August 2025 Market Commentary
The month of August bore the brunt of the breakdown of trade negotiations between the US and India as the US levied a 25% tariff on India and additionally, levied another 25% as penalty for the purchase of Russian crude oil. Losses deepened amid renewed Russia-Ukraine tensions, which dampened market sentiment. There was some succour after the Prime Minister talked about Goods and Services Tax (GST) reforms in his Independence Day speech. Consumption forward sectors like Autos, FMCG and Consumer Durables were the top gainers for the month while the key laggards were Oil & gas, Power and Infrastructure. FIIs continued to sell significantly to the tune of USD 4bn.
India Composite PMI rose to 63.2 in August 2025, up from 61.1 in July and marking a 17-year high, despite coming in below the flash estimate of 65.2. The reading also sets a new record for the index, amid a broad-based pick-up in output growth across both manufacturing and services. Total new orders expanded at the fastest pace since mid-2010, though the acceleration was driven mainly by service providers. Employment also rose solidly, at a quicker pace than in July. By sector, manufacturing growth broadly stabilized, while services recorded a sharper increase.
Headline CPI inflation in Aug rose to 2.1% YoY from 1.6% in July. Core inflation was steady at 4.21% (Jul 4.22% coming off from Jun 4.53% with telecom tariff hikes in the base). However, this was largely on an increase in personal care, largely on gold prices rising 1.9% MoM. On YoY basis, food & beverage prices were flat (v/s -0.8% in July). Within Food & Beverages, vegetables & pulses prices continued to decline sharply, while oil and fruit prices soared. August WPI rose to 0.52% from -0.58% in the previous month, as food prices rose MoM. Food inflation came in at -3.1% from -6.3% with deflation in Veg inflation at -14.2% vs -29.0%.
Bond yields climbed as the RBI kept rates unchanged in its Aug 2025 monetary policy meeting, opting for a wait and watch approach to assess the impact of earlier rate cuts on the economy, contrary to market expectations of a dovish tone or further easing. Losses were extended after the Indian Prime Minister announced sweeping changes to the Goods and Services Tax (GST) regime, reigniting fiscal concerns and fears of increased debt supply. However, yields found some succour after a major global credit rating agency upgraded India’s long-term sovereign credit rating from 'BBB-' to 'BBB. The benchmark 10 year G Sec yield hardened 22 bps from 6.38% in July to 6.59%. Corporate bond spreads expanded across different maturities.
The first half of September has seen a recovery in the domestic equity market, spurred by the announcement of rationalization of the regime. Slab rates of 28% and 12% have been eliminated and absorbed into slabs of 18% and 5%. Sectors such as life insurance have been completed exempted from GST while products which are classified as sin goods will now be taxed at a higher slab of 40%. In addition, thawing of trade relations between India and China as well as India and the US is expected to benefit Indian capital markets in the near future. Focus will now shift to the US Federal Reserve and its much anticipated rate cuts. Considering lower than expected earnings from 1Q for corporate India, the valuations have proved to be sticky and some further time correction could be seen before we see an upward resumption.
Regards,
Investment team
Pramerica Life Insurance
