Dr. Tirthankar Patnaik

Chief Economist at the National Stock Exchange of India

About Dr. Tirthankar Patnaik

Dr. Tirthankar Patnaik is Chief Economist at the National Stock Exchange of India. He has 20 years of experience in Indian capital markets, macro and sector strategy, quantitative finance and consumer banking. Dr. Patnaik started his career as a researcher at IGIDR and worked on a number of academic and corporate projects in the area of econometrics and quantitative finance, followed by a stint in consumer banking analytics as an analyst with the Global Consumer Group of Citibank in India and Europe. His next focus area was equity strategy for institutional clients, initially with Citigroup Global Markets as India equity strategist, and then with Religare Capital Markets Ltd, as the India Strategist and Chief Economist. In his last assignment prior to joining NSE, he was the Chief Strategist and Head of Research for India, at Japan-based Mizuho Bank. Tirthankar has a PhD from the Indira Gandhi Institute of Development Research, Mumbai, where his area of research was high-frequency finance and market microstructure. He also has an MSc in Statistics, and a BSc in Mathematics, both from the University of Madras.

Posts by Dr. Tirthankar Patnaik

A post-pandemic reality check?


January 2022  Global markets completed a hat-trick of positive annual returns in 2021; the Indian market’s 24.1% return was the best in four years, even as the Omicron variant of the Coronavirus spread like no other. Our sanguine expectations on this variant from the last month’s Market Pulse have been only partially realised, however. Overall caseload in India continues to remain well above 250,000 daily, just shy of the Second-wave peak, but with a fraction of the deaths (~570 now vs. 4000 then). However, the sheer spread of the variant is high enough to push casualties up—deaths remain on an upward trend. Unlike the last time, the spread is very different across states this time. A similar phenomenon is also being seen globally, where the daily caseload at 3m+ is over 3x the second wave. Daily casualties remain substantially lower but are on a rising trend. What’s more, substantial divergence remains across countries. The new year—third in the pandemic—allows us to pause and reflect on the macro environment likely in 2022. Growth is likely to turn less conducive after two years with rising rates (IMF estimates 2022 growth to be 4.4% vs. 5.9% in 2021), with vaccine shortages (and inequity) likely to continue across large parts of the world. The geopolitical environment has also warmed up, on tensions with Russia in Ukraine. In a panoply of charts, our Story of the Month lays the global macro background, complete with indicators across multiple sectors, and then proceeds to build an outlook for the Indian economy in FY23. The last word on the pandemic remains to be said, but markets have woken up to the reality of life after it. Capping a sterling 2021, when the MSCI World Index rose 20.1%, January has been a reality check. A trifecta of rising expectations of rapid monetary tightening amid high and rising input costs across the board, expensive valuations and geopolitical tensions have roiled markets. Developed market equities are down 7-8% YTD, while EM equities have extended last year’s losses. Closer home, market benchmark NIFTY 50 is down 0.4% (As of January 25th, 2022). FIIs remained net sellers of Indian equities for the third