# 1 Markets
Indian equity markets remain volatile amid global uncertainties including US-India trade talks, US fiscal risks, and currency fluctuations. Short covering and optimism around growth, earnings, and monsoon prospects are driving intermittent rallies. Markets rebounded sharply on May 22, led by tech and consumer stocks, though both the indices still closed the week down 0.65%. Morgan Stanley sees the correction as a buying opportunity, with a base-case Sensex target of 89,000 and bull-case of 1,00,000 by June 2026.
The central bank is expected to continue cutting rates as the latest inflation data showed that price growth fell below the RBI’s 4% target for the 3rd month to a six-year low. The yield on the 10-year Indian G-Sec fell to below 6.25% in May, the lowest in over three years, as India’s ceasefire with Pakistan allowed lower interest rates and the prudential fiscal outlook to retake markets’ forefront. FPI inflows continue to surge despite gap between Indian (6.28%) and US bond yields (4.555) lowest in 22 years, probably due to US rating down grade and low inflation in India. 10y yield closed at 6.22% on Friday.
A weak $16B U.S. Treasury auction triggered a surge in yields, equity sell-off (S&P 500 ↓1.5%), and dollar weakness, signalling investor anxiety over America’s rising structural deficits. The latest budget bill may push federal debt to 125% of GDP by 2034, with no credible path to fiscal consolidation—underscoring bipartisan unwillingness to curb spending or raise taxes. While bond yields continue to surge, all the three broad indices recorded red last week reflecting inflationary concerns.
# 2 RBI
2.1 Central Govt. last week has notified formation of Payments Regulatory Board. The notification marks a significant reconfiguration of regulatory power in the payment’s ecosystem. Previously managed by the Board for Payment and Settlement Systems (BPSS) — a body constituted entirely within the RBI framework — the new PRB introduces government-nominated members for the first time. The PRB will now have seven members: three appointed by the Union Government, three by the RBI, and the RBI Governor as Chairperson. This structure dilutes the RBI’s exclusive domain, introducing cross-institutional oversight.
Implications
- The RBI has consistently opposed external involvement in payments regulation (as reflected in its 2018 dissent note to the recommendations of an inter-ministerial committee) on the premise that digital payments are inextricably linked with monetary policy, financial stability, and systemic risk management — all core functions of the RBI.
- With direct government representation, the board risks politicisation of payments governance, especially on contentious issues like MDR on UPI, merchant discount rates, or payment infrastructure subsidies.
- Digital payments are now critical national infrastructure, warranting broader institutional inputs beyond a traditional banking regulator and requires expertise beyond monetary policy.
- With both RBI and the Government nominating members, turf conflicts could arise, especially on issues where political and economic considerations diverge (e.g., consumer pricing of digital payment services).
The formation of the Payments Regulatory Board (PRB) represents a pivotal governance transition in India’s digital financial infrastructure. Much will depend on how the board is operationalised — in structure, process, and intent. This is a strategic moment for India’s fintech and digital economy ecosystem, demanding careful institutional design and balance of power.
2.2 RBI has issued draft guidelines on Friday proposing new rules to simplify the process of claiming unclaimed bank deposits, now over ₹78,000 crore. Key changes include:
- Self-declaration from the customer in case of no change in KYC information or change only in the address details may be obtained through an authorised BC of a bank.
- Prior to due date of periodic up dation of KYC, bank shall give at least three advance intimations, including at least one intimation by letter. Issuance of such advance intimation shall be duly recorded in the bank’s system. KYC updates via video (V-CIP) and business correspondents (BCs), especially for rural users.
- KYC can be done at any branch, not just the home branch.
This is a laudable initiative to bring down huge amount lying in unclaimed bank deposits and will help customers or nominees reactive accounts inactive for over 10 years. These accounts are currently transferred to RBI’s Depositor Education and Awareness Fund (DEAF).
2.3 Key Highlights from CIBIL -MSME Commercial Credit Trends released by SIDBI last week
- Credit Supply and Demand Trends:
- Commercial credit supply declined 11% YoY in Q4FY25 due to asset quality concerns from external headwinds, capping full-year growth at 3% YoY.
- MSME credit portfolio expanded 13% YoY to ₹35.2 lakh crore as of March 2025.
- Asset Quality:
- Balance-level delinquencies (90+ DPD) fell to a 5-year low of 1.8%, down 35 bps YoY.
