In May, global equities did well due to the tariff truce, which lowered the risk of a full-blown trade war, with the MSCI World Index rising 5.5% month-on-month. Amongst the major regions, MSCI USA and South Africa were the best performers, gaining 6.3% and 4.9% respectively, while Brazil and India were the weakest returning -0.2% and 1.1%, respectively. Nifty 50 was up 1.7%, closing the month at 24,751. The performance was driven by positive factors such as de-escalation between India and Pakistan, a pick-up in economic momentum, relentless FII buying, India-UK FTA, record RBI dividends and easing inflation, while further upside was capped by a tepid 4QFY25 earnings season, rising supply in primary markets, and a 90- day US-China tariff truce benefitting export-oriented nations and higher crude oil. Large-caps rose by 2.1%, while small/ mid-caps outperformed, rising by 4.0%/9.6%, respectively. Most sectors ended the month in the green.

Indian benchmark 10-year treasury yields averaged 6.30% in May (lower than the April average of 6.40%). On month-end values, the 10Y yield was lower and ended the month at 6.29% (down 7bps MoM). The U.S. 10Y yield closed the month at 4.41% (23bps higher MoM). INR depreciated 1.3% over the month and ended the month at 85.58/USD, with one-year depreciation at 2.5% now. Oil prices rose 1.1% in May, following a 18.1% decline in Apr. Brent currently trades at $63.9, having ended at $63.2 as of end-Apr.

Global markets did well, driven largely by developments in U.S. trade policy. The US and China significantly de-escalated their trade war, bringing bilateral tariffs of 145% (on Chinese exports) and 125% (on US exports) down to 30% and 10% respectively. However, global trade slowed sharply as the tariffs that remain take their toll, and frontloading effects unwind, while the global economy (especially the US) will be weighed by extreme policy uncertainty. Currency markets also responded, with the U.S. dollar experiencing periods of both strength and weakness as investors reassessed the economic and geopolitical landscape. Gold prices weakened and closed at $3289 in May, after marking a new all-time high at $3,500 in April.

The Indian economy continues to show resilience despite recent cross-border incidents, diplomatic breakdown and escalations/de-escalations. While the US-China tariff truce improved global sentiment, it narrowed the tariff gap advantage for India with other export-oriented nations. RBI approved a record transfer of INR 2.7tn (0.7% of GDP) as annual dividend to the Central Government. This is higher than the budgeted ~INR 2.3tn and last year’s dividend of ~INR 2.1tn (0.6% of GDP). Sharp acceleration in GDP growth to 7.4% YoY in 4QFY25 from 6.2% in 3QFY25. India and the UK finalized a Free Trade Agreement (FTA) that will reduce tariffs on 99% of Indian exports and facilitate British companies in exporting whisky, cars, and other goods to India.

CPI: April CPI was recorded at 3.16% YoY – the lowest print since July 2019 – softening a tad from 3.34% YoY in March. Sequentially, headline prices inched higher after remaining flat in March. Food prices declined for a fourth consecutive month by -0.2 % m/m, though the pace of declines has progressively slowed. While vegetable, cereal and pulse prices continued to decline, rising meat and fruit prices served as a partial offset. On a year-on-year basis food inflation softened to 2.1 % – the lowest in three-and-a-half years. Robust production from the rabi (winter) crop coupled with forecasts of an above normal monsoon is expected to keep food price momentum benign in the near future. Core inflation steadied at 4%-4.1% in April from 4.1% in the previous month.

Trade: India’s trade deficit in April widened to a five-month high of $26.42 billion from $21.54 billion in March as growth in imports doubled versus exports. On a year-on-year basis, the trade gap in goods in the previous month was wider as well compared to $19.2 billion in April 2024. While merchandise exports rose 9 percent on-year to $38.49 billion in April, goods imports increased 19 percent to $64.91 billion. India’s oil imports rose to $20.72 billion in April from $19 billion in March. Gold imports fell to $3.1 billion in April from $4.4 billion the previous month. Exports to the U.S. jumped 27% to $8.42 billion in April from $6.61 billion a year earlier. Among product categories, electronic goods, including mobile phones saw the sharpest year-on-year jump of 33% in April.

BOP: The Balance of Payments (BOP) deficit surged to a historical high of US$37.7bn in Q3, driven by significant capital outflows. Net capital flows turned negative at -US$26.8bn, with outflows in Foreign Portfolio Investments (FPI) and Foreign Direct Investments (FDI), banking capital, and other capital. FPI outflows were primarily in equities due to rising UST yields and risk-off sentiment following the change in the US government. Banking capital outflows were linked to NOSTRO accounts, foreign currency loans to residents and nonresidents, and related assets. Other capital outflows, amounting to US$11.7bn, included export receipt timing, India’s subscription to international institutions, and SDR allocations. FDI flows, usually stable, turned negative due to higher repatriation and Indian investments abroad. This sharp rise in outflows contributed to pressure on the INR, despite the current account deficit remaining low.

The first half of May witnessed buying of $2.2bn, while adding only an incremental $0.1bn in the second half. FII turned buyers in the bond markets with $1.4bn of buying in May, following a $3bn sell-off in April. FII bought $2.3bn in May (vs $1.3bn in Apr). DIIs remained net buyers for the 22nd consecutive month, with moderate inflows of $7.9bn in May (vs inflows of $3.3bn in Apr). Mutual funds were net buyers in May, with inflows of +$5.6bn (vs +$2.1bn in Apr). Insurance funds were also net buyers, with inflows of +$2.3bn (vs+$1.2bn in Apr). Retail continued to sell with ~$0.5bn of outflows in May (vs $0.6bn of outflows in Apr).