The month gone by – A snapshot

Global markets witnessed high volatility last month, as geopolitical tensions in West Asia, elevated energy prices and tightening of global financial conditions weighed on investor sentiment. Increase in inflation concerns led the US Fed, European Central Bank and Bank of Japan to raise policy rates. Most economists expect major central banks to implement further rate hikes in the coming months. This has contributed to sharp uptick in global bond yields.
MSCI World Index and MSCI Emerging Market Index declined by 1% largely on account of rising global yields and geopolitical uncertainty. Concerns around global energy supplies led Brent crude prices to rise by 14% in September.
Economy: Strong momentum faces increasing headwinds
Recent data points such as GST collections, industrial production and bank credit growth indicate strong momentum. All three major global rating agencies, Moody’s, S&P and Fitch, as well as Asian Development Bank and OECD (Organisation for Economic Co-operation and Development) have raised their growth outlook for India. These agencies expect resilient domestic demand, and government measures to cushion the impact of higher energy prices.
However, economic growth in the second half is likely to face increasing headwinds from tightening of financial conditions, continuing disruption to supply chains, and elevated energy costs. Deficient monsoon rainfall is expected to have a detrimental impact on rural consumption, while also leading to elevated food prices. Despite these headwinds, India is expected to remain amongst the fastest growing economies globally.
Equity Market: Domestic fundamentals remain supportive
Indian equity markets witnessed high volatility during September as higher global bond yields, renewed geopolitical tensions and foreign portfolio outflows weighed on investor sentiment. Foreign Institutional Investors (FIIs) sold Indian equities worth US$3.2 billion while Domestic Institutional Investors purchased equities worth US$2.9 billion during the month.
The medium-term outlook for Indian equities remains positive supported by resilient economic growth, strengthening investment activity and healthy credit growth. Corporate fundamentals are likely to benefit from continued strength in domestic consumption as well as the investment cycle. However, higher energy prices and emerging inflationary pressures could weigh on corporate profitability in the near term, while elevated global yields may keep foreign flows volatile.
Recent moderation in market sentiment, along with sustained growth in corporate profitability, should gradually improve the valuation-growth trade-off. We continue to maintain a positive stance on Indian equities from a medium to long-term perspective, while recognising that global uncertainty and higher energy prices may result in elevated volatility in the near term.
Fixed Income market: MPC may initiate rate hike amidst rising inflation
Retail inflation has been trending up in recent months, with August CPI rising to a 20-month high of 4.8%. While higher food and fuel prices have contributed to the uptrend, more generalised price pressures are starting to become evident. Many economists project the possibility of further increase in inflation in the coming months. Given this outlook, the RBI’s monetary policy committee is expected to initiate rate hike in the upcoming meeting.
Increase in price pressures and elevated fiscal deficits has led to sharp increase in global yields in recent months. Over the past few weeks RBI has initiated various measures, including open market sale of debt securities, to mop up excess liquidity from the banking system. Markets have now priced in multiple policy rate hikes by the central bank. These factors have contributed to an upward trend in domestic bond yields. Amidst heightened volatility in global debt markets, FIIs withdrew US$ 1.6 billion from domestic debt markets last month.
Outcome of the forthcoming monetary policy meeting, global energy prices and movement in global bond yields, remain key monitorables for domestic debt markets. Given these uncertainties, domestic yields are likely to exhibit heightened volatility in the near term.