Dear Reader,
The focus of Indian monetary policy has clearly shifted to supporting growth. The latest RBI projections on GDP growth make that amply clear. In its statement on Friday, the MPC revised down its GDP growth forecast for Q1 FY26 to 6.7 percent from the earlier 6.9 percent and for Q2 FY26 from 7.3 percent to 7 percent.
The inflation forecast was also revised lower, but only a bit. The projection for Q1 FY26 is now 4.5 percent from the earlier 4.6 percent, but that for Q2 has been retained at 4 percent. In other words, the change in the growth forecast is much more than in the inflation forecast. That set the stage for a fundamental change in monetary policy under new RBI Governor Sanjay Malhotra. That is what my colleague Dinesh Unnikrishnan pointed out here.
It is of course clear where the big growth risk comes from. After saying that growth is expected to pick up in FY2026 and that domestic demand and investment will be robust, the RBI governor’s statement said, “Global headwinds, however, continue to impart uncertainty to the outlook and pose downward risks.” That’s not very different from what the RBI has been saying all along—but the big difference, although politely not mentioned by the MPC, is Donald Trump’s ascension to the US presidency and the flurry of unprecedented and often outlandish announcements and policy actions that have shaken up the markets since then. Indeed, the RBI governor did mention "excessive volatility in global financial markets and continued uncertainties about global trade policies" in his statement. And in his press conference, he was worried that the tremendous uncertainty would affect growth, consumption, and investment. As my colleague Neha Dave wrote, global factors will be key for RBI in FY26. The rate cut is pre-emptive action.
It does seem as if the Trump administration has declared an economic and financial war on any country that doesn’t do what it wants. The question is: why now? What has changed for the US to embark on such policies?
The pundits are offering several explanations. The most popular one is that Trump is unhinged and his penchant for spectacle and playing to his support base are the prime reasons.
A variant of this is that Trump’s rapid-fire announcements are aimed at unsettling his opponents, keeping them on tenterhooks and thus obtaining the advantage in any negotiations. Years ago, the Soviet-born British journalist Peter Pomerantsev, in an article titled ‘Putin’s Rasputin’, wrote this about the disruptive tactics used by Putin advisor Vladislav Surkov in the London Review of Books: “In contemporary Russia… the stage is constantly changing: the country is a dictatorship in the morning, a democracy at lunch, an oligarchy by suppertime, while, backstage, oil companies are expropriated, journalists killed, billions siphoned away. Surkov is at the centre of the show, sponsoring nationalist skinheads one moment, backing human rights groups the next. It’s a strategy of power based on keeping any opposition there may be constantly confused, a ceaseless shape-shifting that is unstoppable because it’s indefinable.” Seen from that angle, Trump is a pale imitation of Putin.
Kinder people say Trump’s bluster and bombast is just a negotiating tactic, aimed at getting maximum advantage. It is certainly that, but it doesn’t take into account the damage it’s causing to America’s friends, the harm it is doing to its soft power. Indeed, the bullying, the hectoring, and Trump playing the role of a mob boss may well help China the most, as we pointed out here.
Those that detect a rationale behind his policies say that his instincts are isolationist and that he may even be a force for peace in the world. But what would one say to his plan to drive the Palestinians out of Gaza and converting it to a Middle East Riviera? Or his claiming Greenland and the Panama Canal? Or his tightening of the sanctions on Iran?
Some point out that even the liberal US establishment pursued similar policies towards China, towards Palestine and towards Iran—all that Trump is doing is taking those policies even further. What the liberals dislike is Trump’s acting tough towards the rest of the Western alliance, including Canada and the European Union.
One way of looking at Trump’s policies is that perhaps they reflect a desperate attempt to turn the US into Fortress America. It’s a realisation that in the struggle to preserve American hegemony in today’s world, in order to counter the China-Russia alliance, the US can no longer afford to play Mr Nice Guy, even to its friends. From now on, if you want American protection, you have to pay for it, is the message from Trump to the NATO nations. Greenland is important because of its rare earths and because of its Arctic location, Panama is important because of its canal.
