The month gone by – A snapshot

Global markets rallied in April as the ceasefire in West Asia, as well as renewed optimism around the AI theme, outweighed investor concerns related to energy supply-chain disruption. Elevated energy prices have started to feed into higher retail inflation in many countries. This has reduced the possibility of easing measures by central banks. While Australia’s central bank has raised policy rates, most other central banks, including the US Fed, have adopted a more cautious approach, and have held policy rates unchanged for now. Continuing geopolitical tension has rendered future monetary policy path quite uncertain.

As a result of West Asia conflict, the World Bank has projected a deterioration in global growth outlook, with more significant impact on developing countries. It has cautioned that disruption to fertilizer supply chains ‘could lower future crop yields, curtail food supplies, and further raise (food) prices.’

The MSCI World Index rose by 9% last month, while MSCI Emerging Market Index rallied by 15%. After a sharp increase in March, crude oil prices declined by 4% in April, but continue to remain significantly higher than the trend seen before the West-Asia conflict.

Economy: Resilient economy faces increasing risk

Despite the headwinds emerging from geopolitical tensions, Indian economy continues to demonstrate resilience. Composite PMI data for April indicates pickup in momentum in both services and manufacturing sectors. However, industrial production growth for March declined to a five-month low, due to sharp decline in fertiliser production. Additionally, IMD has projected a deficit monsoon this year, which can potentially act as a headwind for the rural economy.

India’s Ministry of Finance has acknowledged these risks and has cautioned that the West Asia conflict has altered the macroeconomic outlook, with increased risk of slower growth, higher inflation and wider fiscal and external deficits, especially if energy and fertiliser supply disruptions persist.

Despite these headwinds, Indian economy is expected to remain amongst the fastest growing globally. RBI has projected India’s FY 2027 GDP growth at 6.9%. The central bank has, however, highlighted that ‘escalation of the (West Asia) conflict and weather-related events, pose downside risks to the domestic growth outlook’.

Equity markets continue to see beyond the current volatility

Equity markets performed well in April, with Nifty index up 7.5%, while Midcap/small cap rallied 13.6/18.4%. Amongst sectors, Real Estate, Energy and Metals outperformed while IT and Pharma underperformed. Foreign Institutional Investors (FIIs) sold equities worth US$4.4bn while Domestic Institutional Investors (DIIs) bought equities worth US$5.5bn.

Equity markets continue to look beyond the current events in West Asia. Given historical precedence, a resolution of the crisis would likely lead to structurally lower input prices for the world economy. Indian corporate earnings have been resilient so far, although the energy price impact will likely weigh on earnings in next 1-2 quarters. Valuations look attractive from a medium to long term perspective. We maintain our positive view on equity markets.

Fixed Income market: RBI remains on hold amidst increasing uncertainty

The retail inflation for March at 3.4% remained below RBI’s midpoint target of 4%. However, acknowledging risks from disruption to energy and fertilizer supply chains, and deficit monsoon rainfall, the central bank has projected inflation to rise in the coming months. Given ‘the trade-off between anchoring inflation expectations through policy tightening while minimising its impact on growth’, the RBI’s monetary policy committee held policy rates unchanged last month. While most analysts expect the central bank to continue to maintain policy rates on hold this year, the market has started to price in some possibility of a rate hike. FPIs sold US$ 0.5bn from Indian debt markets in April.

The India 10-year GSec yield closed at 7.02%, though it exhibited significant volatility through the month. Amidst significant uncertainty emanating from global developments, domestic yields are likely to remain volatile in the coming months.