The Nifty50 declined by 4.8% in June 2022 on the back of a sharp global market correction, inflation worries, falling rupee and continued
FII selling. BSE Midcap Index and BSE Small cap Index continued to underperform the Nifty and declined sharply by 6.2%/6.0%,
Indian equities declined 6.8% (USD terms), similar to the performance of broader regional markets in June (MSCI APxJ / EM: -6.2%/- 7.1%).
Global equities fell sharply by 8.6% (MoM) in June 2022 as markets
continue to battle key concerns on Geopolitics, the hawkish Fed
stance in light of high inflation and the increasing likelihood of a US
Worldwide, most major indices saw a sharp decline in June led by the US S&P500 down 9.2%, Euro Stoxx (-8.2%), FTSE UK (-6.4%) and Nikkei JP (-3.3%). Only Chinese equities bucked the trend and Hang Seng gained 2.1%.
In sectoral trends, Metals continued to be the biggest loser (-14%) again driven by a correction in global metal prices. Consumer Durables (-9%), Real Estate (-6%), Information Technology (-6%) and Banking (-6%) were other significant losers. Healthcare (-4%), Power (-4%), Oil & Gas (-3%) and FMCG (-3%) also ended in the red for the month.
Only Autos (1%) gave positive returns during the month supported by expectations of a decline in the steel and other commodity prices helping auto earnings.
FIIs continued to be net sellers of Indian equities in June (-$6.3 bn, following -$4.9 bn in May). This marked the 9th consecutive month of net equity outflows for FIIs, with YTD outflows of $28.5 bn.
DIIs recorded inflows of $5.7 bn in June, maintaining the buying trend observed since March 2021. Mutual funds and insurance funds were both net buyers in June with $2.6 bn inflows and $3.1 bn inflows, respectively.
The World Bank cut India’s economic growth forecast for the current fiscal to 7.5% from 8% as rising inflation, supply chain disruptions and geopolitical tensions taper recovery.
After a surprise 40 bps increase in repo rate in May, RBI further raised the repo rate by another 50 bps during June post the Monetary Policy Committee (MPC) meeting. RBI also increased its full-year 2022-23 CPI inflation forecast by a full 100 bps from 5.7% to 6.7%.
May CPI inflation remained elevated at 7% (YoY) although it came off from an 8-year high of 7.8% (YoY) in April. While core-core inflation (standard core adjusted for petrol and diesel) fell sharply to 5.5% (YoY) in May from 6.5% in April, it was largely on account of a favorable base effect.
Index of Industrial Production (IIP) growth continued to improve for a 5th successive month and was up 7.1%yoy which was much above expectations.
Manufacturing PMI (54.6) and Services PMI (58.9) continue to remain in the expansion zone in May’22, with Services PMI continuing its rise post first quarter of the year, primarily due to the easing of Covid restrictions.
India’s FX reserves came in at $598 bn. FX reserves have declined by US$2.9 bn in the last 4 weeks. INR depreciated sharply over the month (down 1.7% MoM) and ended the month at 78.97/USD in June.
Benchmark 10-year treasury yields averaged at 7.49% in June (15 bps higher vs. May avg.) and ended the month at 7.45% (up 4 bps MoM). Oil prices declined marginally (-2.4%) over the month of June, after rising sharply in May.
Revenues of the Government of India have benefitted from stronger growth and inflation/higher commodity prices in FY22. Final gross tax collections (provisional) exceeded revised budget estimates (from Feb 2022) by ~Rs.2 tn ($26 bn). GST revenue collection for Apr’22 was at Rs 1.44 trillion up 56% year on year.
The global geopolitical and macro-economic situation remains highly volatile with a higher US interest rates and increasing likelihood of a US recession adding to the mix. Higher global crude and commodity prices along with supply chain bottlenecks in various sectors continue to keep inflation at elevated levels. While Government and RBI are now focusing on containing inflation, a higher fiscal deficit has led to further strengthening of bond yields. This is likely to result in higher interest cost for other borrowers as well.
On the positive side, we expect rural demand to improve supported by higher agri commodity prices along with a forecast of a normal monsoon. Also, higher government spending on infrastructure supported by buoyant tax collection should support economic growth in the near term. Over the medium term, partial shift of global supply chains away from China to India in certain sectors and measures like PLI (Production Linked Incentive Scheme) are likely to aid domestic manufacturing growth. Also, market valuations have also become more reasonable after correction over the last two months. We, therefore, continue to remain constructive on Indian equities going forward.
Source: Bloomberg, MSCI
The Federal Open Market Committee (FOMC) in its July meeting hiked
policy rates by 75 bps, taking the federal funds rate to 1.50%-1.75%.
