How contained is the c/a deficit? When growth is too strong, it tends to show up in macro stability indicators. As we saw above, its lack of presence in services inflation is intriguing (even though it has shown up clearly in CPI goods inflation). But is it showing up elsewhere, for instance in external balances? We take a look at the c/a deficit in India and the headline message is similar to inflation. The headline c/a deficit is low at 0.3% of GDP as per RBI’s aggregated monthly data, and not showing signs of excesses. Once again, we peel the onion and find that the details can’t be ignored. True the c/a deficit is low, but within that, the goods trade deficit is only growing. Luckily, rising services exports and remittances are offsetting the rise, keeping the c/a deficit low (see exhibit 9). But given the uncertainties around the impact of AI on services exports growth, one needs to be careful on how long services can fund a rising goods deficit. Already, services exports have grown at a softer pace this year (see exhibit 10). So we go back to the goods deficit to see what’s causing the continued rise. And we are in for a surprise. Compared to a year ago, the rise in the trade deficit is not caused by high oil and gold imports. Rather, it is caused by a higher core goods deficit. The electronics deficit has risen sharply, as has non-electronic core goods deficit (see exhibit 11). The electronic trade deficit has risen sharply for components and computer hardware, and not mobile phones (which is a growing surplus, see exhibit 12). And interestingly, much of the worsening has been caused by higher prices rather than higher volume growth (see exhibit 13). With strong global demand, this part of the deficit may not come down sharply too quickly. We go on to investigate non-electronics core goods deficit, and find that imports are rising at a fast pace across the board – consumption, investment, metals, and agricultural goods (see exhibit 14), reflective of strong domestic growth. A new risk assessment To summarise, the services sector plays a very important role in determining where growth will land, how long inflation will remain low, and till when will external deficits be contained. Low services inflation and high services exports are keeping a lid on inflation and external imbalances, respectively. It will be important to keep an eye on these, if they turn. All of this could become more important if the global environment remains tough for long – high oil prices and elevated global yields. External imbalances are equally about capital inflows as they are about the c/a deficit. The strong flood of foreign inflows into India on the back of the FCNR scheme will also end by 31 August (recall that the scheme is now ending a month sooner than earlier announced by the RBI). And other subsidised windows for ECB and foreign bank borrowing will also close by end December 2026. This means that even though spot FX reserves have gone back up, and the full-year BoP surplus is significant, when we divide it up by quarters, it may show a lower surplus following the September highs (see exhibit 15). If risks (such as higher services inflation and lower services exports) do materialize in this backdrop, it may make interest rate increases an important ‘bitter pill’ which policymakers need to administer – to dampen the demand which is clearly stoking goods inflation and strong core goods imports. Early action would be important given transmission lags. We think that the RBI had struck a dovish note in its 5 August policy meeting. But it sounded more neutral in its minutes released on 19 August. The governor said that “persistence of realised prints at these or higher levels”, and higher pass-through from food and fuel leading to “de-anchoring of expectations” could result in rate hikes. Deputy Governor Gupta called for waiting and watching some more for “weather-related uncertainties to fully settle”. We have long maintained our view of two rate hikes in FY27, taking the repo rate to 5.75%, and our assessment of services sector-led risks and RBI minutes only make us more confident of our rate hiking view. https://www.hsbc.com.my/wealth/insights/market-outlook/india-economics/inflation-external-trade-and-rates/
2026-08-19 12:03
