The month gone by – A snapshot
Global markets rallied sharply in July as investors started to price in the possibility that global monetary tightening may not be as prolonged as feared. Recent data releases from prominent economies have led to concerns of a sharp slowdown. IMF has reduced global growth forecast and cautioned that ‘world may soon be teetering on the edge of a global recession’.
Most global central banks have hiked rates as inflation continues to remain high. The US Fed recently raised policy rates by 75bps, while the European Central Bank initiated monetary tightening with a 50bps rate hike. However, given the emerging economic uncertainty, the US Fed has withdrawn its forward guidance and indicated that future rate hikes would be data dependent.
Hopes of monetary tightening abating led to global equity markets rallying by 8% in July. While emerging markets declined by 1% during the month, Indian equity markets hugely outperformed with a 9% increase. Flows from foreign institutional investors turned positive after a gap of 10 months. Crude oil prices declined by 4% and ended the month at US$ 110 / barrel.
Indian economy continues steady recovery
High frequency data points such as GST collections, bank credit growth, industrial production, and Purchasing Managers’ Index (PMI) survey indicate steady recovery in the Indian economy. After some weakness in June, rainfall has picked up in July. This augurs well for agriculture sector and the rural economy. A sharp rally in the US Dollar led to significant depreciation in INR in July. The RBI continued to intervene in the foreign exchange market to prevent undue volatility in INR.
RBI expresses comfort on inflation
Retail inflation in June remained above RBI’s threshold level. However, the recent decline in commodity prices has led to some comfort. The central bank expressed optimism that ‘inflation may be peaking’. We expect RBI to remain focused on managing inflation in the upcoming monetary policy.
Outlook: Fears of a possible slowdown in global economic activity has led to a decline in global bond yields. Indian market yields eased sharply in July, as the market has started to price in a slower pace of monetary tightening. We expect yields to remain volatile in the near-term.
Sharp rally in equity markets
After witnessing a decline over three consecutive months, the Nifty Index staged a strong rally in July with a 9% gain driven by positive inflows from Foreign Institutional Investors (FIIs) and continued buying from Domestic Institutional Investors (DIIs). Banking and Capital Goods sectors outperformed while Information Technology and Pharmaceuticals sectors underperformed. FIIs bought US$ 0.6bn of equities during the month after a ten-month hiatus.
Outlook: The global economic environment continues to remain challenging owing to increasing expectations of a sharp slowdown in developed markets, due to monetary tightening and deterioration in consumer sentiments.
From a domestic market perspective, the sharp fall in metal prices and downward bias in energy prices augur well for corporate profitability. The Q1 FY23 results, so far, have been broadly in-line with expectations with steady improvement seen across domestic-facing sectors. High-frequency data points indicate healthy recovery across automobiles, real estate, travel & tourism and industrial sectors. After a sharp up move, we expect markets to consolidate in the near term. We continue to maintain positive outlook on equities from a medium to long term perspective.