Markets have been volatile between 17400 to 18100 levels. Globally high inflation, energy crisis in Europe & fears of recession are indicating to some tough times ahead. The dollar index has gone up to a two decade high of 110. Prices of crude among other metals & mining commodities are on a downward trend due to fears of global slowdown which should help bring down inflation print.
FII which had been selling heavily in Indian equities, to the tune of Rs.2.88 lakh cr in the first 7 months of this calendar year have finally turned net buyers. They were net buyers to the tune of Rs.22025 cr in August followed by Rs.1916 cr MTD till 16th September. DIIs have been buying into the markets & with FIIs also buying we expect liquidity to go up. A strong USD and increasing yields/interest rates globally, we may see a reversal in trend in short term.
As per AMFI data, net inflows into equity-oriented mutual fund schemes dropped 31% m-om to Rs 6,120 cr in August. Inflows through the SIP route stood at Rs 12,693 cr in August compared to Rs 12,139 cr in July. Meanwhile, five NFOs in the equity segment helped net Rs 3,062 cr. Debt-oriented schemes received net flows of Rs 49,164 cr compared to just Rs 4,930 cr in July. The liquid funds category saw the highest net inflow of Rs 50,095 cr, followed by ultra-short duration funds at Rs 6,372 cr and money market funds at Rs 5,929 cr. The Indian mutual fund industry’s net assets under management reached an all-time high of Rs. 39.33 lakh cr in August 2022.
Gold prices have been declining over the last fortnight to near six-month low of ~Rs. 49,200/10gm. The yellow metal had fallen sharply in the previous week, weighed by gains in dollar index and firm US bond yields. In global markets, the yellow metal fell to $1,668/oz. All eyes are on the Fed’s policy decision later week. Though most analysts expect a 75 bps hike, some see the US central bank hiking by 100 basis points. High interest rates increase the opportunity cost of holding non-yielding bullion. The Bank of England is also meeting this week and analysts expect a 50 to 75 basis-point hike.
Brent Crude prices are on a downward trend at around $90/bbl, for the first time since Russia’s invasion of Ukraine, on oil demand concerns due to renewed lockdowns in China and the global economic slowdown. Hence, IEA also marginally cut its CY22 global oil demand growth estimate by ~0.1mmbpd for CY22; oil demand worries, however, are partly offset by switching of demand from gas to oil given record high gas prices (at 3-4x of equivalent oil price).Softening crude oil prices are seen as a big positive for the domestic market as well as global inflation.
The U.S. dollar is experiencing a once-in-a-generation rally. For the rest of the world, that is a big problem. The dollar’s role as the primary currency used in global trade and finance means its fluctuations have widespread impacts. The currency’s strength is being felt in the fuel and food shortages in Sri Lanka, in Europe’s record inflation and in Japan’s exploding trade deficit. The dollar’s rise this year is being fueled by the Federal Reserve’s aggressive interest-rate increases, which have encouraged global investors to pull money out of other markets to invest in higher-yielding U.S. assets. Recent economic data suggests that U.S. inflation remains stubbornly high, strengthening the case for more Fed rate increases and an even-stronger dollar. A stronger dollar makes the debts that emerging-market governments and companies have taken out in U.S. dollars more expensive to pay back. Emerging-market governments have $83 bn in U.S. dollar debt coming due by the end of next year, according to data from the Institute of International Finance that covers 32 countries.
Consumer Price Index (CPI) inflation reversed from its three-month downward trend, spiked to 7 % in August, up from 6.71% in July. Food inflation, which accounts for nearly half the CPI basket, soared 7.62% in August 2022 as against 6.75% in July. Apart from food and beverages, the fuel and light segment rose 10.78 % The central bank has hiked key policy rate by 140 basis points in May-August, returning borrowing costs to pre-pandemic levels. The RBI’s next policy decision is due on 30th September and another round of rate hike is on the anvil. The central bank expects inflation to average 6.7% in the year to March.