month in a row in December, with net outflows at US$2.5bn—the highest monthly outflows since March 2020, translating into net outflows of US$3.9bn in FY22 thus far (Apr-Dec 2021). Fixed income markets reflected similar worries, with short-term yields rising in anticipation of the change in monetary policy stance, while the long end of the curve remained sensitive to lingering growth concerns. The Union Budget FY23 would be presented within a week, on February 1st, and for a reflective market, also happens this time to be closer to elections in five states. Our Chart of the Month takes a closer look at historical data since 1997 and finds that while equity indices have tended to be range-bound about the Budget, with a decline in volatility. Could this time be different? On the macro front, The CSO’s advance estimates for FY22 at 9.2% is marginally lower than our 9.5% and expects overall output to surpass pre-COVID levels this year. While private consumption continues to lag, investment growth at 15% is good news for a sustained recovery. Nominal GDP—important for budgetary calculations—is pegged at 17.6%, meaningfully higher than the budgeted 12.9%. Growth seems to have lost some momentum in the second half, particularly in contact-intensive services, possibly reflecting the impact of rising Omicron spread and renewed restrictions as well as persistent supply-side bottlenecks. Meanwhile, retail inflation continues to rise., up 70bps MoM to 5.6% in December, with core inflation staying put at 6.2%. The trade deficit in December remained high at US$21bn, but with both components higher. Apart from these we also have on current account deficit (expect 1.6% of GDP for FY22) and the fiscal deficit. There are four papers in the Insights section, two from the NSE-NYU Conference 2020. The first paper by Kalimipalli, Marisetty and Ramachandran offers a sobering assessment of capital infusion into public sector banks. Based on data over the period 2008-19, the authors rule out unequivocal evidence of such infusions lowering the systemic risk in these banks. The second paper by Gatchev, Seth, Singh and Vishwanatha finds a reassuring drop in price variability of IPO stocks after price limits were introduced by SEBI in 2012. A highly cited paper Sensoy (2009) considers the need for ideal measures of fund performance, with results that over 30% of diversified US MFs had a mismatched benchmark in their prospectus (then), potentially aligned with fund managers’ incentives to improve cash-flows. The last paper by Kozak, Nagel and Santosh take a bold step towards characterising stock market returns, but not through the standard three- or four-factor return models, with a bevy of models to estimate the stochastic discount factor (SDF) coefficients for models with many (50+) factors. Our theme of this month’s Pulse is life after the pandemic. The central banks seem to have woken up to the reality of high-inflation post-pandemic world, with implications for both monetary policy and growth. Overall debt levels across the world have shot up in addition, thanks to the liberal fiscal stimuli. India’s relatively fiscally conservative stance, coupled with easy monetary policy has worked well thus far. As seen in the CSO’s estimates, however, our PFCE (that’s Private Final Consumption Expenditure) remains anaemic. That needs to change going forward for the fledgling recovery to sustain; the Union Budget FY23 might just act as the catalyst here.

