The month gone by – A snapshot

Global markets: Global equity markets rose in August as monetary policy easing cycle gathered pace. With major central banks such as European Central Bank, Bank of Canada and Bank of England having initiated rate cuts, US Fed Chair Jerome Powell indicated that the Fed will also start reducing policy rates from this month. Inflation in the US has continued to decline and is now at a 39-month low.

Led by strong gains in the US markets, global equity markets rallied by 2.5% last month. MSCI Emerging Markets index showed a relatively subdued performance with 1.4% gain. Expectations of higher crude oil production by OPEC+ countries from October onwards, as well as slowing demand from major economies, led to prices declining by 2% in August.

Economy: Consumption revival supports GDP growth

The GDP growth eased in June quarter to 6.7% y-y from 7.8% in the March quarter. The GDP growth was supported by growth in private consumption increasing to a seven-quarter high at 7.4%, and capital expenditure holding firm at 7.5%. The decline in government expenditure acted as headwind to growth. The agriculture sector growth at 2% was at a one-year high. Above average rainfall in the ongoing monsoon season augurs well for rural demand revival.

Global rating agency Moody’s has raised its forecast for India’s GDP growth for 2024 and 2025. It has cited improvement in macroeconomic scenario as well as anticipated revival in rural demand. Fitch has reaffirmed India’s sovereign credit rating at ‘BBB-/stable’. It expects India to remain amongst the fastest growing major economies globally. All three major global credit rating agencies continue to rate India in the investment grade category.

Equity markets: The buoyancy continues

Indian markets moved higher amidst the strong global backdrop driven by increasing expectation of interest rate cuts by major central banks. Nifty index was up 1% while Mid and Small Cap indices were up 0.6% and 0.9% respectively. Information Technology and Pharmaceuticals sectors outperformed while Metals and Oil & Gas sectors underperformed. Foreign Institutional Investors (FIIs) invested US$1.2 bn in August while flows from domestic investors stood at US$6 bn.

Outlook: The global macro-economic landscape is witnessing divergent trends with stable data points from the US economy and sluggish trends in the Chinese economy. Indian economy continues to show encouraging trends driven by industrial sector and gradual revival in the consumption segment. Benign commodity prices augur well for current account balance. Estimates for corporate earnings growth show stable trends. While we expect markets to remain range bound in the near term, our stance on equities remains positive from a medium to long term perspective.

Fixed Income market: Yields exhibit declining trend

Retail inflation for July declined to an almost five-year low at 3.5%. The RBI’s monetary policy committee (MPC) continues to maintain a cautious stance and held policy rates unchanged last month. While acknowledging the decline in inflation, RBI’s Governor Das cautioned that ‘the pace is uneven and slow’. Despite RBI’s cautious stance, most analysts expect MPC to initiate rate cuts in the current financial year.

Outlook: Amidst favourable macroeconomic conditions, the 10-year GSec yield declined to a 27-month low at 6.86% in August. FIIs continue to purchase domestic debt securities, with August inflows at US$1.9 bn. Strong growth in tax revenues suggest that the central government is likely to achieve its fiscal consolidation target for the year. Despite cautious stance by RBI, we expect yields to exhibit a declining bias in the coming months.