Wholesale Price Index (WPI) eased to 12.41% in August as against 13.93% during the month of July. Despite the easing in the wholesale inflation data, the WPI continues to remain in the double digits for the 17th consecutive month beginning April 2021. The food articles segment witnessed a spike of 12.37% in August, attributed to a rise in vegetable prices. The fuel and power segment eased to 33.67% last month from 43.75% in July.
The Index of Industrial Production (IIP), India’s factory output, witnessed a growth of 2.4% in July, as compared to 12.3% in June. The manufacturing sector’s output grew 3.2% in July 2022. The mining output contracted 3.3% while power generation increased 2.3% during the same period. Capital goods production recorded the highest growth among use-based categories at 5.8% but contracted sequentially in July by 6.7% from June levels.
India’s manufacturing Purchasing Managers’ Index (PMI), compiled by S&P Global, dipped to 56.2 in August from a reading of 56.4 in July. Production volumes were supported by a pick-up in exports and upbeat projections for the year-ahead outlook, said the monthly report. The seasonally adjusted S&P Global India Services PMI Business Activity Index rose from July’s four-month low of 55.5 to 57.2 in August, highlighting a rebound in growth. The upturn was attributed to stronger gains in new business, ongoing improvements in demand, job creation and overtime work. The S&P Global India Composite PMI Output Index rose from 56.6 in July to 58.2 in August, indicating a sharp pace of expansion.
As per Society of Indian Automobile Manufacturers (SIAM), the passenger vehicle segment witnessed a hike of 21.1% selling 2,81,210 units last month. The two-wheeler sales also received a push in the post-pandemic era with a 16.33% growth selling cumulatively 15,57,429 units in August 2022. As for three-wheelers, the total sale saw a leap of 62.5%, selling 38,369 units in August 2022. In the first quarter of 2022-23, domestic CV sales grew 112% at 2,24,512 units. While good monsoon and the upcoming festive season are likely to increase demand, we need to keep a close watch on the dynamic supply-side challenges.
The Goods and Services Tax (GST) collected in the month of August 2022 jumped 28% y-o-y partly driven by higher inflation. August GST collections came in at Rs.1,43,612 cr of which CGST is Rs. 24,710 cr, SGST is Rs. 30,951 cr, IGST is Rs. 77,782 cr (including Rs. 42,067 cr collected on import of goods) and cess is Rs. 10,168 cr (including Rs. 1,018 cr collected on import of goods). For six months in a row now, the monthly GST revenues have been more than the Rs. 1.4 lakh cr mark. Despite the excise duty cut on petrol and diesel, the Centre’s indirect tax collections grew by a robust 14% on year in April-August of the current financial year. This should help keep the budget deficit below the target of 6.4% of GDP.
India Ratings became the latest agency to cut its FY23 GDP forecast. The ratings agency cut the forecast to 6.9% from 7%. Fitch also lowered India’s economic growth forecast for FY23 to 7% from its June 2022 estimate of 7.8%. It now expects the GDP to slow further to 6.7%t in FY24 as compared to its earlier forecast of 7.4%. India’s biggest strength continues to be domestic economic activity, which has shown more resilience compared to the rest of the world.
Globally high inflation, rising interest rates coupled with a slowdown is worrying as there are fears of recession. Another round of major rate hikes are expected soon by both FED & BoE as inflation remains sticky. Crude prices are declining on slowdown fears & with expectations of sanctions being lifted on Iran, crude should decline further. GST collections have remained above Rs.1.4 lakh cr partly due to high inflation. IIP numbers need to sustain at higher levels while inflation has to come down to the 4-6% band. The dollar index is at a two decade high as major global currencies are depreciating. In addition to DII flows, with FIIs returning to Indian markets, liquidity is expected to remain strong. We strongly advise investors to continue their SIPs in equity funds & if possible increase the amount.
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Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 14 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.