The month gone by – A snapshot
Global markets corrected in August as initial signs of slowdown in economic growth combined with monetary policy tightening led to souring of market sentiments. There are signs of slowdown in interest rate sensitive sectors in the US, although the employment market remains robust. The outlook for European economies remains weak amidst high energy prices.
Inflation in most developed economies continues to be at elevated levels. Both US Fed as well as the European Central Bank have indicated that they will aggressively tighten monetary policy. Crude oil prices declined by 12% to US$ 96 / barrel, as concerns over possible decline in global demand came to the forefront.
China’s economy has seen a sharp slowdown due to frequent disruptions arising from Covid-19 related lockdowns. China’s central bank has been following a loose monetary policy to help revive economic growth.
Amidst deterioration in sentiments, global equity markets declined by 4% in August. However, Indian equity markets outperformed global peers with a 4% increase as flows from foreign institutional investors continued in August.
Indian economy continues steady recovery
India’s April-June 2022 GDP growth came in below expectations primarily due to weak government spending. The GDP data indicates strong growth in private consumption as well as in the agriculture sector. This combined with good progress of monsoon augurs well for the rural economy. The recent high frequency data points such as GST collections, bank credit growth, road toll collections and Purchasing Managers’ Index (PMI) survey indicate steady economic recovery.
Inflation focused RBI raises policy rates
RBI raised policy rates by 50 bps last month to 5.40%, as it continued to emphasize the need to bring down inflation. Retail inflation declined in July, although it remained above RBI’s threshold level. Given moderation in commodity prices, the RBI Governor has expressed confidence that inflation may have peaked and is likely to gradually decline towards its target range.
Outlook: Developed market bond yields increased during the month. However, domestic bond yields eased, as the market took comfort from the declining inflation trend. Media reports related to possible inclusion of Indian debt in one of the prominent global bond indices added to the positive market sentiment. However, given global uncertainties, we expect yields to remain volatile in the near-term.
Equity market momentum continues
Nifty gained 4% in August as momentum in equity markets continued on the back of strong inflows from Foreign Institutional Investors (FIIs). Power, Capital Goods and Oil & Gas sectors outperformed while Information Technology and Pharmaceutical sectors underperformed. FIIs bought equities worth US$ 6.8bn during the month; this was the second month of inflows after a hiatus of 10 months.
Outlook: Heightened volatility is being witnessed in global economic environment amidst fluctuating commodity prices, hawkish stance of the US Federal Reserve and continuing geo-political crisis. These factors are likely to induce a slowdown in global economic trade and services. However, on a relative basis, India stands out as a bright spot owing to a sustained recovery across consumption, industrial and financial sectors. Most high-frequency indicators suggest robust underlying growth in the economy. FII flows and movement in commodity prices remain key monitorables in the near term. Our view on Indian equity markets remains positive despite slightly expensive valuations.