Month gone by – A snapshot
Global equity markets moved up in March primarily on the back of easing global monetary policy stance. India significantly outperformed the broader emerging market (EM) pack after two months of underperformance, with MSCI India moving up by 9%, well ahead of MSCI EM at 1% return. This was largely on account of huge inflows by foreign institutional investors even as domestic institutional investors were net sellers. However, fixed income markets remained broadly range-bound. Liquidity injection and rate cuts by RBI (50bps in 2019), declining global bond yields and appreciating INR were partly offset by an expected huge supply of G-secs in H1FY20.
RBI cuts policy rates for the second time in a row
The six-member Monetary Policy Committee (MPC) cut the policy rate by 25bps to 6.0%, citing the need to strengthen domestic growth, as near-term inflation trajectory remains benign. However, the policy stance was retained at “neutral”. The MPC has also reduced its inflation and growth forecasts, thereby keeping expectations of further rate cuts intact. The monsoon, movement in crude oil prices, India’s fiscal situation and volatility in financial markets are key factors to watch out for in the near-term.
Easing global monetary policy stance
The Federal Reserve, in the recent monetary policy meeting, announced that there will be no further rate hikes in 2019, citing concerns about US as well global growth. This was followed by European Central Bank which announced fresh stimulus in response to weakening Eurozone growth prospects. This led to a sharp drop in global bond yields, with US/Germany 10-year yields declining by 80/60bps from October 2018 high.
Fixed income market sentiments improve
Bond yields traded in a range-bound manner in March. Liquidity injection by the RBI via forex swaps, expectations of further rate cuts amid benign inflation and declining global bond yields positively impacted market sentiments. However, this was partly offset by announcement of a front-loaded G-sec borrowing calendar in H1FY20, rising crude oil prices and concerns around fiscal slippage. The foreign institutional investors turned net buyers in March, with net inflows at $2.9bn – the highest in 21 months. The 10-year yield ended the month 6bps lower at 7.35% (-80bps from September peak level).
Outlook: Benign inflation-growth trajectory, coupled with easing global monetary policy stance, may open room for further rate cuts. This, in turn, bodes well for fixed income market. However, demand-supply situation is expected to remain unfavourable amid tight domestic liquidity and higher supply of G-secs. This, in turn, may limit the decline in bond yields. Going forward, movement in crude oil prices and US bond yields as well as outlook on monsoon are expected to have a significant impact on Indian fixed income market.
Equity market at all-time high levels
Indian equity markets witnessed a significant rally in March with both Nifty and Mid-cap index moving up by ~8%. However, Nifty (FY19: +15%) has significantly outperformed the Mid-cap index (FY19: -3%) over one-year period. Key factors that supported the rally include a) an easing global liquidity environment, b) optimism over US-China trade negotiations, c) expectations of further rate cuts by RBI and d) diminishing perceived political risk. The FIIs were strong buyers for the second consecutive month (net inflows at $8.5bn in Feb-March) even as domestic institutional investors booked profits in the rally.
Outlook: Global liquidity is expected to remain easy amid dovish stance by global central banks. This is expected to result in continued flow of foreign capital into emerging markets, including India. On the domestic front, continued improvement in corporate earnings and benign domestic interest rate environment bode well for equity markets. However, uncertainty around upcoming general elections, geo-political tensions, tightening domestic liquidity and growth slowdown remain key concerns. While markets may consolidate in the near-term, we continue to remain positive from long-term perspective.