Key takeaways No new stimulus, but China has delivered a more proactive tone on countercyclical measures and incremental support. Amid rising trade tensions, policymakers signal balanced trade and stronger services to support outbound investment. Consumption supports shifts to services, with welfare and livelihood measures supporting more sustainable demand. China data review (July 2026) Retail sales rose 0.6% y-o-y in July (down from +1.0% in June), as auto sales fell 17% y-o-y, weighing on overall growth. The weakness likely reflects payback from earlier trade-in programs and revisions to EV purchase tax exemptions that reduced demand. Communication appliance sales outperformed, rising 20% y-o-y, partly driven by price increases linked to AI-related demand. Industrial Production grew 4.5% y-o-y in July, led by high-tech manufacturing (+16.9% y-o-y vs +14.1% in June) on AI-driven demand and the domestic innovation push. Export-oriented sectors also outperformed but weakness in consumer-facing industries and construction-linked materials persisted. Coal mining output also weakened sharply, falling 10.8% y-o-y in July. Fixed Asset Investment fell 12.9% y-o-y in July. Manufacturing investment declined 4.4% y-o-y amidst oil-driven cost pressure and muted pricing power among some consumer-facing sectors. Infrastructure investment remained weak (-14.7% y-o-y), partly affected by extreme weather, while property investment plunged 27% despite modest sales improvement in larger cities. Headline CPI eased to 0.5% y-o-y in July (from 1.0% in June), driven by softer vehicle fuel prices (+0.8% y-o-y). Durables inflation was mixed: communication appliance prices rose on AI-related cost pass through, while other big-ticket items remained under pressure. PPI moderated to 3.5% y-o-y (from 4.1%), led by oil-linked sectors tracking lower Brent prices. Exports rose 23.9% y-o-y in July led by green technology items and semiconductors. ASEAN exports increased by c38% y-o-y on regional AI-supply chain collaboration, while exports to the US grew 17% y-o-y from a low base. Imports stayed strong, rising 27.5% y-o-y, supported by AI-related demand, domestic industrial upgrading and commodity imports. China Politburo: Steady support now, scope for more On 30 July, policymakers reviewed the H1 economic performance and set out key economic and policy priorities for H2. Shifting growth model; more counter-cyclical focus Policymakers broadly maintained the current policy stance, reiterating “proactive” fiscal policy and a “moderately loose” monetary policy, while noting the economy is increasingly led by new growth drivers. They also flagged continued headwinds and revived calls to “strengthen counter-cyclical” support – wording that was not used during the April meeting – reflecting softer domestic momentum. Exports have helped cushion growth, but pressure for additional policy support is building. Fiscal policy takes the lead; further support remains possible The Politburo called for faster spending and greater bond utilisation, starting with the deployment of existing annual quotas. Issuance has lagged versus last year: Special Local Government Bond (SLGB) issuance is 55% year-to-date (Wind) compared with 63% over Jan-July last year, while refinancing bond issuance has reached 84% of the annual quota – highlighting local fiscal constraints and a tilt towards refinancing over new investment. Meanwhile, the stance around monetary policy suggests less urgency for broad interest rate cuts or reserve requirement ratio (RRR) cuts. Support is more likely via targeted structural tools and liquidity operations (e.g., Open Market Operations and treasury bond purchases). Infrastructure push via the “six networks” Accelerated fiscal spending is expected to support investment in the “six networks” – power, water, computing, information and communications technology, urban infrastructure, and logistics – which was also part of the 15th Five-Year Plan. The National Development and Reform Commission (NDRC) has cited over RMB7trn of investment this year (Xinhua, 25 May), though detailed plans are yet to be unveiled. A stronger infrastructure push should provide counter-cyclical support needed to lift domestic demand. Trade rebalancing to ease external tensions While exports remain a key growth pillar, trade friction persists, including EU tensions and new US restrictions (e.g., on power inverters and robotics imports). The Politburo’s call for “mutually beneficial international trade” points to a rebalancing towards services and FDI. Stronger innovation capacity is supporting inbound high-tech investment (high-tech FDI +33.2% y-o-y in H1), and continued emphasis on attracting foreign capital may help stabilise external linkages. Consumption: services-led in the near-term; livelihood support in the medium-term Policy continues to prioritise domestic consumption, with a focus on services and humancapital investment, consistent