The month gone by – A snapshot

Global markets: Global equity markets rallied in September as larger than expected policy support measures by US and Chinese central banks aided market sentiments. The US Fed initiated policy easing cycle with a 50bps reduction in policy rates and has indicated that it will continue to reduce policy rates in the coming months. China’s policymakers have announced large policy easing measures aimed towards reviving consumption and providing support to financial markets and real estate sector. Prospects of monetary policy easing globally has led to OECD raising global growth projection for this year.

Global equity markets rallied by 2% last month. Led by strong gains in the Chinese markets, MSCI Emerging Markets index rallied by 6%. Expectations of higher crude oil production by OPEC+ countries, as well as slowing demand from major economies, led to crude oil prices declining by 9% in September. However, the recent escalation of geopolitical tensions in the Middle East, and its impact on crude oil prices, need to be closely monitored.

Economy: High frequency indicators show divergent trends

India’s 2024 GDP growth forecast has been raised by the World Bank to 7%. The World Bank has highlighted gradual improvement in urban unemployment trend and has emphasized that ‘India has boosted its competitiveness through the National Logistics Policy and digital initiatives that are reducing trade costs’.

While most analysts continue to project India’s growth trajectory to remain amongst the fastest globally, recent high frequency data points are indicating signs of a slowdown in the near term. Manufacturing PMI, though high from a global relative perspective, has declined to an eight-month low at 56.5. The September GST collections slowed to a 40-month low at 6.5%, and passenger vehicle and commercial vehicle sales declined on an annual basis. Analysts, however, expect urban demand to revive with the onset of the festive season, and above average monsoon rainfall to support the rural economy.

Equity markets: Markets turn cautious

Indian markets saw continued positive momentum on the back of improving global backdrop and strong flows. Nifty index gained 2.3% in September. Automobile, Metals and Power sectors outperformed while Information Technology, Capital Goods and Oil & Gas sectors underperformed. Flows continued to remain strong with Domestic Institutional Investors (DIIs) investing US$4 bn while inflows from Foreign Institutional Investors (FIIs) were at US$6 bn.

Outlook: The global geo-political situation has turned adverse with recent developments in the Middle East. This may induce volatility in global financial and commodities market and may delay the expected improvement in macro-economic situation in developed markets. From a local market standpoint, the impact of global volatility would be relatively lower given stable financial markets and strong macro-economic situation. The upcoming results season and monetary policy meeting may provide further cues on the demand environment and corporate earnings trajectory. Post the strong rally witnessed over the last few months, we expect markets to remain cautious in the near term. We maintain a positive view on equity markets from a medium to long term perspective.

Fixed Income market: Markets await possible change in RBI stance

Retail inflation reading for August came below RBI’s target mid-point of 4% for the second consecutive month. Underlying core-inflation has remained below 4% for nine consecutive months. Additionally, sharp decline in crude oil prices will further help improve the inflation outlook. Given the favourable inflation backdrop, and emerging signs of growth slowdown, many analysts expect the MPC to change its monetary policy stance to ‘neutral’, and initiate rate cuts in the subsequent policy meetings.

Outlook: Initiation of monetary policy easing measures by major central banks over the past few months, has led to a decline in yields across most markets. Global developments, along with favourable domestic macroeconomic conditions, led to the 10-year GSec yield to decline to a 31-month low at 6.75%. An expected change in RBI’s monetary policy stance may support further decline in domestic yields in the coming months.