The month gone by – A snapshot
Global equity markets rallied in June, as re-opening of developed market economies led to an increase in economic activity amidst improvement in business and consumer sentients. The economic growth projections for US and EU have been revised upwards. The US polity is negotiating implementation of another fiscal stimulus package directed towards infrastructure spending.
Crude oil prices increased to US$ 75/barrel due to increase in demand from reopening of global economies. The continuing increase in energy prices is emerging as a concern for markets.
Most major central banks have reiterated their commitment towards continuing policy support. Some policymakers, however, have begun to sound caution on inflation.
Economy recovering from Covid-19 second wave
The Government has extended relief measures to adversely affected sectors of the economy, particularly healthcare, hospitality and tourism. The quantum of credit guarantee through the banking system has been increased to Rs 4.5 lakh crores. The scheme of free food grains to vulnerable families has been extended till November 2021.
There has been a rebound in economic activities as indicated by several high frequency indicators. The government has significantly expanded the vaccination drive over the past few weeks. However, the possibility of a third wave remains a key risk for markets.
RBI reiterates monetary policy support
In its June monetary policy meeting, RBI reduced the FY22 GDP growth estimate to 9.5%. It reiterated its focus towards prioritizing economic growth. The central bank expects inflation pressure to be transient owing to supply chain disruptions. It maintained CPI inflation estimate at 5.1% for FY22. FIIs withdrew US$ 583mn from the Indian debt market in June 2021.
Outlook: The fixed income market sentiment has been adversely affected due to higher inflation in May and increase in energy prices. RBI continues to take measures to maintain stability in bond yields. Despite bearish sentiments, supportive measures by the central bank are expected to curb undue volatility in the near term.
Equity markets consolidate in June
Post the sharp rally in May, equity markets took a breather in June with 1% gain in Nifty Index. The undertone was positive led by strong corporate results and positive reopening trends. Information Technology and Fast-Moving Consumer Goods sectors outperformed while Banking and Oil & Gas sectors underperformed. FII inflows into equity markets in June was at US$ 1.6bn.
Outlook: India’s macro-economic activities have been showing improvement across indicators. The global data points also remain supportive. The pace of vaccination has significantly improved; this is expected to support faster normalisation. The government continues to announce relief measures for troubled sectors, thereby aiding the ensuing economic recovery.
The corporate performance for Q1 FY22 was impressive leading to earnings upgrades. Though valuations are slightly above historical average, benign liquidity conditions and improving domestic flows are expected to support equity markets. We continue to maintain a positive stance on equities.