2025-09-05 07:04

Key takeaways The GST rate cuts and rationalisation across a host of goods and services has been approved by the GST Council and will be effective from 22 September. Key to funding the tax cuts without a large fiscal implication is the folding of the compensation cess into the GST. Growth could be higher and inflation lower, improving India’s macro mix. The Goods and Services Tax(GST) overhaul announced by Prime Minister Modi on 15 August was approved by the GST Council on 3 September. The following are worth noting: Fewer and lower rates. The new rate structure will comprise two key rates – 5% (merit rate) and 18% (standard rate) – alongside a 40% ‘de-merit’ rate. This was arrived at by slashing tax rates from 12% to 5% and from 28% to 18% for the majority of items (though rates were raised for a few items like coal). The new rates will apply from 22 September (except for tobacco products, which will be moved from the compensation cess rate to the 40% GST rate later in the year). Products impacted. On the consumption side, several essential items saw a rate cut (e.g.,toothpaste, shampoo, small cars, air conditioners, and medicines, see Exhibit 1). On the production side, inputs in several sectors will face a lower tax burden (e.g. tractors in the agriculture sector, leather and marbles in labour-intensive goods, cement in construction sector, RE devices in the power sector, medical devices in the healthcare sectors). Some exemptions were added –individual life and health insurance policies will be exempt from the GST. Structural improvements. The rationalisation was not limited to lower and fewer tax rates. Some of the inverted duty problems were corrected for the textiles and fertiliser sectors. Plans were laid out for easier GST registration, pre-filled returns, and quicker refunds. If these improvements are indeed made, it will improve the ease-of-doing-business environment. From compensation cess to a 40% bracket. The compensation cess fund, which served several purposes since the inception of the GST regime, will be closed around September (or when the GST bonds are fully repaid). The items in the compensation cess bucket will be moved to the 40% GST bracket, making it regular GST revenue to be shared by the centre and state governments. This has been a key step for ensuring that the fiscal cost of tax cuts is not too high. Fiscal implication. Details showed that the gross revenue loss from the tax cuts is about INR930bn (USD10.8bn) in a consumption base of FY24. Revenues folded from the compensation cess to the 40% tax bracket can fund INR450bn (USD5.2bn) of the loss, leaving a net loss of INR480bn (USD5.6bn), which is 0.16% of GDP. Scaling this to the FY26 base implies a net revenue loss of INR570bn (0.16% of GDP) over a year. Since only halfofthe fiscal year is left, the implication for FY26 would be around 0.1% of GDP. Growth boost. Crudely put, the government’s loss is the consumer’s gain. Over a year, led by stronger consumption, GDP growth can increaseby 0.2ppt. (However, for this to transpire, the government should not run a tighter fiscal policy to offset the consumption boost.) It is also important to put the GST cuts in a broader context. If we add on the benefits from the income tax cut earlier this year (0.3% of GDP), and a lower debt servicing burden due to repo rate cuts (0.17% of GDP), the overall boost to consumption can be 0.6% of GDP. Of course, a part of this could be saved instead of spent, lowering the net boost. Inflation impact. We estimate that the tax rate cuts can lower headline CPI inflation by c1ppt if producers pass on all benefits to consumers. If the pass-through is only partial, the inflation fall could be closer to 0.5ppt. We expect the RBI to cut rates once again by 25bp in 4Q25, taking the repo rate to 5.25%. https://www.hsbc.com.my/wealth/insights/market-outlook/india-economics/gst-rationalisation-goes-live/