Russian roulette in Ukraine


February 2022  “There are decades when nothing happens; and there are weeks when decades happen”. Lenin’s well-known quote is often invoked for situations when global events seem to be getting ahead of us. Arguably the world around has never remained static, even geopolitically (US leaving Afghanistan in ’21), but the Russia aggression in Ukraine would rank right up there. As we note in our Market Roundup section, the macro implications of the Russia-Ukraine conflict are likely to be far-reaching, reflecting in commodities and risk assets in general already, amid higher volatility across the board. Developed markets underperformed emerging markets (EMs) in January 2022—the first time in three months. While the MSCI World Index ended the month 5.3% lower, MSCI EM Index outperformed with a smaller loss of 1.9%. Selling continued in February, with MSCI World and MSCI EM Indices falling by 3.3% and 5.5% respectively in February thus far (As on February 24th, 2022). Indian equities moved in tandem with the broader EM pack, with modest selling in January that intensified in February amid rising geo-political tensions, reducing earnings growth momentum, and worsening domestic growth-inflation trade-off. This was partly offset by abating fears on the COVID front leading to continued unlocking of the economy, a credible growth-focused Union Budget and unchanged policy stance by the RBI. The Nifty 50 Index ended January with a modest loss of 0.1%, outperforming its EM Peers, but has fallen by 5.3% in February thus far, led by a broadbased sell-off. Mid- and small-caps have sharply underperformed this year, pointing towards a strengthened risk-off environment. Strong buying by domestic institutional investors (DIIs) has failed to make up for heavy selling by foreign capital outflows over the few months. Apart from geopolitical news, rising inflation kept global fixed income securities on the hook, with yields rising through the term structure, leading from the front. US 1-5 year treasuries have risen 60-80bps YTD, while the 10-year have jumped 47bps to pre-pandemic levels of 2%. The RBI’s unexpectedly dovish policy stance kept the lid to some extent on Indian paper, with antipodean effects, short-term yields stayed largely flat, while renewed growth concerns and heavy supply of government paper this year (FY23 fisc at 6.4% with new borrowing at Rs14.9trn) saw the 10-year yield rise 30bps. The pandemic continues to be clearer in the rear-view mirror, with the overall caseload in the country expected to drop below 100,000 soon. What is important now is the trajectory of the recovery that the economy would take and here, the RBI’s call to provide support for growth amidst global inflation and shying away from guidance on the planned path of policy normalisation bears testimony to the state of aggregate demand. The RBI expects FY23 GDP growth at 7.8%, a tad higher than our estimate of 7.5%, but lower than the 8.5% posted by the Economic Survey. Notwithstanding a potential improvement in growth recovery, headline consumer inflation is expected to moderate in FY23, with RBI’s estimate for the fiscal pegged at 4.5%—lower than our estimate of 5%. Barring the Russian roulette in Ukraine, global central banks have been on the tightening path, and the RBI runs the risk of falling behind the curve on inflation, potentially exposing the economy to more stringent raises going forward. Case in point, crude prices have increased by 17% since November last year, but pump prices have fallen by 13%, thanks to continued excise duty cuts. The Union Budget FY23 is a continuation of the Government’s pro-growth vision and lays out a blueprint to drive India’s growth trajectory over the next 25 years (‘Amritkal’). There is a strong focus on supporting capital formation to guide the economy through the recovery from the damage caused by the COVID-19 pandemic until private investment resumes. The budget, however, refrained from announcing any direct sops for boosting consumption. At 6.9% of GDP, the revised fiscal deficit for FY22 is a tad higher than the budgeted estimate of 6.8%. Please see our detailed analysis. Our analysis of corporate earnings in the third quarter of the fiscal finds weak domestic demand, thanks to recurring COVID spells, continued supply-chain disruptions, and intensifying input cost pressures. Top-line growth YoY has dropped from 41% in June’21 to 28% in September and now, a still respectable, but a lower 25%. Corporate earnings this year of the top 200 covered companies is now pegged at 41%/22% over FY22/23, a 31?GR that’s primarily led by commodities. Our analysis has many more interesting details across sectors, across all three levels (top-line, profits and margins). The Insights section has multiple interesting papers. The first by Majumdar and Singh (2020) finds communication on COVID-19 by firms across sectors to help in reducing information asymmetry. A highly cited paper by Forbes and Rigobon (2002) analyses contagion across markets and makes the subtle point that the increased interconnectedness seen during times of crises that we consider contagion could be largely explained by the correlation brought about by inevitably increased volatility during such periods. On a lighter note, if wars and related disruptions to the markets weren’t enough, a paper by Edmans, Garcia and Norli (2007), using a cross-sectional study across 39 countries finds that loss in an international football match has an economically and statistically significant negative effect on a country’s stock market. We live in interesting times, regardless of the antecedents of the expression. Thanks to the pandemic, or despite it, the world we live has changed substantially in the last few years, and such changes are not done yet.

