The month gone by – A snapshot

Global economy and markets: Global equity markets corrected due to geopolitical uncertainties, concerns over slower than anticipated monetary easing in the US and emerging markets outflows driven by Chinese fiscal stimulus. The consensus for US Fed remains for a 25bps rate cut at the November meeting. In the latest World Economic Outlook, the IMF raised its 2024 and 2025 economic growth forecasts for the U.S. The global growth is projected to be 3.2% in 2025. Emerging markets saw outflows on the back of announcement of stimulus measures by China, with India facing the largest outflows. The MSCI World Index was down by 2% while the MSCI EM index was down by 4.4% in October2024.

Economy: Some moderation in economic growth

The RBI in its October meeting changed the policy stance to ‘neutral’ but decided to keep rates on hold with a 5:1 majority. The minutes of the MPC indicate that members remain sanguine about growth and concerned over elevated food inflation. Domestic high frequency indicators suggest some signs of moderation in growth. RBI retained its growth forecast for FY25 at 7.2%, however the growth estimate for 2QFY25 was reduced from 7.2% to 7%. Above normal monsoon may lead to better farm incomes and revival in consumption in the economy.

Equity markets: Indian equities correct on somewhat weaker earnings and China stimulus

Indian markets came under pressure as corporate earnings have been muted, relative valuations are expensive and FII outflows remained high. Commentary by technology companies indicate some green shoots in demand, especially from Banking & Financial Services clients in North America. Nifty 50 was down by 6.2% while Nifty Midcap 100 was down by 6.7%. Among Nifty sectoral indices, Automobile sector (-13%) underperformed while PSU banks relatively outperformed (-0.5%).

Outlook: The earnings upgrade cycle for Indian corporates may have peaked out in the near term. Domestic flows remain supportive with Systematic Investment Plan (SIP) flows crossing Rs 25,000 crores for September month. FPIs sold US$ 11.2bn in Indian equities while DIIs bought ~US$ 12.8bn in Oct’24. Despite the near-term volatility, we remain constructive on Indian equities from a medium to long term perspective given the key levers of growth (favourable demographics, increasing income levels and policy continuity) remain intact.

Fixed Income market: RBI unlikely to cut rates soon

FTSE announced inclusion of India in its EM and Asia indices. This is likely to lead to additional flows into Indian Fixed Income markets. CPI inflation inched up to 5.5% in Sep’24 from 3.65% in Aug’24, led by sharp increase in vegetable prices. RBI Governor indicated that cutting interest rates in December MPC meeting would be 'risky and premature' as the country's growth remains steady with inflation moderating. US 10- year yields have risen by 50bps over the month on expectations of less aggressive easing by the Fed, uncertainty related to outcome of US Elections and concerns on rising US Government debt. FPI debt outflows were US$ 0.7 bn for Oct’24.

Outlook: Domestic yields are likely to be range bound on account of rising trend of global yields, counterbalanced with moderate rate cuts expected from RBI and sustained G-Sec demand from both domestic and global investors. The lower fiscal deficit in H1FY25 compared to budgeted estimates coupled with buoyant tax revenues are likely to impact bond markets positively.