The month gone by – A snapshot

Global economy and markets: Global equity markets corrected in August as investors became concerned that central banks may keep interest rates elevated. While Fitch downgraded the US sovereign rating, S&P downgraded the credit rating of some prominent mid-tier US banks. These developments impacted investor sentiment. While the US economy continues to outperform expectations, economic activity has slowed down in Europe and China. Chinese policymakers have announced more measures to help improve investor sentiment.

Inflation in major economies, including US and Eurozone, has shown signs of stabilisation. Both US Fed as well as European Central Bank have indicated that they remain vigilant and may raise interest rates, if required.

MSCI World Index corrected by 3% in August, with MSCI Emerging Market index declining by 6%. MSCI India relatively outperformed global market peers with a 2% correction. Crude oil prices rallied in August largely due to resilient global demand and tightening supplies by OPEC+ countries.

India’s sovereign credit rating has been reaffirmed at investment grade ‘Baa3/Stable’ by Moody’s. The rating agency has cited expectations of strong economic growth and strengthening of India’s financial sector in support of its decision. All three major international credit rating agencies have rated India in ‘investment grade’ category.

Economy: June quarter GDP growth at one-year high

June 2023 quarter GDP growth rose to a one-year high at 7.8% y-y. Growth was led by the services sector, mainly financial, real estate, and professional services category. Private consumption as well as overall capital expenditure witnessed strong growth. Sharp decline in input prices during the quarter contributed to robust economic performance.

Global rating agency S&P has projected a decade of strong economic performance for India with annual GDP growth expected to average 6.7% through FY 2031. However, near-term risks to economic growth are emerging on account of record low rainfall in August as well as uncertainties in the global macroeconomy.

Equity markets: Buoyancy continues

Indian equity markets consolidated amidst volatile global markets. Information Technology and Capital Goods were key outperformers while Oil & Gas and Banks were key underperformers. Foreign institutional investors (FIIs) remained buyers with an inflow of US$ 1.5bn in August. FIIs have invested close to US$20bn over the last 12 months.

Outlook: While global economic outlook remains uncertain, the Indian economy continues to witness robust growth aided by government capital expenditure and services sector. The corporate results for Q1 FY24 have been better than expected and management commentaries remain upbeat on demand environment across industrial, services and consumption sectors. Although valuations have caught up with earnings growth estimates, we continue to maintain a positive stance on Indian equities.

Fixed Income market: Inflation trends higher

Retail inflation rose sharply to a 15-month high in July, mainly on account of sharp increase in vegetable prices. With non-food inflation remaining stable, RBI indicated that it expects the upsurge in inflation to be temporary as fresh supply of vegetable produce may help to lower prices.

Nevertheless, failure of monsoon rains in August and uptrend in global crude oil prices have emerged as key risks. These factors need to be closely monitored.

Outlook: Despite significant volatility in global yields due to macroeconomic uncertainty, domestic yields have remained largely stable. Although RBI has indicated that it remains focused on managing inflation, market expects policy rates to remain stable. Given this backdrop, bond yields may trade rangebound in the near term.