Russia-Ukraine and the world economy


March 2022  Amidst the relatively fertile area of opinion and received wisdom in the immediate aftermath of the Russia-Ukraine conflict was the almost universal agreement on its duration, given the perceived imbalances in the military balances. As the war enters a second month and has yet to show signs of any resolution, commentary and forecasting based on peace returning after a short, terrible war needs to be realigned with reality. One month on, crude prices remain on the boil, despite the marginal drop in risk premium. Natural gas, food, and commodity indices in general have remained elevated, and little seems to have changed in the underlying causes that led to these conditions. The sanctions imposed by the West on Russia have only expanded in scope, without a peak in sight, and seem unlikely to be ephemeral in any way. Despite the relatively small size of the two economies in terms of GDP, their impact on energy and food prices is likely to disproportionate. For instance, Russia accounts for ~30% of global crude and natural gas production; Ukraine and Russia together account for a third of global wheat exports. Our Chart of the month is a quick study on the impact of Russia and Ukraine in global trade, and good measure, their linkage with India. For global central banks, the need to contain inflationary expectations remains, partly exacerbated by negative real rates that may not help anchor them. The US Fed’s 25bps hike earlier this month with six more to follow, and later commitment to go even more hawkish as necessary shows where we are, now. In this concoction we can mix in a Chinese slowdown, engendered by their zero-COVID policy. China’s growth target of 5.5% this year is the lowest in decades and could still be out of reach. For the rest of the world, a not-yet-post-pandemic recovery gets an extension with negative results. The response from fiscal (spend even more?) and monetary policy (delay tightening or worry about inflation) worldwide would be divergent, and may not yield the right results, in the absence of a concerted effort. Longer-term tendencies towards autarky, and the resultant impact of supply-chain efficiency would be only of the many unintended consequences of a great-power geopolitical conflict. The IMF’s current forecast for global growth in 2022 is 4.4% but could see downgrades by the April WEO. “May you live in interesting times”, as the Chinese say. Please see our Story of the month, “Escalating Russia-Ukraine tension add to stagflation woes”. While the MSCI World Index is down 2.7% in February and 6.8% in 2022 thus far (As on March 23rd, 2022), EM equities have underperformed, with the MSCI EM Index falling by a tad higher 3.1% in February and 7.4% in the year thus far. Indian equities tracked global markets and sold off sharply in February owing to intensified geo-political tensions, rising commodity prices and attendant inflationary pressures and aggressive rate hike outlook of global central banks, particularly the US Fed. This was partly offset by sustained accommodative stance by the RBI, a credible growth focused Union Budget, and resilient corporate earnings. The Nifty 50 Index ended February with a loss of 3.2%, but has risen by 2.7% in March thus far, contrasting EM peers. Gains over the last month have been primarily led by commodity-oriented sectors that have benefited from a spike in global commodity prices. Mid- and small-caps have sharply underperformed this year, pointing towards a strengthened risk-off environment. Strong buying by domestic institutional investors (DIIs) has failed to make up for heavy selling by foreign capital outflows over the few months. Global debt markets remained afflicted by aggravated inflationary pressures and aggressive rate hike stance by the US Fed, with yields rising across the spectrum. The selling was far more intense at the short end of the curve, with the US 1–5-year treasury yields rising by a steep 110-140bps in 2022 thus far, while 10-year yield has risen by 82bps to 2.3%. Other developed economies also saw yields inching up sharply, with German and UK 10-year bond yields rising by more than 60bps in 2022 thus far. India fixed income markets has remained under pressure too, albeit not as intensely, thanks to the RBI’s easy policy stance and incrementally strengthened dovish rhetoric. Strong dollar, rising crude oil prices, worsening geo-political tensions and a hawkish Fed have all weighed on EM currencies including the INR (-2.3% in 2022TD to 76.3). On the macro front, inflation continues to rise (6.1% in Feb’22), steadily undermining the assumptions of the RBI MPC that led to a 4.5% figure for FY23. Despite the arguments against imported inflation in food, this component of the basket has been rising for five consecutive months. The general direction of wholesale inflation in the country remains due North, since August 2020. What is also worrisome is that core inflation has been inching higher on a sequential basis. Third quarter GDP at 5.4% missed expectations and could be heralding more woe as aggregate demand reels under input costs rising faster than incomes. January IIP print at 1.3% (two-year CAGR at 0.4%) outlined the problem well. The April meeting of the RBI MPC promises to be interesting. As usual, the Insights section of the Market Pulse affords serious thought with its ideas. The first featured paper by Mrinal Mishra and Steven Ongena studies how loan off-take behaviour is affected by a novel event: Conflicts. While the disbursement of loans does not change, the cost of lending does. Another paper by Shohini Kundu and Nishant Vats examines the geographic variation in investment, not through agglomerative forces like the availability of factors of production, or a favourable geographical location, but through history. Does where you end up really depend on where you began? Two other highly cited papers explore interesting questions: How does founding-family ownership relate to firm performance, and if momentum in stock prices is really what it is. Speaking of ideas, an interesting one is the so-called Amara’s Law. It posits that we tend to overestimate the impact of new technology in the short run, but we underestimate it in the long run. In other words, there are high hopes attached to a new idea, only to see the dashed over the course of the next few years, at which point the changes wrought by it really ‘move the needle’. There are several examples in the past, like the telephone, steam engines and computers in the past, all with promise, then disappointment, and eventual transformational change. Experience does not necessarily lead to wisdom, however. Amara’s law could be equally true today for the distributed ledger, digital currencies, ADAS and climate change. And why technology, indeed. Consider the Russia-Ukraine conflict in the same prism, and the world no longer looks the same.

