Nifty declined by 2% in April 2022 driven by weak global sentiment as geo-political pressures and inflation worries continued to drive
FII selling. However, local buying support helped the BSE Midcap index and BSE Smallcap index to rise by 1.3% and 1.4%, respectively
outperforming the Nifty.
Indian equities declined -1.7% ($ terms) but ended higher than broader regional markets in April (MSCI APxJ / EM: -5.4%/-5.7%)
Global equities fell sharply over the month (-8.1% MoM/-13.4%
YTD). Geopolitics dominates the narrative as markets face the
binary risk from spiking commodity prices and central bank
Worldwide, most major indices saw sharp declines with the US S&P500 down 8.8% driven by a sharp decline in some of the tech names. Nikkei (-3.5%), Hang Seng (-4.1%) and Euro Stoxx (-1.2%) also suffered declines, while FTSE UK (0.4%) ended almost flat.
In sectoral trends, IT was the biggest loser (-12%) driven by slowing growth and lackluster earnings performance for most names. Real Estate (-4%) and Metals (-3%) were other sectors which saw decline. Banking and Healthcare sectors were almost flat for the month, while Oil & Gas (4%), Autos (4.8%) and FMCG (5.6%) saw a recovery in April. Power was the best performer up 18% in April but has also been the clear outperformer over the last 1 year across all time frames.
FIIs continued to remain net sellers of Indian equities in April (-$3.4 bn, following -$3.7 bn in March). This marked the 7th consecutive month of net equity outflows for FIIs, with YTD outflows of $16.9 bn. DIIs recorded inflows of $4.1 bn in April, maintaining the buying trend observed since March 2021. Mutual Funds and Insurance Funds were both net buyers in April with $2.9 bn inflows and $1.2 bn inflows respectively.
CPI Inflation rose to 7% in March from 6.1% YoY in February well above market expectations driven by a sharp bounce in food inflation. The major impact of rising fuel cost is yet to be felt. Core-core inflation also continued to strengthen rising to 6.2% highlighting the inflationary pressures in the economy.
Rising inflation also forced RBI to move away from its accommodative stance as while the repo and reverse repo rates remained unchanged at 4% and 3.35%, respectively, it introduced an (uncollateralized) Standing Deposit Facility at 3.75% which is 40 bps above the current reverse repo rate to serve as the new floor of the policy corridor. Thus, effectively hiking the bottom of the corridor by 40 bps.
Index of Industrial Production (IIP) growth remained sluggish at 1.7% YoY in February although better than 1.3% YoY in January. India’s manufacturing PMI (54) and Services PMI (53.6) remained in the expansion zone in March. Services PMI showed improvement in March compared to February levels with the lifting of Covid restrictions.
India’s FX reserves came in at $600 bn. FX reserves have declined by US$17.2 bn in the last 4 weeks. INR depreciated over the month (down 0.8% MoM) and ended the month at 76.43/$ in April. Benchmark 10-year treasury yields averaged 7.08% in April (26 bps higher vs. March avg.). On month-end values, the 10Y yield was up and ended the month at 7.14% (up 30 bps MoM). Oil prices remained flat in April after gaining 5.7% in March.
On the positive side, GST collections stood at Rs. 1.42 tn in March (15% YoY).
The global macro-economic back drop has become more challenging and the near-term impact on India is likely to be negative. Impact of fuel price adjustments, rising global fertilizer and food prices and the pass-through of higher input costs to consumers, along with supply chain bottlenecks in various sectors will continue to push inflation higher and are likely to negatively impact economic growth and consumer demand. Higher inflation and government borrowing plan have already led to a sharp increase in government bond yields over the last few months. This is also likely to result in higher interest cost for other borrowers as well.
Higher government spending on infrastructure and measures to boost domestic manufacturing like PLI (Production Linked Incentive Scheme) remains a potential support for the economy in the current year. While we continue to remain constructive on Indian equities going forward, the recovery cycle is likely to be pushed out and more gradual impacted by the current geo-political disruptions.
