The month gone by – A snapshot

The continuation of West Asia war has resulted in global energy prices remaining elevated. This has led to uptrend in inflation across most economies. The US Fed Chair has expressed dissatisfaction with current levels of inflation and has cautioned that the Fed may have to tighten monetary policy. Markets are now pricing in rate hikes by most major central banks in the coming months.

The MSCI World Index rose by 2% last month, while MSCI Emerging Market Index rallied by 3%, primarily on account of rebound in Artificial Intelligence related trades. The prospect of tighter monetary policy, and elevated levels of fiscal deficit has led to significant uptick in sovereign bond yields across most developed markets.

Global rating agencies S&P and Fitch reaffirmed India’s sovereign rating at BBB and BBB- respectively. The agencies highlighted India’s strong economic growth prospects, while expressing concern over relatively weak fiscal parameters. All three major global rating agencies continue to rate India in the investment grade category.

Economy: GDP growth better than expected

GDP growth for the first quarter of FY27 was higher than expected at 7.8% led by resilient domestic demand. Strong domestic demand and easy monetary policy conditions contributed to sharp increase in capital expenditure growth to 12% during the quarter. Manufacturing sector continued to show traction.

High frequency indicators such as credit growth, GST collections, and corporate earnings suggest continuing economic momentum. Despite headwinds from elevated energy prices and deficit monsoon rainfall, most analysts have raised their growth forecasts for FY27, and expect India to remain amongst the fastest growing major economies globally.

RBI’s measures to attract overseas capital flows contributed to India’s forex reserves rising to a record high last month. This has also helped stabilise the currency amidst significant global uncertainty. Better than expected inflows have led RBI to terminate the overseas deposit mobilisation scheme one month ahead of schedule.

Equity Market: On a consolidation mode

Indian markets consolidated in the month of August. While Nifty index corrected by 1%, buoyancy in Mid and Small cap segment continued as both indices rose by 2% and 3% respectively. The Metals and Capital Goods sectors outperformed while Fast Moving Consumer Goods (FMCG) and Oil & Gas sectors underperformed. Foreign Portfolio Investors (FPIs) bought equities worth US$3 bn during the month, while Domestic Institutional Investors (DIIs) bought equities worth US$5 billion.

The global macro-economic conditions are showing mixed trends. On one hand, the global growth remains above expectations despite the build-up of inflationary pressures; on the other hand, the concerns regarding West Asia war have resurfaced leading to higher commodity prices and spike in global bond yields. These trends could necessitate tightening of monetary policies across key regions.

The outlook for Indian equities continues to appear sanguine driven by strong macro-economic indicators, stable flows, and attractive earnings outlook. However, the challenging global backdrop could lead to near term volatility. Notwithstanding the near-term concerns, our view on Indian equities remains positive.

Fixed Income market: MPC minutes indicate inflation concerns

Retail inflation for July rose to a 19-month high at 4.5%. Higher food and fuel prices have contributed to uptrend in inflation in recent months. While the RBI’s monetary policy committee (MPC) held policy rates unchanged last month, minutes released subsequently indicate increasing discomfort on inflation by the MPC members. The RBI Governor has expressed the view that increasing inflation ‘may need policy tightening’. Analysts expect RBI to begin increasing policy rates later this year.

Increase in global bond yields to multi-year high, and the possibility of RBI initiating policy tightening measures in the coming months, contributed to an increase in domestic bond yields last month. After three months of FPI inflows into Indian debt market, August flows turned negative with an outflow of US$ 0.3 billion.

Given the relatively hawkish commentary from MPC, elevated energy prices, and uptrend in global yields, domestic yields may exhibit an increasing trend in the near term.