The month gone by – A snapshot

Global markets corrected last month, as emerging concerns about the sustainability of ‘AI’ rally prompted profit booking. The ceasefire in West Asia has largely held, though intermittent clashes have added to market volatility. Higher energy prices due to the conflict had led to increase in inflation in many countries. This led to European Central Bank and Bank of Japan’s decision to raise policy rates last month. The US Fed, in its first meeting under new Chair Kevin Warsh, held policy rates unchanged, though it raised inflation projections.

The pickup in shipments through the Strait of Hormuz, combined with US providing a temporary sanction waiver to crude oil exports from Iran, led to a sharp 21% decline in crude oil prices last month. Lower energy prices have led some analysts to dial back expectations of rate hikes by global central banks.

The MSCI World Index corrected by 1% last month, while MSCI Emerging Market Index declined by 2%. MSCI India outperformed global markets with over 1% return. Measures to attract capital flows have stabilised the Rupee, which appreciated against the US Dollar last month.

Economy: Steady momentum amidst monsoon risks

Indian economy continued to exhibit resilience in June with high frequency indicators such as bank credit, GST collections and vehicle sales indicating strong economic momentum. Composite PMI, however, fell to a three-month low as increase in energy prices and disruption to global supply chains adversely impacted some industries. Deficit monsoon rainfall is emerging as a key headwind, particularly for the rural economy.

RBI’s measures to attract overseas capital flows into the economy, especially the banking sector, has helped pause depreciating pressure on the currency. Most analysts expect significant inflows of foreign capital to accrue over the coming months, which should lead to stability in the external account sector.

Equity Market: Positive momentum building

Indian equity markets demonstrated resilience despite volatility arising from global geopolitical developments and concerns around economic growth. In June, Nifty index gained 1.4%, Small-cap index rose by 4% while Mid-cap index remained flat. Banking, Realty and Healthcare sectors outperformed, whereas Information Technology (IT), Metals and Power sectors underperformed. Foreign Portfolio Investors (FPIs) sold equities worth US$3.1 bn during the month, while Domestic Institutional Investors (DIIs) bought equities worth US$8.3 billion.

Looking ahead, the outlook for Indian equities remains constructive, supported by lower energy prices, policy support, improving earnings visibility and sustained domestic liquidity. Corporate earnings are expected to remain buoyant, supported by steady nominal GDP growth and strength in export-linked sectors.

Fixed Income market: RBI holds policy rates amidst global uncertainty

Higher inflation of food items, coupled with increase in energy prices, contributed to retail inflation for May rising to a 16-month high at 3.9%. Weak monsoon rainfall has led to decline in sowing of crops compared to last year. A resultant possible increase in food prices is emerging as a key risk to inflation outlook. However, government’s ability to intervene through its large stock of cereal crops, as well as recent decline in energy prices should help mitigate the overall impact of poor rainfall.

RBI held policy rates steady last month despite increasing uncertainty. In subsequent interactions, RBI Governor indicated that it is ‘premature’ to speculate on the need to raise policy rates. The Government’s decision to remove taxes on capital gains and interest income for foreign investors in government securities contributed to FPI inflows rising sharply to US$5.3 billion last month.

A dovish RBI commentary, combined with significant inflows from FPIs led to a 25bps decline in 10-year GSec yield to 6.75%. Progress of monsoon rains, sustainability of lower energy prices, and possible decision on inclusion of Indian debt in a major global debt index, are key monitorables for debt markets.