Increasing Liquidity A Good News; How Long Can It Sustain?

In its monthly macro update, Emkay has highlighted the surge in domestic liquidity, which has driven a bull steepening of the yield curve. In the short term, this should help lenders, especially NBFCs with fixed-rate books and banks with weak deposit franchises.

Experts see a few green shoots in Consumption/Growth supported by tractor sales, Non-Oil Non-Gold imports, and the RBI Consumer Confidence Index. However, broad-based recovery is still to be seen, as major concurrent indicators like Loan Growth, Passenger Vehicle sales, and Credit card transactions continue to be weak. With RBI aggressively easing, analysts expect lending activity to pick up from next quarter on, followed by a consequent rise in consumption.

Pressure on the Rupee and FX reserves has notably diminished, with stability returning aided by FPI flows. The DXY correction of ~10 per cent from its peak is meaningful, now below 100 after 100 days of Trump's tumultuous tenure. Tariff risks appear largely priced in, with the path ahead skewed toward constructive trade negotiations broadly favorable for India.

The RBI announced a fresh OMO of Rs1.25 trillion, potentially pushing domestic liquidity to over 1per cent of NDTL. The RBI's massive easing push has led to a bull-steepening of India's yield curve, and the tenor spread has expanded to 40bps YTD from 10bps. Short-term yields below 3Y maturity have fallen by 65-75bps, slightly ahead of the 50bps repo rate cut. This is expected to have a significant impact on borrowing costs.

Majority of the clients concurred with their positive view on India. The RBI easing puts India in a more favorable cyclical position, especially as worries around a deep recession in the US abate. This is also resulting in India seeing disproportionate flows versus other emerging markets.

Emkay'ssectoral calls faced push-back, though. Financials remains the favored sector, though its low-growth argument resonated with some specialists. SMID private banks are seeing interest, to play easy liquidity and the MFI turnaround.

Cement was another favored sector. Finally, autos and discretionary had a mixed response: some investors are bottom-fishing while others are waiting for more concrete evidence of a demand revival.

Nouriel Roubini emphasizes how the ongoing AI revolution reinforces the persistence of American exceptionalism, positioning US growth to accelerate from the current 2 percent to 4 percent by decade–-end—of which AI will contribute 200bps. Roubini expects the US economy to avoid a material recession over the near-to-medium term. Systemic risk to the dollar reserve currency status remains negligible.

A capex boom is underway, led not only by the 'Magnificent Seven' but increasingly due to non-tech sector’s scaling AI deployment, suggesting that investment as a share of GDP will rise sustainably. The US will maintain its leadership, with China a second, while global adoption of AI technology accelerates. Unlike past industrial revolutions characterized by logarithmic growth, the AI era promises exponential expansion, with the US advantaged by unparalleled scale and network effects.