Global Economy

The US economy continues to perform well, though some Fed policymakers have ‘expressed concern that progress toward the 2% inflation objective had stalled’. China’s economy continues to face headwinds from over-capacity in manufacturing and stress in the real estate sector. Japan has announced a large fiscal stimulus which has resulted in sharp increase in sovereign bond yields.

MSCI Global Index traded range bound last month with a 0.2% return, while MSCI Emerging Market Index declined by 2.5%. MSCI India outperformed global markets with 0.8% returns. Rupee has declined to a record low against the US Dollar amidst continuing outflows from the equity markets and increase in trade deficit.

Indian Economy: Strong GDP growth in September quarter

India September quarter GDP growth rose to a six-quarter high at 8.2%. Services sector continues to exhibit robust growth at 9.2%, while manufacturing sector expanded strongly with a 9.1% expansion. Low inflation, reduction in indirect and direct tax rates as well as good monsoon helped revive growth in private consumption.

Global rating agency Moody’s has projected that ‘supported by robust infrastructure spending and solid consumption’, India’s economy is likely to continue to exhibit strong growth in the coming years. Government has announced the implementation of labour reforms, which will provide greater flexibility to employers, while at the same time increase safeguards for workers. Progress of the ongoing India-US trade negotiations remains a key monitorable as continuation of high tariffs on exports to the US has started to emerge as a headwind to external trade.

Equity Market: Nearing all-time high

Indian markets continue to witness positive momentum with Nifty index nearing all-time high levels. Better-than-expected earnings and improving optimism around India-US trade deal drove the performance. The Nifty index rose by 2% in November while Mid and Small cap indices posted 0.4% and -3% returns respectively. The Information Technology (+5%) and Banking (+3%) sectors outperformed while Power (-5%) and Real Estate (-5%) underperformed. Flows from both Domestic Institutional Investors (DIIs) as well as Foreign Institutional Investors (FIIs) remained positive.

Outlook: The global macro-economic uncertainty is reducing amidst receding trade tensions and monetary easing. This has led to upward revision in global GDP growth expectations by economists. India continues to remain the fastest growing major economy. The recently announced GDP figures suggest a strong pick up in manufacturing and consumption sectors. The macro-economic backdrop appears strong with benign inflation, improving growth prospects and likely continuation of easy monetary policy. Corporate earnings surprised positively and witnessed upgrades, after many quarters, driven by reforms, improving consumption and benign commodity prices. After multi-quarter consolidation and improving growth trajectory, valuations look reasonable. We continue to maintain a constructive stance on Indian equity markets.

Fixed Income Market: RBI may ease policy further as inflation declines to record low

Led by decline in food prices and GST reforms, retail inflation in October declined to a record low at 0.3%. The outlook remains benign with inflation likely to meaningfully undershoot monetary policy committee’s target of 4% this year. The RBI Governor has recently indicated that ‘macro indicators reinforce the belief that there is definitely scope’ to reduce policy rates. However, given the strong economic growth momentum, opinion remains divided on whether rate cut will happen in the December policy meeting. FPIs purchase of Indian debt continued last month.

Outlook: Domestic bond yields remained largely stable in November, with the 10-year GSec yield declining by 2bps to 6.51%. RBI carried out Open Market Purchases of GSecs last month which helped support market sentiment. Despite significant global uncertainties, given expectations for further monetary policy easing, we expect yields to trade rangebound around current levels in the near term.