- Micro segment (₹<10L exposure): delinquencies rose to 5.8% (vs 5.1% YoY).
- Small segment (₹10L–₹50L): marginal rise to 2.9%.
- Origination & Lending Profile:
- New-to-Credit (NTC) MSME share in originations stood at 47%, down from 51% YoY.
- Public sector banks accounted for 60% of NTC loans; trade sector led NTC borrower share (53%), while manufacturing led NTC growth (70% YoY).
- Sectoral and Regional Insights:
- Manufacturing sector accounted for 34% of loan value, though its share is steadily declining in favour of professionals & services (now 36% of originations).
The ecosystem is witnessing early-stage formalisation, but micro and small borrowers remain vulnerable and disproportionately impacted by macro shocks. SIDBI highlighted the persistent credit gap in the MSME sector, calling for structural support via skill development, innovation, and formal credit access. TransUnion CIBIL stressed the need for debt management assistance and resilience-building mechanisms for MSMEs.
# 3 SEBI
3.1 The International Financial Services Centres Authority (IFSCA) has introduced a comprehensive framework to facilitate co-investment through Special Schemes by Venture Capital Schemes and Restricted Schemes (Large value funds) operating in IFSCs through its circular dated May 21, 2025
Key Highlights:
- A Special Scheme can be set up by a Fund Management Entity [FME] having an operational Venture Capital or Restricted Scheme.
- It must co-invest in a single portfolio company (exceptions allowed for corporate actions like mergers).
- Must be registered as a Company, LLP, or Trust under Indian law.
- Must mirror the structure and tenure of the existing fund and be co-terminus with it.
- The parent scheme must hold at least 25% of the equity/capital/interest in the Special Scheme.
- The Special Scheme can undertake leverage within the limits disclosed in the placement memorandum of the existing scheme.
- Encumbrance can be created on ownership interests for borrowing purposes.
- Term Sheet (with disclosures) to be filed within 45 days of investment.
- No fresh KYC for existing investors; KYC mandatory for new entrants.
- Activities may be reported jointly with the main scheme.
The framework introduced by IFSCA is a benchmark for regulatory responsiveness—offering the flexibility the industry has long sought. It allows participation from investors beyond traditional LPs, permits leverage, and requires only a term sheet filing with no prior approval. We hope SEBI adopts a similar facilitative approach to enable co-investments effectively.
3.2 SEBI has mandated last week that all regulated entities ensure their digital KYC processes are accessible to persons with disabilities, following an April 30 Supreme Court directive promoting inclusive financial access. Revised FAQs issued by SEBI outline implementation methods:
- Video KYC must accommodate disabilities, using alternative methods such as head movements or on-screen OTPs where typical cues like blinking aren’t feasible.
- Guardians may sign on behalf of disabled individuals, subject to standard KYC compliance.
- Thumb impressions and CKYC data (with consent) are acceptable alternatives for authentication.
This directive aims to foster inclusive access to financial services and aligns with SEBI’s broader digital empowerment objectives.
# 3 Economy
3.1 Fitch Ratings Revises Growth Potential: India Up, China Down
- India’s medium-term potential GDP has been revised upward to 6.4% (from 6.2%) driven by a stronger-than-expected increase in labour force participation, though total factor productivity (TFP) growth is expected to slow to its long-run average of 1.5%.
- The upgrade reflects greater contribution from employment than productivity, with capital deepening assumptions revised downward.
- In contrast, China’s potential growth is revised downward to 4.3% (from 4.6%) due to weaker capital formation, a shrinking labour force, and lower projected TFP growth amid property market stress.
The report signals a shifting dynamic among emerging markets, where India’s relative structural growth prospects are improving while China’s are gradually tapering.
3.2 Moody’s last Wednesday published:
- India’s large internal market, low export dependence, and government-led infrastructure and consumption support shield it from global trade volatility.
- India’s robust services sector, domestic-focused infrastructure, and reduced tariffs from the US (cut from 27% to 10%) soften the blow of trade tensions.
- Continued high demand in power, transport, and digital infra is expected to drive capital investment over 5–7 years.
- Sound financial sector and liquidity position backstop economic momentum amid global uncertainty.
- Recent geopolitical flare-ups pose greater downside risk to Pakistan than India.
Moody’s report reiterates India’s strong domestic resilience to overcome possible downside effects of Trump tariffs.