The pace of Quantitative Tightening remained unchanged. The dot plot
indicated that the federal funds rate will move to 3.4% by December 2022
and 3.8% by December 2023 before moving lower to 3.4% by December
2024. Inflation continued to remain the main source of concern with
expectations of inflation becoming broad based. Inflation (PCE) projections
for 2022 were revised higher and are expected to remain above 2.0%
throughout 2023 and 2024. Meanwhile, estimates of the Unemployment
rate were moved higher whereas real GDP growth expectations were
revised lower from the March 2022 projections. The FOMC Chair indicated
that the future course of rate hikes will remain dependent on incoming
inflation prints and although at the current juncture a 50-75 bps hike is
likely in the July meeting, hikes of 75 bps thereafter are not expected
to be common. The Bank of England (BOE) also hiked policy rates by 25
bps to 1.25%. This is their fifth consecutive rate hike. The BOE expects
inflation to remain above 9.0% over the upcoming months before moving
to above 11.0% later this year. US CPI for May 2022 came in at 8.6% (vs
8.3% in April) with Core CPI marginally lower at 6.0% (vs 6.2% in April).
US 10-year Treasury yields remained volatile and traded above 3.0% for
most of the month, while almost touching 3.5% before the FOMC meet.
Crude prices during the month traded in the range of USD 110/bbl to USD
120/bbl. However, with talks around a possible recession gaining ground,
Crude prices are now trading closer to USD 100/bbl and correspondingly
US Treasury yields have fallen below 3.0%.
On the domestic front, CPI inflation for May 2022 moderated to 7.04% from the previous month’s high print of 7.79%. Core inflation also eased to 6.10% (vs 7.00% in April). Although inflation is expected to have peaked in April, the trajectory to below 6.0% is most likely to be gradual. WPI inflation continued its upward trajectory clocking 15.88% in May 2022 (vs 15.08% in April) led by higher vegetable prices and fuel index. IIP data for Apr 2022 increased to 7.1% (vs 2.2% in March). Trade deficit for May 2022 widened to USD 24.29 bn (vs USD 6.53 bn last year). Exports grew at ~20% y-o-y, however, imports on a y-o-y basis increased by more than 60%, with oil imports up by more than 100%. For FY2022, the Current Account Deficit (CAD) came in at USD 38.7 bn (1.2% of GDP), against a surplus in FY2021. Higher oil prices continue to put pressure on the import bill, resulting in markets now penciling in higher CAD estimates for FY2023. PMI numbers have been encouraging with Manufacturing PMI at 53.9 and Services PMI at 59.2 in June 2022.
The Government levied special additional excise duty of INR 23,250/ton on domestic production of petroleum crude, and additional excise on exports of petrol, diesel and ATF at INR 6/litre, INR 13/litre and INR 6/ litre respectively. These measures would help in offsetting the shortfall in revenue due to the excise cut done earlier. The Government also increased the import duty on gold from 10.75% to 15% to curb imports. In order to boost FX inflows and stem further depreciation of the Rupee, the RBI announced a slew of measures, including exemption from maintenance of CRR and SLR on incremental FCNR(B) and NRE deposits, removal of shortterm limits for FPI investments in debt instruments of less than one-year maturity and increase in limits for ECBs under automatic route.
The T-Bill and SDL auction calendars for Q2 FY2023 were announced, with gross T-Bill issuance in Q2 FY2023 at INR 2.73 Lakh Crs (weekly auctions of INR 21,000 Crs vis-à-vis INR 33,00 Crs in Q1) and gross SDL issuance in Q2 FY2023 at INR 2.12 Lakh Crs (vis-à-vis actual borrowing of INR 1.1 Lakh Crs in Q1).
On a month-on-month basis (as on June 30, 2022), money market rates moved up by 20-30 bps while 2-3 year G-Sec rose by 5-10 bps. Yields in the 5-10 year segment have also moved up by 5-10 bps. Although 1-year OIS levels moved higher by 15 bps m-o-m, 5-year OIS closed 10 bps lower from the previous month’s closing.
Central Banks globally have been on a tightening path with most economies witnessing frontloading of rates due to soaring inflation. However, discussions around possible recessionary impact globally have picked up recently. This has resulted in softening of Crude prices and a corresponding rally in rates. Domestic rates have also seen a correction with the 10-year benchmark moving lower by around 25 bps from the recent highs. Pressure on the external sector and thereby Rupee continues to remain a key monitorable. However, the recent measures by the Government and RBI might help in alleviating further worries. The RBI Governor has abstained from giving any guidance on the future course of rate actions, leaving it completely data dependent. Against this backdrop, global growth parameters, inflation trajectory and Crude prices remain key factors going forward.
We had previously mentioned that the terminal rate is expected to be in the range of 6.0%-6.5%, implying a positive real rate. The 2-4 year part of the yield curve was pricing in a higher terminal rate than this and we had highlighted that this segment offers good relative value vis-à-vis other points on the curve. Given the policy actions taken so far by the MPC and in the event of Crude prices staying below the MPC’s baseline assumption, the easing of inflation might happen sooner than expected.We continue to believe that the 2-4 year part of the curve offers good value for investors who are looking at a medium-term investment horizon. However, we remain cautious in our outlook on the longer end of the yield curve as the supply demand dynamics remain still uncertain and yields need to become much more attractive to justify adequate relative value versus the 2-4 year space.
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