2025-09-04 12:02

Growing optimism as markets gear up for Fed rate cuts Trade tariffs were undoubtedly the key factor shaping market dynamics in Q3, intertwined with inflation and growing US debt concerns. Yet, they didn’t stop US equity indices from reaching new highs, or Q2 earnings growth from exceeding consensus expectations. Rapid technological innovation deserves much of the credit, and we believe this trend will continue. While most of the positive drivers for Q3 should remain in force, we may start to see the real impact of tariffs on growth and inflation in the coming quarter. However, we aren’t too worried because we should see the return of US rate cuts, as the Fed shifts its focus from inflation to tackling a mild growth slowdown. Moreover, the US One Big Beautiful Bill Act has ushered in a new phase of tax cuts, and we expect further deregulation to follow. What does this mean for investors? Most economic indicators suggest that the increase in US inflation will only be mild and gradual, so the wait for rate cuts will soon be over. Lower rates will help boost economic activity and corporate investments, lifting market sentiment and creating further upside for risk assets. Not only will equities benefit, but the bond markets are also primed to perform well, as more investors may move to lock in current yields before rates are cut further. So, we maintain a risk-on approach, with the US, China and Singapore remaining our top picks for equities. Moreover, we’ve recently moved US investment grade bonds back to an overweight position too. AI innovation remains firmly in place The pace and scope of AI adoption are going from strength to strength, helping companies improve productivity and explore new sources of revenue. This should justify technology’s elevated valuations, help offset the impact of tariffs to some extent and offer enormous opportunities across sectors that benefit from the AI ecosystem more broadly – software, cloud services and networks, as well as industrials and infrastructure. Given that the broader tech theme accounts for 48% of the US equity market, US stocks should fare well if this momentum continues. Deregulation can also foster a more conducive environment for growth to accelerate, particularly in the IT and financials sectors. Outside the US, Fed rate cuts and recent dollar weakness are key positives for Asia, and the power of AI innovation remains a key driver for earnings too – especially in China, where leading tech stocks are still trading at 30%-40% discounts to their global peers. China’s renewed focus on supply-side reforms should also help lift earnings expectations. Europe is less preferred, as growth momentum remains lacklustre and its AI adoption is still lagging behind. Overall, we think the US rate cuts and AI innovation will be the key drivers that will help compensate for challenges in some parts of the economy. That’s why we remain positive on the market outlook while keeping an eye on tariff, inflation and growth risks across the board. Diversification in action Our four investment themes for the final quarter of 2025 continue to emphasise diversification across asset classes, sectors and regions, to build resilience in an uncertain world. And this resilience is further enhanced by adding less-correlated assets, such as gold, infrastructure and other alternatives, to our multi-asset strategies. In line with the theme of diversification, we’ve included a special feature on infrastructure and its role in the transition to a net zero future. Another piece looks at unconventional approaches to retirement among affluent investors, with mini retirement growing in popularity. As we head into the final stretch of a volatile year, investors will need to remain on guard against any surprises that could trigger further swings in markets. As always, our investment team is ready to discuss any changes you would like to make to your portfolio. https://www.hsbc.com.my/wealth/insights/market-outlook/investment-outlook/growing-optimism-as-markets-gear-up-for-fed-rate-cuts/

2025-09-02 07:04

Key takeaways Weaker-than-expected US payroll numbers, an elevated real policy rate and Fed Chair Powell’s comments at Jackson Hole reinforce market expectations for rate cuts to resume in September. Investors are likely to move cash to bonds to lock in higher yields. The falling correlation between stocks and bonds also means that quality bonds are better diversifiers against equity market volatility. We upgrade Global and US investment grade to overweight. In the US, the headwinds of growth moderation, tariff-driven goods inflation and elevated valuations should be offset by Fed rate cuts and AI-led innovation, with tax cuts and deregulation providing further support for equities. We remain overweight on global equities, with a preference for the US and Asia, and maintain diversification through multi-asset strategies. In addition to the high US tariffs of 50%, India is also facing short-term cyclical headwinds, leading to slowing earnings momentum and continued foreign investment outflows. We therefore downgrade Indian equities to neutral and prefer China and Singapore in Asia. Government support for AI adoption and domestic consumption, along with a renewed focus on addressing the overcapacity issue, is boosting market optimism for Chinese equities. Defensive qualities and an attractive dividend yield bode well for Singapore’s equity market. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-monthly/moving-cash-to-bonds-ahead-of-fed-rate-cuts/