3.3 Morgan Stanley in its report released last week has marginally revised its GDP growth projections for India, now expecting 6.2% in FY26 (up from 6.1%) and 6.5% in FY27 (up from 6.3%). The upward revision reflects improved external demand prospects due to easing US-China trade tensions.
Key Drivers Highlighted:
- Domestic demand remains the primary growth engine, especially amid global uncertainties.
- Consumption is forecasted to broaden, with urban demand strengthening and rural consumption already robust.
- Investments will be led by public and household capex, with private corporate capex recovering gradually.
- RBI is expected to pursue a deeper easing cycle due to moderated inflation and a soft growth outlook.
- The government is likely to maintain its fiscal consolidation path, while pushing infrastructure-led spending.
Despite the above drivers the forecast of 6.2% is lower than RBI’s own growth forecast at 6.5%.
3.4 As per S&P Global publication last week,
- The HSBC Flash India Composite Output Index, which captures activity across both manufacturing and services, is estimated to have risen to 61.2 in May from 59.7 in April, indicating robust expansion.
- The HSBC Flash India Manufacturing PMI edged up to 58.3 in May from 58.2 in April, signalling continued strength, albeit at a stable pace.
- The Services PMI Business Activity Index surged to 61.2 from 58.7
A reading above 50 denotes growth, and the index has now remained in expansion territory for over three years. At the composite level, the latest upturn was the quickest in just over a year. While manufacturing showed a slight slowdown in growth, the services sector posted its fastest output rise in 14 months.
3.5 Key highlights from State of Economy published in RBI Bulletin last week
- Global growth is facing headwinds from trade frictions, policy uncertainty, and weak consumer sentiment, but the Indian economy has shown resilience.
- High-frequency indicators for industrial and services sectors in India maintained momentum in April, with a positive outlook for agriculture due to a strong rabi harvest and favourable monsoon forecasts.
- The labour market in January-December 2024 remained resilient, while exhibiting signs of moderation as compared to the previous year.
- India’s merchandise exports grew by 9.0 per cent (y-o-y) to US$ 38.5 billion in April 2025, as favourable base effect more than offset the negative momentum.
- The Index of Industrial Production (IIP) growth rate moderated to 3.0 per cent (y-o-y) in March 2025 from 5.5 per cent in March 2024.
- Headline inflation moderated to 3.2 per cent in April 2025, the lowest since July 2019.
- In the fixed income segment, bond yields traded with a soft bias, with the 10-year G-sec benchmark declining to 6.29 per cent on May 19, 2025.
- Based on early results, sales growth for non-government non-financial companies moderated to 6.4 per cent during Q4:2024-25.
- Debt serviceability, as measured by the interest coverage ratio (ICR), for manufacturing companies improved to 9.0 during Q4.
- External commercial borrowing (ECB) registrations by Indian companies reached a record high of US$ 61.2 billion during 2024-25, a 24.3 per cent increase over the previous year.
- As of May 9, 2025, India’s foreign exchange reserves stood at US$ 690.6 billion, providing a cover for more than 11 months of goods imports and 96 per cent of external debt outstanding at end-December 2024.
- Gross FDI Remains Robust – FY25: $81 bn vs FY24: $71.3 bn; Net FDI Crashes 96% YoY – $353 million in FY25, from $10.1 billion in FY24, marking the lowest level in over a decade.
The global economic outlook remains clouded, but the outlook for India is one of cautious optimism. The Indian economy continues to be ring-fenced by stability encompassing monetary, financial and political stability; policy consistency and certainty; congenial business environment; and strong macroeconomic fundamentals. The headline collapse in net FDI belies a healthy gross inflow trend, offset by a sharp spike in repatriation and outbound Indian investments — both indicators of a maturing capital market but with potential long-term balance-of-payment implications if not offset by durable capital inflows
3.6 As per data released by GoI last week,
- Core sector growth slowed sharply to 0.5% YoY in April, the weakest in 8 months, down from 6.9% in April 2024 and 4.6% (revised) in March 2025.
- Only coal (+3.5%) and natural gas (+0.4%) reported sequential production gains; refinery (-4.5%), fertilizers (-4.2%), and crude oil (-2.8%) saw notable contractions.
- Steel (+3%), cement (+6.7%), and electricity (+1%) posted positive growth, albeit slower than March due to high base effect.
Analysts attribute weak core growth to base distortions and sectoral divergence, with construction-led demand partly supporting cement and steel output.