with the 15th Five-Year Plan (e.g., tourism, healthcare, sport, elderly care, childcare). This suggests support may be more targeted at services than durable goods (e.g., trade-in programmes) where policy support appears to be fading after earlier frontloading. Livelihood measures are expected to target key groups – gig worker protections, support for rural elderly, and vocational training. Over the medium term, reforms expanding access to public services based on permanent residence could reduce precautionary savings among ~170 million migrant workers, unlocking consumption potential. A unified national market remains a priority Policymakers reiterated plans to advance the “Regulation on Building a Unified National Market” to place local government actions on a more rules-based footing. Green objectives are also being strengthened (e.g., broader carbon market coverage and efficiency upgrades), alongside sector-specific measures aimed at curbing “involution”, particularly in new energy (e.g., EV tax incentives, export VAT rebates, and taxes on batteries/solar panels). Addressing local protectionism and persistent “triangular debts” in corporate payment chains remain critical to restoring cashflow transmission and improving business confidence. Externally, tackling “involution” may also help reduce trade tensions. Source: LSEG Eikon * Past performance is not an indication of future returns Source: LSEG Eikon. As of 18 August 2026, market close https://www.hsbc.com.my/wealth/insights/market-outlook/china-in-focus/china-politburo-steady-support-now-scope-for-more/
2026-08-17 08:10
Key takeaways The USD has weakened recently, given JPY-supportive intervention and rising Fed-driven US policy uncertainty. The ongoing debate over the direction of the US data pulse has added to the pressure. Even so, unless the outlook clearly improves in other major economies, the USD could resume its upward trend. The USD has struggled recently, falling back to levels last seen around the 16-17 June Federal Open Market Committee (FOMC) meeting. Two headwinds stand out. First, the US Dollar Index (DXY) has been weighed down by spillover effects from coordinated intervention by Japan’s Ministry of Finance and the US Treasury to support the JPY. Second, the USD softened after the July FOMC meeting, reflecting a poor market reception to the statement and Chair Warsh’s messaging. Looking ahead, the Federal Reserve’s (Fed) next steps will be pivotal for near-term USD direction. We still think the USD should be supported by a stronger cyclical outlook than elsewhere, but that view can be challenged if US policy uncertainty becomes a more material drag. This may help explain why resilient US growth and relatively high short-term rates haven’t translated into the USD strength one might expect. Some moderation in the US data pulse is possible, but the contrast versus activity surprises elsewhere in the G4 remains sizeable (Chart 1). Across the suite of the USD’s rate differentials, the gap that continues to stand out to us is between EUR-USD and the difference in five-year inflation adjusted yields. Despite the move lower in the yield differential in the last few months, EUR-USD has remained elevated (Chart 2), suggesting the USD is adjusting only gradually. Source: Bloomberg, HSBC Source: Bloomberg, HSBC We believe the currency can resume its gradual appreciation, including against the EUR and JPY, given its sizeable interest rate differential gaps still in place. Nonetheless, with another round of key US data before the next FOMC meeting, the road ahead may be bumpy. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/usd-to-resume-strength-against-eur-and-jpy/
2026-08-12 07:08
Key takeaways Volatile energy markets continue to swing inflation and rate expectations… …but moves in core inflation have been much more benign… …and most activity data are holding up reasonably well. Uncertainties over the path to a resolution of the Middle East conflict have caused the oil price to move in a volatile manner in recent weeks – firstly back up to USD100/b, then back below USD80/b – the difference having quite a sizeable impact on the global economic outlook. At the time of writing, markets remain hopeful of a resolution; however, as we have seen, this can change quickly. Headline risks, core contained Headline inflation risks, therefore, remain acute: beyond oil and gas, other commodity prices remain elevated. And the rising probability of a more powerful El Niño later this year is keeping food prices high, particularly rice prices. The encouraging part of the inflation