2025-09-01 12:02

Key takeaways Most EM currencies have lost upward momentum lately, as markets are looking for clues on the Fed’s rate path… …but the Fed has finally signalled an exit to its rate hold. EM currencies are likely to appreciate in this upcoming Fed’s rate cutting cycle, in our view. Many emerging market (EM) currencies have lost appreciation momentum so far in the third quarter, with most Asian currencies surrendering some earlier gains (Chart 1). This is partly because the US Dollar Index (DXY) has stabilised, rather than falling further, as markets look for clues on the Federal Reserve’s (Fed) policy path. Going forward, the Fed’s policy is likely to be a key driver for the FX market. At the Fed’s annual economic symposium in Jackson Hole in August, Chair Jerome Powell signalled a rate cut soon. Fed funds futures are now pricing in rate cuts of c55bp by the end of the year, with a c88% chance of a 25bp cut at its 16-17 September meeting (Bloomberg, 28 August 2025). Relatedly, the potential for a more dovish tilt in the composition of the Federal Open Market Committee (FOMC) is also catching market attention. Stephen Miran (who authored the ‘Mar-a-Lago Accord’ which laid out a framework to weaken the USD) has been nominated to temporarily fill in for Adriana Kugler (who stepped down from her position as a governor on 8 August but whose term was due to end in January 2026) and he may be confirmed by the Senate just in time to vote at the FOMC’s September meeting. Meanwhile, US President Trump announced on 25 August (US time) that he is removing Fed Governor Lisa Cook. Cook challenged this order in court and in the meantime, the Fed has deferred a decision on her status (Bloomberg, 28 August 2025). If there are growing market concerns about the Fed’s independence, the USD could take a hit. Our base case is for the USD to weaken modestly over the coming months. Source: Bloomberg, HSBC Source: Bloomberg, HSBC In our view, EM currencies could be stable or even outperform in the upcoming Fed’s rate-cutting cycle. First, the US economy is slowing but not in a recession, with Bloomberg’s US recession probability forecast currently standing at c35% (Chart 2), and so there will probably be limited negative spillover impact to EM growth, with rather contained “safe haven” demand for the USD. Second, many EM central banks have been cutting rates and some EM governments have been rolling out more supportive fiscal measures and embarking on market reforms in response to the US’s imposition of tariffs. These measures could support EM growth and currencies. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/em-currencies-when-the-fed-resumes-cutting-rates/

2025-08-25 12:02

Key takeaways There is limited scope for the quarter-to-date underperformance of the JPY and the NZD to extend… …which the JPY would be supported by converging USJapan rates, amongst other domestic developments… …while positive factors for the NZD may be delayed. So far this quarter, the NZD is the worst-performing G10 currency, with the JPY coming in second to last (Chart 1). The question arises as to whether or not this trend will continue. In our view, there is scope for the JPY to strengthen against the USD in the months ahead. Cyclical drivers, in particular yield differentials, have started to become more dominant in the FX market. Coming on the heels of a likely resumption of the Federal Reserve (Fed) easing at its 16-17 September meeting, yield differentials between the US and Japan would probably narrow, which points to USD-JPY downside (Chart 2), especially if the Bank of Japan (BoJ) turns more hawkish. Our economists expect the BoJ to deliver its rate hike at its 29-30 October, while markets only priced in c50% for this to happen (Bloomberg, 21 August 2025). In addition, less Japanese political uncertainty and less angst about the future fiscal path should help the JPY. Source: Bloomberg, HSBC Source: Bloomberg, HSBC As for the NZD, we turn cautious over the near term. The Reserve Bank of New Zealand (RBNZ) cut its policy rate by 25bp to 3.00% at its 20 August meeting, with a 50bp cut discussed. The RBNZ's policy rate projection was also revised lower to trough at 2.55% in 1Q26 (previously 2.85%), weighing on the NZD. External factors, like lacklustre emerging Asian currency performance, have also turned less favourable, pausing the rise in NZD-USD. However, our cautious near-term stance on NZD-USD does not change our optimistic medium-term stance, where we think monetary and fiscal easing globally should provide a cushion for downside growth risks. The NZD is likely to be supported by a stronger terms of trade outlook, more direct exposure to potential fiscal measures from China, and more consistent bond inflows – these considerations are sitting in the back seat at the moment. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/jpy-and-nzd-underperformance-to-continue/

2025-08-25 12:02

Key takeaways Table of tactical views where a currency pair is referenced (e.g. USD/JPY):An up (⬆) / down (⬇) / sideways (➡) arrow indicates that the first currency quotedin the pair is expected by HSBC Global Research to appreciate/depreciate/track sideways against the second currency quoted over the coming weeks. For example, an up arrow against EUR/USD means that the EUR is expected to appreciate against the USD over the coming weeks. The arrows under the “current” represent our current views, while those under “previous” represent our views in the last month’s report. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-trends/g10-currencies-central-banks-in-focus/