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News Topical, Digital Desk : The strength displayed by the US economy in the third quarter of 2025 has transformed capital flows in global financial markets. US GDP grew at an annual rate of 4.3%, the fastest in two years. Consumer spending remained strong, government spending provided support, and exports surprised the world. The biggest impact of strong economic growth has been that it has reduced pressure on the US Federal Reserve to cut interest rates quickly. Inflation is not fully under control, and the labor market has not cooled down. Consequently, the Fed has room to wait. This is why two-year US Treasury yields remain above 3.5%, a clear indication that dollar returns remain attractive. However, President Donald Trump has consistently indicated that he wants a Fed Chair who will cut rates when markets are good, and there have been talks of replacing current Chair Jerome Powell. Despite this, the bond market appears unconvinced by these statements. In an environment of strong growth, hopes for a sharp rate cut have diminished. The situation for India is further complicated by the rupee also being under pressure. The rupee had fallen to a record low of 91.07 against the dollar. While there has been a slight recovery, the currency remains volatile. A weak rupee could provide some relief to exporters and policymakers. Especially at a time when the India-US trade deal is still in limbo, currency weakness directly hurts returns for foreign investors. Hedging costs have risen, and forward premiums are at multi-year highs. This indicates that the market is bracing for further volatility, even as the Reserve Bank of India attempts to manage the situation in the background. This provides another reason for global funds to exercise caution in India. There is some relief on the trade front. India's recent trade data has been better. Exports have shifted to new markets, and the trade deficit has declined faster than expected. However, foreign equity investors do not return based on trade data alone, especially when the stock market has performed poorly. In 2025, India was among the world's weakest-performing large markets, and the rupee was also among the currencies that depreciated the most. Some strategists believe that the rupee is now undervalued based on REER, which could make India attractive in the long term. However, the reality is that investors pursue performance. Unless the narrative changes and there are concrete positive signals on the India-US trade front, it is unlikely that FPI flows will return. The AI sector has also not experienced any major setbacks. There were fears of an AI bubble bursting some time ago, but after a slight correction, tech stocks have recovered. This has given global investors another reason to stay invested in the US. India has been seen as an "anti-AI trade" in recent months, which has not worked in its favor for now. Flow data tells a similar story. So far in 2025, foreign portfolio investors have sold approximately ₹1.6 lakh crore from Indian equities, the largest figure for any year.
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