Markets in a low-growth, high inflation world


April 2022 The Russia-Ukraine war has entered a phase where the immediate outcome—however unfortunate that might be—has begun to cede space to the longer-term consequences. A world getting inured to the outrage and reasoning about the war, its terrible imagery has now settled in, and it is time to think of how life would change in its aftermath. Markets across the world are waking up to the reality of runaway inflation and an impending slowdown that would hinder corrective action. Our fears and worries about a reality assessment in the March ’22 edition of the Market Pulse have now morphed into downgraded forecasts of global GDP by multilateral agencies, and in a sobering April for the markets thus far. The IMF now pegs global GDP growth for 2022 at 3.6%, down by 80bps, with prices slated to rise 7.4%. The World Bank expects 2022 growth to be 3.25%. Restricted supply from Russia—either due to the sanctions, or due to Moscow’s own punitive measures (cf. Poland and Bulgaria)—are likely to have debilitating impact on a fledgling global recovery, pushing already-high prices skyward, precipitating crises across countries. Sri Lanka today is reminiscent of the Middle East in the early 2010s when food shortages led to systemic changes. And lest the current events remind us of 20th century irredentism, other examples abound across the world. From a long-term perspective, the impact on the global economy would also be driven by redefined alliances in the wake of the Ukraine war. Following a near-full recovery in March with a 2.5% gain, developed market equities (MSCI World Index) witnessed a landslide fall in April at the steepest monthly pace (-8%) in last two years. The EM pack continued to underperform their DM counterparts, falling by 2.5% in March and by another 8.6% in April thus far(As on April 27th, 2022). In addition to the Russia-Ukraine war and its unfortunate consequences, global markets have had to worry about another overhang, the impending slowdown in China, where major cities and industrial region remain under watch under the ‘zero-COVID’ policy followed there. Indian equities have tracked global markets in terms of heightened volatility but have meaningfully outperformed emerging as well as developed market equities this year and that too by a wide margin. This has been supported by strong inflows by domestic institutional investors over last several months that have far exceeded massive outflows by FIIs. Sustained accommodative stance by the RBI, near-complete re-opening of the economy and strong fiscal support have kept sentiments of domestic investors buoyant. The Nifty 50 Index ended March with a gain of 4%—the highest in seven months but has fallen by 2.4% in April thus far (2022 YTD: -1.8%), primarily led by the IT sector. Sell-off in global debt markets has gained further strength in the wake of worsening inflationary pressures owing to the Russia-Ukraine standoff and aggressive rate hike stance by the US Fed. The US 1–5-year treasury yields have risen by a steep 150-185bps in 2022, while the 10-year yield has moved up by 132bps to 2.8% (As on April 27th). Yields in other developed economies have also seen a sizeable jump but not as steep as seen in the US. Indian fixed income markets have remained under pressure too, with yields rising across the board, albeit by a much lower quantum. This possibly reflects muted expectations of a faster rate hiking cycle ahead despite a hawkish RBI tone in the April policy, thanks to the prevailing slack in the economy. Strong dollar, rising crude oil prices, worsening geo-political tensions and a hawkish Fed have all weighed on EM currencies including the INR (-2.95% in 2022TD to 76.5). On the macro front, inflation continues to rise (6.95% in Mar’22), surpassing the RBI’s upper bound for the third month in a row. This forced the RBI to shift their narrative from growth to inflation in the April policy and raise inflation forecast for FY23 by a steep 120bps to 5.7%. There has been clear moderation in growth momentum—Manufacturing PMI in March came in at six-month lows; IIP growth at 1.7% in February fell short of market expectations. This has led to downgrades in growth forecasts across the board. Our estimate of FY23 GDP growth of 6.5% is far more sobering than the RBI’s 7.2% (down from 7.8%) and the IMF’s 8.2% (down from 9.0%) and assumes a rather severe impact of the ongoing geopolitical crisis on global trade and inflation. India’s external vulnerability has shot up meaningfully, with our estimate suggesting a widening of current account deficit by 170bps to 3.5% in FY23 if crude averages at $100/bbl. This may impart depreciating bias to the INR, even as India’s strong foreign exchange reserves and active intervention by the RBI may provide some downside support. As usual, the Insights section of the Market Pulse affords serious thought with its ideas. In this edition, we try and touch upon an important facet of ESG—the ESG reporting in India, it’s evolution over the years and transition to the much-awaited Business Responsibility and Sustainability Report (BRSR). With more quantitative and standardized disclosures on ESG parameters, the BRRR enables better comparability across sectors, companies, and markets. Insights from academic reports include the first featured paper by Daniel W. Richards and Gizelle Willows that examines how trading behaviour of individual investors varies across days and times within a day. The authors suggest that individuals gain more information during weekends, leading to higher frequency of trades on a Monday morning. Two other highly cited papers explore interesting ideas; the first analyses the underlying drivers of a mutual fund’s activeness and its performance and the second attempts to answer whether market timing affects capital structure. While we are on insights, it would be remiss on our part not to reiterate our call for research proposals under the NSENYU Stern Initiative. The last ten years have seen this initiative blossom into one of the top finance conferences in the country. Events of the past two months may have been sobering for the world in large; the greatly increased uncertainty adds to the two other game-changing trends of our time. Climate change as a theme, and secondly, the accelerated impact of technology in our lives. The lives of billions would be defined by these three in the near to medium future, and countries would be differentiated by their response. For all the current pain, India could among those that stand out.

