Market Review

Market Review

Nifty after trading in a tight range during the month of July rallied in August (+8.7%) closed above 17000 levels at month-end to register the best monthly gains in CY21 led by gains in all heavyweight stocks. However, the broader market took a bit of a breather after strong gains in Jul with BSE Mid-cap and BSE Small-cap indices gaining 3.3% and 0.5% respectively. Indian markets are enjoying a considerable bull run, with Year-to-date gains of 20%+, supported by global liquidity. MSCI India continued its significant outperformance in Aug vs MSCI EM as Indian equities rose a substantial 11% ($ terms) and outperformed broader markets in August (MSCI APxJ/EM: +1.9%/+2.4%).


Global equities had a solid run - up 2.4% in August. Strong growth, solid earnings surprises and Fed’s accommodative stance have led global equities higher. Chinese equities remained flat led by weakness in July activity data and continued regulatory overhang.
Worldwide, major indices also displayed an uptrend with the US S&P500 up (+2.9%), along with Nikkei (+2.9%), while Euro Stoxx (+2.0%) and FTSE (+1.2%) also registering positive gains. Hang Seng was the worst performer with (-0.3%) returns.
By sector, Utilities, Communication Services, IT and Staples outperformed while Materials, Consumer Discretionary and Health Care were notable laggards in August. June-q results were strong (benefitting from the lower base last year), but reflected increasing margin pressure and moderation in top-line momentum. Among sectoral indices, Power, IT and oil & gas gained more than 10%. Metals and realty indices which were the best performers in July ended with a marginal loss of 3.1% and 2.1%.
FIIs turned to net buyers of Indian equities again (+$628mn, following -$1.7bn in July). Q1’21 saw $7.3bn of inflows, while Q2 ended at a modest $758mn of net buying. DIIs remained big net equity buyers for the sixth month running (+$930mn, vs +$2.5bn in July). Mutual funds were net equity buyers at US$1.4bn while insurance funds net sold US$521mn of equities in August. Mutual fund and insurance fund flow data is as of 26- August.
India’s GDP 1QFY22 real GDP growth rose to 20.1% compared to 1.6% in 4QFY21. Year-on-year growth rates are extremely buoyant because they come off a very depressed base, with the economy having contracted more than 24% in the same quarter the previous year. However, GDP sequentially contracted 23% (q/q, saar) as per JPM estimates in the midst of the second wave. The sequential contraction was partially mitigated by strong export growth -- the only component to register positive sequential growth on the demand side.
CPI inflation came down to 5.6% in July from 6.3% in May and June, helped by a large base effect and softening food price momentum. On a year-on-year basis, core-core inflation softened from 5.4% to 5.1%, also helped by a favorable base effect.
June IP came in at 13.6%yoy led by a gradual pick-up in sequential momentum. Despite the June rebound, IP remains below its pre-pandemic level. Within IP, the slowest to recover by June have been capital goods (81% of the pre-pandemic level) and consumer durables (83%).
As India’s economy continued to open in July, both the manufacturing and services PMIs improved vs June. The manufacturing index jumped 7pts MoM to 55.3 while the services index rose by 4pts to 45.4— remaining below 50 for a third consecutive month. The composite index rose from 43.1 to 49.2 but remained below the expansionary threshold of 50 for the third month.
India’s FX reserves are close to its all-time peak, standing at $617bn currently. FX reserves have increased by US$5.7bn in the last 4 weeks. INR rallied (up 1.9%) and ended the month at 73.01/$ in August.
Benchmark 10-year treasury yields was up 2bps and ended the month at 6.22%. Brent oil price declined 5.5% to ~$71/bbl in August.
Fiscal deficit for Apr-Jun was Rs3.21tn or 21.3% of the budgeted FY22 deficit (at Rs.15.1tn or 6.8% of GDP). GST collections grew 30% YoY in August (Rs 1.12tn, from Rs 1.16tn in July).
The vaccination pace against Covid-19 has increased sharply from under 2mn a day in the middle of May to over 8.0mn now. As of 31 August, c.653mn shots have been administered in India (c.37% of the population has taken one shot+). We expect a majority of adults to be vaccinated by Dec 2021 but the larger cities are ahead and can possibly open ahead of the November festive season.
Finance Minister announced a National Monetization Pipeline (NMP) envisaging total asset monetization potential of Rs6trn over FY22-25. This should help government raise fiscal resources and limit the further sharp increase in government debt.
Monsoon trends worsened to 9% below average in Aug from -1% in end-July. While the rice (key summer crop) producing regions received adequate rainfall, this may impact the winter crop due to low reservoir levels in wheat producing regions. More importantly, this poses a risk to rural sentiment which has already been battered by the second wave.
Overall, increased vaccination efforts and removal of restrictions, stimulative monetary policy and strong export demand boosted by the constructive global environment should help the economic recovery gain momentum in the coming quarters, in our view.