story is the lack of spillover into other areas of the inflation basket. Our measures of so-called ‘supercore’ inflation, which strip out food, energy and their related items (such as airfares and food away from home), have hardly budged. In most economies (with the notable exception of the Philippines), inflation increases since February have been concentrated in headline inflation rather than core measures. US inflation in June saw this quite clearly, even if the eurozone flash release saw a slight tick up in core inflation. In most of Asia, for now, inflationary pressures remain on the food and energy side. Source: BLS, Latest data: June 2026 Source: ECB, Latest data: June 2026 Robust Q2 growth Surprisingly, global growth data for Q2 have broadly performed well. Despite higher headline inflation squeezing household incomes, US and European consumers have kept spending, and, in Asia, Korea and Taiwan recorded robust growth, primarily driven by AI demand. Mainland China’s domestic activity remains subdued, but trade data are still robust, with exports rising for high-tech products. The recent Politburo meeting didn’t announce any new stimulus, but it did emphasise service-related consumption and promoting a more balanced trade profile. Source: USCB Latest data: May 2026 Source: SingStat, MODS，MOEA Latest data: June 2026，June 2026，May 2026 Additional tariffs On the trade front, the US implemented a 10-12.5% tariff on 60 trading partners under Section 301, effective 24 July 2026, although products subject to Section 232 tariffs are exempt. At the same time, the US administration has threatened the EU with additional tariffs after the EU imposed fines on several US tech companies over unethical conduct. Policy challenges How these inflation and growth cross-currents interact is crucial for policymakers. Although we expect the European Central Bank (ECB) to now deliver another rate rise in September, for other major central banks it is a much tougher balancing act. We continue to expect the Federal Reserve and the Bank of England to remain on hold; however, as with so much of the global outlook right now, this hinges on oil prices remaining under control. Source: Bloomberg, HSBC. ⬆ Positive surprise – actual is higher than consensus, ⬇ Negative surprise – actual is lower than consensus, ➡ Actual is in line with consensus Source: LSEG Eikon, HSBC https://www.hsbc.com.my/wealth/insights/market-outlook/macro-monthly/resilient-growth-amid-energy-price-volatility/
2026-08-10 12:02
Key takeaways USD-JPY dropped sharply after joint Japan-US intervention. Coordinated action may be more effective than solo moves but sustained JPY strength requires improving fundamentals. We think USD-JPY will trade in a wider range than before and remain cautious about projecting a sustained downtrend. USD-JPY fell sharply after coordinated interventions to support the JPY on 30 and 31 July by Japan’s Ministry of Finance (MoF) (Nikkei, 1 August) and the US Treasury (FT, 1 August). Both authorities confirmed the joint action on 3 August and said they will not hesitate to do more if needed (Bloomberg, 3 August). The last joint JPY-buying intervention occurred on 17 June 1998 and we see two lessons relevant for today. First, joint intervention has historically been more effective than unilateral intervention (chart 1). After the MoF’s solo intervention in April-May 2026, USD-JPY took seven weeks to return to pre-intervention levels. We believe the market will now be more cautious to rebuild speculative short JPY positions given the increasing scale of MoF intervention, involvement by the US Treasury and sharper USD-JPY declines. Second, intervention alone is unlikely to change the underlying trend of USDJPY. A sustained JPY recovery would likely require more attractive real interest rates (i.e., interest rates adjusted for inflation) in Japan and reduced fiscal concerns, while a major shift in residents’ capital flows should also help. Source: Bloomberg, HSBC Source: Bloomberg, HSBC Our base case remains that USD-JPY will be mostly range-bound, capped by periodic MoF intervention but supported by persistently negative real rates in Japan (chart 2). The range may now be wider due to both USD factors (recent softer US data, less predictable Fed communication and persistent geopolitical uncertainty) and JPY factors (joint intervention, potential changes involving the Bank of Japan (BoJ), the Government Pension Investment Fund and tax-exempt savings accounts). However, unless we see much faster BoJ rate hikes, a clearer government preference for JPY strength (rather than saying that JPY weakness has both positive and negative implications) and a dialling back of fiscal expansion ambitions, we remain cautious about projecting a sustained downtrend for USD-JPY. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/usd-jpy-wider-trading-range-expected/
