The month gone by – A snapshot

Global markets traded rangebound, as uncertainty relating to geopolitical outlook in West Asia, and sustainability of the Artificial Intelligence led investment boom, added to investor unease. Amidst significant uncertainty, major global central banks, including the US Fed, European Central Bank, Bank of England and Bank of Japan held policy rates unchanged. Increase in inflationary pressure has raised expectation of a potential rate hike by US Fed. This has led to increase in US Treasury yields.

US GDP growth during the June quarter was slower than expected, despite tailwinds from Artificial Intelligence related investments. Economic growth in China slowed to an over three-year low due to weak household consumption and continuing weakness in the real estate sector.

The MSCI World Index rose by 0.5% last month, while MSCI Emerging Market Index declined by 3% largely due to correction in Artificial Intelligence related stocks. MSCI India outperformed global markets with 1.5% returns. The increase in geopolitical tensions in West Asia led to a 24% increase in crude oil prices.

Economy: Growth continues despite global uncertainty

Increasing global uncertainty has led IMF to lower current year global growth outlook from 3.5% to 3.0%. Despite risk from higher energy prices and El Nino related weather risks, IMF expects India to remain the fastest growing major economy with GDP growth of 6.4%. High frequency indicators such as GST collections, industrial production, credit growth, auto sales, and corporate earnings are indicative of a cyclical pickup in the economy.

Manufacturing PMI, however, fell to a five-year low as renewed conflict in West Asia led to fresh supply chain uncertainties. After a slow start, monsoon rainfall has picked up. Overall rainfall, however, remains in deficit and has contributed to decline in kharif sowing compared to last year.

RBI’s measures to attract overseas capital flows has resulted in significant inflows and has helped to stabilise the currency amidst high macroeconomic volatility globally.

Equity Market: Positive momentum continues

Indian markets continued to witness positive momentum in July with Nifty index gaining 2% while Mid and Small cap indices rose by 2% and 2.5% respectively. Receding geo-political concerns and improving domestic growth outlook drove this performance. The Information Technology and Automobile sectors outperformed while Power and Oil & Gas sectors underperformed. Foreign Institutional Investors (FIIs) bought equities worth US$2.3 bn during the month, while Domestic Institutional Investors (DIIs) bought equities worth US$3.7 billion.

The outlook for Indian equities continues to improve driven by strengthening demand conditions across consumption and industrial categories, better-than-expected corporate results, and strong financial sector asset quality as well as credit growth trends. Valuations remain attractive basis the growth estimates for corporate profitability. We continue to maintain positive stance on Indian equities.

Fixed Income market: RBI likely to prefer patience amidst increasing uncertainty

Higher food and fuel prices contributed to retail inflation for June rising to an 18-month high at 4.4%. Lower kharif sowing due to weak and uneven monsoon rainfall is emerging as a key risk for food inflation. However, as underlying inflation, excluding food and fuel component, continues to remain low, analysts expect RBI to adopt a ‘wait and watch’ approach, and hold policy rates unchanged in this week’s monetary policy meeting.

FPI inflows into Indian debt markets eased to US$ 3.1bn last month from US$ 5.3bn in June. Bloomberg has deferred the inclusion of Indian Government Securities in its flagship debt index.

Demand from domestic investors helped contain increase in domestic bond yields despite significant increase in global bond yields. RBI’s commentary in the upcoming monetary policy meeting, progress of monsoon rains, and global energy prices are key monitorables for debt markets in the near term.