The month gone by – A snapshot

Global markets: Global equity markets rallied in May as favourable inflation data in the US revived expectations that US economy may be able to achieve a ‘soft landing’. Fed Chairman Powell has opined that ‘inflation will move back down’. Markets continue to expect the US Fed to initiate rate cuts in the second half of 2024. European Central Bank as well as other major developed market central banks are also expected to initiate rate cuts in the next few months.

While US economy is showing signs of some slowdown, IMF has raised growth forecast for China. China has announced ‘historic’ measures to provide support to its real estate sector. MSCI World Index rallied by 4% in May, while MSCI Emerging Market was unchanged. MSCI India outperformed its emerging market peers with a 1% return. OPEC+ has announced extension of its production cuts to end of 2025; this may lead to some degree of volatility in the crude oil market.

Economy: FY24 GDP growth rises to 8.2%

FY24 GDP growth rose to 8.2% from 7.0% in FY23. The Gross Value Added (GVA) growth was relatively more muted at 7.2%. Industrial sector showed robust expansion during the year, led by manufacturing and construction. However, due to volatile weather conditions during the year, agricultural growth was muted at 1.4%. The metrological department has projected above normal rainfall this monsoon season, which bodes well for the rural economy.

S&P has raised the outlook on India’s ‘BBB-’ sovereign credit rating to ‘positive’ from ‘stable’. S&P has opined that ‘India's robust economic expansion is having a constructive impact on its credit metrics’ and ‘expects sound economic fundamentals to underpin (India’s) growth momentum over the next two to three years’. All three major global credit rating agencies continue to rate India in the investment grade category.

Equity markets: Uncertainty ahead

Indian markets were rangebound in May owing to uncertainty regarding the outcome of the Union elections. Q4 FY24 results were in line, with BFSI and Automotive sectors outperforming while disappointments continued in IT and FMCG sector earnings. In May, Nifty Index was flat, the Midcap index (+2%) outperformed while Smallcap Index (-2%) underperformed owing to risk off sentiment and profit booking. Sectors that outperformed were Auto, Realty and Metals while PSU Banks, Information Technology and Oil & Gas sectors underperformed. Foreign Institutional Investors (FIIs) ended the month with net selling of US$ 3.3bn while Domestic Institutional Investors (DIIs) remained net buyers with an inflow of US$ 6.7bn.

Outlook: Given the backdrop of election results, markets will keenly await the final FY25 budget next month. India’s economic momentum remains strong, indicated by sustained growth in domestic manufacturing, discretionary consumption, and services exports. Domestic GDP growth has continued to surprise positively. We remain positive on equity markets from a medium to long term perspective.

Fixed Income market: Improving fiscal situation conducive for bond market rally

The retail inflation in April declined to an eleven-month low at 4.8% y-y. Underlying core-inflation is at a record low at 3.3%. FY24 budget deficit has come in much lower than initially projected. RBI has announced a significantly higher than budgeted dividend. This is likely to help the new government continue on the fiscal consolidation path. Improved fiscal situation for the central government, has led to reduction is the size of Treasury Bill auctions as well as buy-back of existing government bonds.

Outlook: : FIIs resumed purchase of debt securities in May, with overall purchases of US$ 1.1bn. Further improvement in the central government’s fiscal situation as well as increased demand emanating from the inclusion of Indian Government Bonds in JP Morgan’s emerging bond indices from this month-end may lead to domestic yields trending lower in the coming months.