2026-08-05 12:02
Key takeaways Consumer demand was boosted by the hot weather and the World Cup through June and July. The BoE left rates unchanged, but pointed to the upside risks to, and uncertain outlook for, inflation. PM Burnham announced some small policy changes, but the big tough decisions are yet to come. A bit hot all round… The UK economy entered the summer with decent consumer momentum. Retail sales in June rose 1.0% m-o-m, bolstered by sales related to the hot weather and the FIFA World Cup. Notwithstanding those events, retail sales rose 2.6% 3m/yr (Chart 1), likely supported by real income growth of +0.4% y-o-y in June, and a fall in the net inflow of cash savings year-to-date. However, the hot weather was cited as reducing footfall – online sales grew strongly – and fuel sales were down, despite lower prices. That said, the prospect and change of the Prime Minister (PM) in July appear to have helped bolster consumer confidence, particularly across younger age cohorts (Chart 2). Meanwhile, business surveys reported improved activity in July, notably the UK services PMI returned to expansion, manufacturers continued to report growth, but employment growth remained soft. …but can it last? While a sizzling summer of activity is welcomed, some caution over its sustainability is warranted, given the looming headwinds in the second half of the year. Importantly, for households, it will depend on the path of real income growth and the confidence to draw upon savings. On the former, inflation slowed to 2.6% y-o-y in June, but is set to rise to c3.7% in Q4 (Chart 3), and with private sector nominal wage growth expected to remain subdued, the squeeze on household budgets will tighten further, although if the savings rate falls faster than we expect, demand could remain relatively resilient. However, we expect volatile conditions in the Middle East and uncertainty from domestic policymakers to keep a lid on any upside news on demand in H2 2026. The Bank of England’s mixed messaging… At its latest policy meeting, the Monetary Policy Committee voted 6-3 in favour of leaving interest rates unchanged at 3.75%. Against a backdrop of global uncertainty, the tone of the committee was cautious and the risks to inflation were still judged to be on the upside. The Bank of England (BoE) is vigilant to risk that the disruption in the Middle East sparks second-round inflation effects, i.e., price rises ripple through non-energy sectors and into wage negotiations. The challenge for policymakers is the time lag between the initial shock and the evidence of second-round effects being visible. As such, the nine committee members differ in their views over the scale of risk, but also to the correct course of action to mitigate the risk – act now, but risk unduly hurting the economy, or wait and risk being late to contain inflation. We maintain our view that the Bank of England would prefer to avoid hiking interest rates if it can and its own forecasts suggest that financial market rate expectations are high (Chart 4). Indeed, Governor Bailey said that the Bank of England was not “edging towards a hike", although that message is at odds with the additional vote from the MPC for a hike (6-3 versus 7-2 at its previous meeting). …and a new government finding its feet The new Prime Minister, Andy Burnham, hit the ground running with a series of policy announcements aimed at offering some households and businesses “breathing space”. While there were concerns over the funding of such policies, the costing is small relative to the broader challenges in the UK public finances. Indeed, before the new Prime Minister considers his ambitions and how to fund them, there are existing, expensive issues to deal with, from defence, to pencilled in real-terms cuts in departmental spending in the coming years, and higher debt servicing costs. So, while the UK has a new Prime Minister and cabinet, the same challenges remain, and trade-offs will need to be made. For now, financial market volatility has been sanguine, but an Autumn Budget scheduled on 28 October 2026 and a lack of detail on any objective (including social care and devolution) mean that policy uncertainty could complicate this in the weeks to come. https://www.hsbc.com.my/wealth/insights/market-outlook/uk-in-focus/a-bit-hot-but-can-it-last/
