The month gone by – A snapshot
The global equity markets continued to rally in May, as re-opening of developed economies and assurance of policy measures supported investor sentiment. The recovery in US economy has been particularly robust. Several countries in Europe have seen improvement in economic activity following increase in vaccination coverage.
The Organization for Economic Co-operation and Development (OECD) has raised global GDP growth forecast for 2021 to 5.8%, as it expects fiscal and monetary measures to support economic growth. Crude oil prices increased by 3% to US$ 69/barrel due to expected increase in global demand.
Economic recovery disrupted by resurgence of Covid-19
India’s Q4 FY2021 GDP growth data indicates that the economic recovery was well underway with improvement in consumption and capital expenditure trends. However, recent data points indicate a severe disruption to the recovery trajectory due to the impact of Covid-19 second wave. This has led to downgrades in India’s FY22 GDP growth estimate.
With infections declining in recent weeks, many states have started gradually reopening. This should augur well for economic recovery, going forward. Slow progress in vaccination remains a key risk. The Government has extended credit support measures to the hospitality and airline industry to help them cope with the disruption. It has proposed borrowing an additional Rs 1.58 lakh crores in FY2022 to compensate states for the expected shortfall in taxes.
RBI likely to reiterate monetary policy support
Given the severe disruption to economic activity arising from the second wave of Covid-19, RBI is likely to reiterate policy support measures for the economy. We expect RBI to continue with the accommodative policy stance in the upcoming Monetary policy review. The larger than expected dividend payment by the central bank is expected to alleviate fiscal pressure on the government. Foreign Institutional Investors (FIIs) withdrew US$ 115mn from the Indian debt market in May 2021.
Outlook: RBI continues to take measures to maintain benign financial market conditions. These measures have ensured broad stability in domestic bond yields. Given expectations of continuation of supportive measures by the central bank, we expect yields to remain range-bound in the near term.
Equity markets witness strong rally
The Indian equity markets staged a strong rally in May and closed at all time high levels. The Nifty index surged by 6.5% as robust corporate performance, decline in Covid-19 infections and strong growth recovery in developed markets supported the rally. Capital Goods and Oil & Gas sectors outperformed while Telecom and Pharmaceuticals sectors underperformed. The FII inflows into equity markets in May was at US$ 37mn.
Outlook: The earnings growth trajectory for corporate India remains fairly robust, despite disruptions caused by the second wave of Covid-19 and subsequent lockdowns. Indian corporates have used the Covid-19 induced crisis as an opportunity to realign their cost structures, deleverage balance sheets and augment digital capabilities. These measures are likely to have strong medium to long term positive implications for financial metrics and valuations. The likely acceleration in the pace of vaccination should support re-opening and demand recovery. The predictions of a normal monsoon augur well for the rural economy. We continue to maintain a positive view on equities from a medium to long term perspective.