House View: Liquidity leads the rally

Q2 FY25 concluded on an intriguing note as central banks across the world start the liquidity easing cycle. China’s central bank made a big bang announcement delivering its largest stimulus package since the pandemic, aiming to lift the economy out of deflation and steer it back towards the government’s growth target. In the United States, the Federal Reserve finally relented and initiated the rate cut cycle by reducing its benchmark interest rate by 50 bps. Other major central banks such as the European Central Bank (ECB), Bank of England (BoE) and Bank of Canada also added to the rate cut cycle. Only the Bank of Japan is swimming against the tide raising policy rate by 0.15% to 0.25%, the highest level in 15 years. This is to strengthen the Yen and combat inflationary pressures.

Highlights

• Equity markets across the globe ended the last quarter with healthy returns despite several bouts of volatility. Developed market indices generated robust returns in the range of 5-10% in the quarter with a few of them touching a new high (S&P500, Nikkei 225, DAX).
• From being marginal net sellers in 1QFY25 (USD 0.9 bn net outflow), FIIs turned net buyers in 2QFY25 (USD 11.6 bn net inflow), with bulk of the buying coming in September.
• Indian equity markets reached a new all-time high, buoyed significantly by domestic institutional investors (DIIs) injecting approximately USD 12.4 bn. Mid cap indices with 7% returns in the quarter were in line with the large cap indices while returns from small cap indices were a little lower at 4%.
• The global economy is likely to register annual growth of 2.4% this year, down only modestly from 2.7% in 2023. India is standing out with 7% growth expectation in FY25 (as per RBI). Central banks across the globe including the US Fed have started cutting interest rate and are expected to continue the rate cuts as inflation cools off. RBI is also expected to change its stance in the next policy meeting and might kick start the rate cut cycle from December.