The month gone by – A snapshot

Global markets: Global equity markets fell sharply in March, as trade tensions continued to escalate. The US has imposed across-the-board tariffs on nearly all goods imports. Key trading countries, such as China, EU, UK and Canada have mentioned that they will respond with retaliatory measures. Increased uncertainty to the global economic outlook has adversely impacted market sentiments.

Amidst high macroeconomic uncertainties, the US Fed maintained a cautious stance and held its policy rates unchanged last month. It expects lower growth and higher inflation this year due to tariff imposition. Lower than expected inflation in Eurozone, may lead to European Central Bank further reducing its policy rates. Germany’s parliament has agreed to significantly increase spending on infrastructure and defence in the coming years. This has led analysts to project better growth prospects for the country.

Global equity markets corrected sharply by 4% in March, with US markets declining by over 6%. MSCI India outperformed global markets with a 7% return last month, as reasonable valuations attracted investor interest. The Rupee appreciated by over 2% against the US Dollar amidst foreign portfolio inflows into debt and equity markets.

Economy: Growth continues given domestic orientation

The US has imposed 27% tariff on goods imports from India. While the tariff is high on an absolute basis, it is lower than those imposed on key export-oriented Asian economies. Sectors such as pharmaceuticals as well as services, where India has a prominent presence globally, have not been affected. India and US are currently engaged in negotiations for the finalization of a Bilateral Trade Agreement. The successful conclusion of these negotiations will be a significant positive for the Indian economy.

Despite escalating global tensions, Indian economy continues to show steady growth. Manufacturing PMI data for March rose to an eight-month high at 58.1 with survey participants citing favourable demand conditions. GST collections showed improved growth at 10% y-y, indicating steady economic performance and increased compliance. Monetary policy easing measures by RBI are expected to provide support to domestic demand. The outlook for the monsoon rainfalls and possible impact on global growth amidst escalating trade frictions will be key monitorables.

Equity Markets: Stages a strong rebound

Indian equity markets witnessed a strong rebound in March driven by improving growth outlook for the domestic economy, strong flows from domestic as well as foreign investors and reasonable valuations. While Nifty index was up 6.3%, Midcap (+7.6%) and Small Cap (+9.5%) indices outperformed post the sharp correction witnessed in previous months. Power and Capital Goods sectors outperformed while Information Technology and Automobile sectors underperformed last month. Flows from domestic investors remained strong at US$ 3.3bn while Foreign Institutional Investors (FIIs) turned buyers with net purchases of US$ 2.9bn.

Outlook: Growth prospects for the domestic economy are improving indicated by a sequential recovery in select high frequency data points such as industrial production, rural demand, and benign inflationary trends. Recent monetary policy measures announced by the Central Bank with regards to liquidity enhancement should further support the domestic economy. However, the outlook for global economy is turning adverse due to imposition of significantly higher-than-expected tariffs by the US Government on various countries. This could induce volatility in global financial markets. India seems to be relatively better placed due to higher domestic orientation. Given this backdrop, we expect markets to remain range bound in the near term and continue to maintain a positive stance.

Fixed Income market: RBI measures lead to sharp decline in interest rates

Retail inflation in February declined to a seven-month low at 3.6% as food inflation declined sharply. Underlying inflation, excluding food and fuel items has continued to remain subdued. Given favourable inflation data, analysts expect RBI to reduce policy rates by an additional 25bps this month.

FPIs inflows into Indian debt markets increased sharply to over US$ 3bn in March. Amidst global volatility, India’s stable macroeconomic outlook attracted foreign investor interest in both government securities as well as corporate bond segment.

Outlook: Favourable fiscal outlook, liquidity infusion measures by RBI as well as expectations of further monetary policy easing, led to Indian 10 year yields declining by 15bps last month. Given the favourable outlook, domestic yields may continue to exhibit a declining trend in the coming months as well.