It’s interesting that one of the reasons US Secretary of State Marco Rubio advanced for not attending the G20 meet later this year in South Africa is that it uses the G20 to promote “solidarity, equality, & sustainability”. Solidarity, equality and sustainability, in Rubio’s book, are undesirable because they coddle ‘Anti Americanism’. It seems to be a call for a society and world in which might is right and the devil take the hindmost.
Do countries now have to toe the US line even in their internal policies, as South Africa is being called upon to do, or face the consequences? Where does that leave “strategic autonomy’’ for countries?
Of course, policies are rarely so clear cut, and there are always exceptions -- military aid to Israel is one. World leaders are beating a path to Trump’s door to plead that they too deserve exceptional treatment. We will know soon enough where India stands.
For the markets, the issue is how to deal with the volatility and uncertainty, with policy changing on an almost daily basis. This FT article, free to read for Moneycontrol Pro subscribers, is about how investors can harness Trump-induced volatility, while this one is about how to trade the trade war. And we wrote here about how Indian investors should position themselves in a market where volatility is the only constant.
Finally, there is one redeeming feature about Trump, a very big one. Perhaps Trump is merely lifting the veil, and this is what international relations always were, at bottom. It was always a matter of power, covered up by hypocritical posturing about democracy or human rights or a ‘rules-based order’. Under a thin veneer of civility, it was always the law of the jungle. Consider, for example, the CIA funding for regime change under cover of USAID, a cover that Trump and Elon Musk have blown away. Trump has ripped away the phony mask and laid bare the truth that the game was always rigged, it was always about power and money. Indeed, his foreign policy could well be called ‘The Artlessness of the Deal’. It is a refreshing and honest change.
It's also a wake-up call to the rest of the world.
Cheers,
Manas Chakravarty
In case you missed them, here are some of the stories and insights we published this week, apart from our technical picks in the equity, commodity and forex markets:
Stocks
Should you buy financials after the RBI rate cut?
Why this T&D player merits a look, Why is the luggage sector struggling amid a travel boom, SBI, ITC, Trent, V-Guard, Data Patterns, Medanta, Nestle India is a long-term play on consumption, Protean eGov Technologies, Home First Finance, Waaree Energies, Titan, Power Grid, Why Nestle India is a long-term play on consumption, Divi’s Lab, JSW Energy, Asian Paints, Concor, Aditya Birla Capital, Dodla Dairy, IndusInd Bank, There could be more pain for railways, but shipbuilders to gain from Budget 2025, Marico, Nestle India, Automobiles start the year in high gear, Navin Fluorine, Blue Star, Sky Gold,
Markets
Are Indian markets still over-valued?
Why the markets will remain flat and what could trigger growth? Neelkanth Mishra weighs in
What can help bank stocks exit their state of flux?
More than 50% of BSE MidCap index firms see retail stake increase in Q3
Bond markets are back in the eye of the storm
Financial Times
China’s exporters to step up offshoring to beat Donald Trump’s tariffs
The tariff trouble starts with oil
Google goes heavy on investment but light on detail
Companies and sectors
Why order flow challenges could mount for India’s capital goods firms
Decline in sugar output poses challenge for mills
Weight loss drug opportunity is increasingly coming into focus for Indian pharma
The remarkable rise in passenger traffic revenues at Indian Railways
Economy & Policy
Tariffs make dollar supreme, India’s choices more difficult than ever
The US trade deficit with India is higher than that with Canada
Will India’s image as a trade ally get a lift after Budget 2025?
PMI for January shows slower growth
Easing price trends set stage for rate cut
Does Budget 2025 really boost consumption?
Corporate effective tax rate stabilises at higher levels, larger companies in better shape
Budget push for MSMEs would work, but safeguards are key
The stark inequalities in consumption: What the numbers reveal
Interest rates and the two sides of liquidity
Geopolitics & Geoeconomics
The Eastern Window: China’s innovation cookbook
Asia is home to the world’s biggest trade corridors. But India is missing out
Will Trump tariff tremor quicken India-UK FTA?
Tech & Startups
India is late to the LLM party, but can it still make a splash?
Google may supply Tensor chip in the next phase of IndiaAI Mission
AI in edtech and pre-kindergarten market key focus areas going forward, says GSV Ventures' Michael Moe
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