The 10-year benchmark G-Sec yield closed at 6.22% vs 6.20 in the previous month. Benchmark 10-year treasury yields were up 2 bps and ended the month at 6.22%. Brent oil price declined 5.5% to ~$71/bbl in August.


The 10-year benchmark G-Sec yield closed at 6.22%, up by 02 bps from its previous close of 6.20% while that on the short-term 1-year bond ended 05 bps lower at 3.85%. In the corporate bond segment, yields fell across the yield curve over the month.
The 10-year AAA bond yield ended 04 bps lower at 6.88%, while the short-term 1-year AAA bond yield ended 05 bps down at 4.10%.
The spread between 1-year and 10-year AAA bond widened. Within the short-term segment, the yield on 3-month commercial paper (CP) was down 10 bps to 3.4% while 1-year CP yield was down 05 bps at 4.05%.


The FOMC minutes for the July policy (released in August) indicated that conditions for commencement of tapering of asset purchases would most likely be met this year. Most Fed officials believed that tapering might begin this year, although the expectations on timing seemed to be a bit divergent. Concerns were expressed on the spread of the Delta variant weighing on risk sentiment globally. However, there were some views also expressed acknowledging that inflationary pressures might turn out to be more persistent in nature than expected. The Fed Chair in his widely anticipated address at the Jackson Hole symposium mentioned that substantial progress has been met on meeting the inflation target and there is progress on achieving employment goals. Although the Fed Chair did not mention any specific date, he indicated that the tapering announcement was likely this year, depending on the evolving economic conditions (especially pertaining to employment). However, he emphasized that tapering should not be construed as the beginning of a rate hike cycle. Any normalization would be very gradual and basis evolving market conditions, and even with tapering, financial conditions will continue to remain accommodative. 10-year US Treasury rates moved from 1.22% to 1.31% over the month, and have broadly traded range-bound. Crude prices continued to trade in the USD 65/bbl – USD 75/bbl range.
On the domestic front, the MPC minutes was the key event markets were looking forward to. Although MPC members stayed committed to support growth, they acknowledged the underlying inflationary pressures (predominantly due to supply-side factors). They also mentioned the risks associated with a potential third wave and the importance of the pace of vaccination to prevent the impact. The key takeaway from the minutes was that Professor Jayanth Varma expressed his clear dissent against staying accommodative for a long period of time. He advocated for a phased normalization of the LAF corridor and voted against the accommodative stance. Few of the other MPC members were also of the view that gradual adjustments to liquidity could begin even with the stance remaining accommodative.
System liquidity continues to remain in surplus, auguring well for shortterm rates. GST collections have been steady and there is a possibility that Government might not need to borrow extra to compensate States for the GST shortfall. The RBI Governor, through his various media interactions has indicated that the process of normalization of rates will be gradual, to avoid market disruption and increase in VRRR auctions announced in the last policy should be not considered as the beginning of a rate hike cycle.
GDP data for Q1 FY2022 came in at 20.1% (slightly lower than market consensus) aided by a lower base. CPI inflation came down to 5.59% in July from 6.26% in June, helped by a large base effect and softening food price momentum. Core inflation also came off mildly to 6.00% (from 6.20% last month). IIP data for June came in at 13.6% led by a pickup in sequential momentum. RBI conducted INR 50,000 Crs of G-SAP 2.0 auction in August, including liquid securities in the 5-year and 15- year bucket. Barring the first G-Sec auction in August, where RBI did not accept any bids in the 10-year benchmark security, all other weekly G-Sec auctions got cleared smoothly. 10-year G-Sec traded in the 6.20%-6.25% band over the month. G-Sec and Corporate bond yields up to the 5-year segment moved down by 10-15 bps with a good appetite from Traders and Mutual Funds.
With RBI announcing only incremental amounts in the 14 days VRRR auction, goes to show that RBI is extremely cautious to take any step that would distort markets and stand committed to ensure that normalization is achieved in a calibrated manner.
Fund Recommendations & Investment strategy
The L&T Short Term Bond Fund and L&T Banking and PSU Debt Fund are suited for investors who would want to ride this upwards rate cycle with lower volatility over the next 2-3 years with highest quality portfolios.
The L&T Triple Ace Bond Fund, which invests in the 2028-29 maturity segment, with investments in the highest credit quality AAA corporate bonds is positioned for long term investments, especially versus tax-free bonds but comes with a lot of potential volatility through the year. The yields on this part of the curve (7 years average maturity) are the most favorable from a risk-reward perspective.
L&T Resurgent India Bond Fund is positioned with an attractive yield while still having more than 75% of the portfolio in the AAA segment. The interest rate volatility is relatively lower as the average maturity of the fund is below 3 years, making it an ideal investment opportunity for investors seeking higher returns over a plain vanilla AAA fund over a 3 year period.

Source: MOSPI, Internal, Bloomberg

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