Month gone by – A snapshot: Emerging market equities rallied for the fourth consecutive month. India also followed led by strong domestic flows even as Foreign Institutional Investors (FIIs) were modest sellers. Fixed income market, however, was weak led by RBI’s hawkish policy stance. Rupee continued to appreciate amid weakening dollar and strong FII inflows in fixed income markets. Going forward, performance of corporate earnings, along with development on GST rate structure, remains crucial for equity markets. We expect yields to remain firm given RBI’s cautious view on inflation.
Emerging markets rally for the fourth consecutive month
EM equities continued the strong show led by sustained FII inflows amid gradual global economic recovery. The International Monetary Fund raised its global growth forecast for 2017 led by a pick-up in activity in developed markets. This supported market sentiments even as uncertainty about US trade and fiscal policies remain. While the developed market index rose by 8% YTD, the emerging market index outperformed with 15% return.
RBI keeps repo rate on hold citing upside risks to inflation
The RBI kept repo rate (rate at which RBI lends money to banks) on hold at 6.25% but raised the reverse repo rate (rate at which RBI borrows money from banks) by 25bps to 6.0%. The commentary was hawkish with the RBI increasing its FY18 inflation forecast. Further, it remains firmly focused on achieving its medium-term inflation target of 4%. The RBI expects economic growth to revive in FY18 led by 1) pick-up in consumption, 2) decline in lending rates, 3) higher government spending and 4) implementation of structural reforms such as GST.
Fixed income market performance
Fixed income market weakens: After a rally in March amid surplus domestic and global liquidity, the fixed income market sold-off in April. This was on account of RBI’s cautious stance on inflation. On the positive side, FII inflows remained robust at $3bn in April ($7.5bn YTD), thereby adding to the INR appreciation (+5.5% YTD). The 10-year g-sec yield rose by 28bps to 7.0%.
Outlook: The risks to inflation in 2017 remain on the upside arising from 1) uncertainty around the outcome of monsoon, 2) impact of full implementation of 7th Pay Commission recommendations, 3) one-off effects of GST, 4) improvement in global growth leading to higher commodity prices and 5) global financial market volatility. This is likely to keep policy rates on hold in the near-term. Going forward, inflation trajectory, pace of US Fed rate hikes and movement in global commodity prices remain crucial factors for fixed income markets.
Equity market performance
Equity market rally continues: Indian equity markets started the month on a weak note amid rising geopolitical concerns. However, markets ended higher towards the end, following the global rally aided by favourable preliminary French presidential election outcome and decent performance by corporates in Q4 FY17 earnings (reported so far). Participation of domestic institutional investors strengthened in April even as FIIs were modest sellers. While Nifty Index rose by 1.4% in April (14% YTD), the mid-cap index rallied by 5% (23% YTD).
Outlook: Given a sharp run-up this year, equity markets may consolidate in the near-term. On the global front, US trade, fiscal and monetary policies as well as geopolitical developments remain crucial factors for equity markets. On the domestic front, performance of Q4 FY17 corporate earnings, progress of monsoon and impact of GST implementation are likely to impact equity markets in the near-term. Our medium-term outlook on the market remains strong led by 1) pick-up economic activity, 2) expected revival in corporate earnings and 3) continued government reforms.