Source: Bloomberg, MSCI
RBI Monetary Policy Review
RBI shocks markets with a surprise rate hike
The Monetary Policy Committee (MPC) in a surprise move today, hiked rates outside of the bi-monthly policy meeting. Some of the key announcements are as follows:
● The MPC members unanimously voted to increase the policy repo rate under the Liquidity Adjustment Facility (LAF) by 40 bps to 4.40% with immediate effect
● Consequently, the Standing Deposit Facility (SDF) rate was changed to 4.15% and the Marginal Standing Facility (MSF) rate and Bank Rate changed to 4.65% each
● The MPC unanimously decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remained within the target going forward while supporting growth
● Additionally, the RBI also decided to increase the Cash Reserve Ratio (CRR) by 50 basis points to 4.50% of Net Demand and Time Liabilities (NDTL), effective from the fortnight beginning May 21, 2022. This would result in the withdrawal of liquidity to the tune of INR 87,000 Crs
Markets reacted sharply to the unanticipated move today. Short assets of 1-2 months moved up by 40-45 bps, while up to 1-year assets moved higher by 50-60 bps. Corporate bonds up to 3-years moved up by around 50 bps while the movement beyond that was 30-40 bps. G-Sec in the 4-year segment moved by 45 bps and movement in the longer end was 20-30 bps.
The MPC has stunned the markets with its inter-meeting 40 bps rate hike, coupled with the 0.50% CRR hike. One of the key reasons for this surprise rate hike has been attributed to the significant upside risk to the inflation trajectory set out by the MPC in the April policy. The March CPI print was higher than RBI and market expectations and clearly, the April CPI Inflation is likely to be upwards of 7.50%. Amid this backdrop, elevated inflation for too long might de-anchor inflation expectations and impact growth and financial stability, necessitating such an aggressive move.
The entire sequence of gradual rate normalization assumed by the markets so far now needs to be recalibrated to factor in a policy repo rate of 5.15% (policy rate before MPC began easing to allay growth fears due to the pandemic) within the next two policy meetings, with a mounting risk that it could happen at the June MPC itself. Apart from the accelerated timing of rate hikes, markets are grappling with the uncertainty around where the terminal rates are headed. So far, RBI hasbeen tightlipped about this, especially given the various uncertainties on the global, geopolitical and domestic front. But markets are now likely to price in a terminal rate above 6.00%, which would imply further upside in yields before we can expect some consolidation to happen.
We continue to remain cautious in our duration across various actively managed funds while keeping a keen eye on when the balance of risks starts tilting in favor of adding duration.
Debt Market Review
In line with market expectations, the Federal Open Market Committee (FOMC) raised policy rates by 50 bps in its May meeting taking the Fed funds rate from 0.75% to 1.00%. The FOMC also commenced Quantitative Tightening (QT), with the initial run rate of USD 47.5 bn per month from June to August and USD 95 bn per month thereafter. The Fed Chair reiterated that the FOMC will remain focused on managing the inflation trajectory. The Fed Chair also hinted that the FOMC members are not considering a 75 bps rate hike in one shot, however, a 50 bps rate hike each in the next two meetings is a possibility, as is being priced in by markets. The impact of a wage-price spiral on inflation will remain a key monitorable going forward.
The 10-year US Treasury yields continued its sharp move up moving from 2.35% to 2.95% during the month and are trading above 3.0% post the FOMC meeting. 5-year US Treasury yields are also trading above 3.0%. CPI print in the US for March 2022 came in at a multi-decade high of 8.5%, with Core CPI remaining elevated at 6.5%. Among other major economies, BOE also hiked policy rates by 25 bps for the fourth consecutive time amidst concerns that CPI inflation might hit 10.0% in the latter part of the year. Crude prices traded above the psychological USD 100/bbl for most of the month in absence of any resolution pertaining to the war situation.
On the domestic front, CPI inflation for March came in much higher than expected at 6.95% (vs 6.07% in February) due to higher food inflation. This was the highest CPI print in 17 months. Meanwhile, Core inflation also edged higher. For FY2022, the average headline inflation was 5.5%. WPI inflation also rose sharply at 14.55% (vs 13.11% in February). Given the uncertainty around the geopolitical situation, higher commodity prices will likely keep WPI inflation elevated.
IIP data for February 2022 remained weak at 1.7% (vs 1.5% in January). Trade deficit for March came in at USD 18.51 bn (vs USD 13.64 bn last year). For FY2022 the Trade deficit was reported at USD 192 bn. GST collections continue to remain robust with revenues for April 2022 at an all-time high of INR 1.67 trillion. PMI numbers were encouraging with Manufacturing PMI at 54.7 and Services PMI at 57.9.
Yields started rising post the April MPC meeting and subsequently after the higher than expected CPI print, as expectations of policy rate hikes started getting priced in. On a month-on-month basis (as of April 30, 2022) the 2-5 year G-Sec segment saw yields rising by 50-60 bps while 10-year yields moved higher by 30 bps. Corporate Bonds also saw a similar move up during the month. OIS levels saw an even higher monthon- month movement with yields rising by 50-80 bps. Markets saw a fair bit of short positions getting built in benchmark securities and covering of positions subsequently, resulting in a fair bit of volatility in yields.
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