Adjusting and responding to high inflation and uncertainty


May 2022  It was a mere five months back that the world markets were celebrating a hat-trick of positive returns years, with major indices at life-time highs, having bested the worst of the Coronavirus pandemic, the US economy firing on all cylinders, and with the rest of the world following suit. The last five months have been a testimony to how things could go wrong even at the end of the tunnel. Runaway inflation breaching levels not seen in decades, finally made central banks sit up and take notice, including the RBI, on May 4th. Russia’s invasion of Ukraine in February, and the spread of virus in China were unforeseen events, as were the consequences. The Chinese lockdown of major urban centres exacerbated the impact on growth in the world’s second largest economy, while the failure to realise revanchist ambitions in Ukraine amplified the distortionary impact on several commodities, including those in the agricultural space. While incremental rate hikes are now a given, global markets continue to face the consequences of the increased political uncertainty in our world this year. Global equities had a landslide fall in April at the steepest pace in the last two years, with no signs of respite in May (MSCI World Index: -8.4% (April), -5% (May till date), YTD -17.8%). Ongoing geopolitical tensions that refuse to ease, continued supply-chain disruptions, COVID-induced lockdown in China and rising interest rates have all weighed heavily on investor sentiments, notwithstanding visible economic ramifications of some of these issues. Emerging markets (DM) outperformed the broader developed market (DM) pack and fell by a little lower 5.7% in April and 3.8% in May thus far (YTD: -16%), reflecting the impact of pick-up in risk aversion globally. Indian equities, while following suit, were relatively less impacted, reflecting the impact of strong buying by domestic institutional and retail investors, in turn providing some support amidst massive FII outflows. On the negative side, a sharp spike in recent inflation prints, expectations of more front-loaded rate hikes by RBI after the one delivered early this month and resultant surge in bond yields have added to investors’ caution. The Nifty 50 Index ended April with a loss of 2.1%, albeit much lower than its EM/DM counterparts, but is down 4.9% in May thus far (2022 YTD: -6.3%). Sell-off in global debt continued in April as worsening inflationary concerns have increased expectations of aggressive rate hikes by the US Fed, leading to yields rising across the board. Markets, however, saw some respite in May after Fed’s Chair indication of 75bps hike being off the table for now. After a 30-50bps hike in May, sovereign bond yields in the US remained somewhat steady or inched down marginally across the curve in the current month. Indian fixed income market is finally catching up, with yields rising sharply over the last month or so following RBI’s surprise rate hike, overshooting the movement in global bond yields by a wide margin. The sell-off has been far more intense at the short-end, leading to significant flattening of the yield curve. Meanwhile, EM currencies have remained under pressure amid continued dollar strengthening, with INR falling 4.3% against the USD to record-high levels in 2022 till date. On the macro front, inflation continued to rise and in an incrementally more broad-based manner, jumping to an eightyear high of 7.8% in April and surpassing the RBI’s upper bound for the fourth month in a row. This forced the RBI to go for an aggressive off-policy hike of 40 bps early this month, with expectations of more front-loaded hikes getting priced in. IIP growth at 1.9% in March was a tad higher than market expectations but provided dismal signs of recovery. Growth estimates are getting curtailed, with our estimate of 6.5% for FY23 being somewhat more sobering than the RBI’s 7.2% and the IMF’s 8.2%. Worsening global backdrop has increased India’s external vulnerability, as witnessed from widening trade deficit, flight of foreign capital away from Indian equities and depreciating rupee. Our estimates point to a huge deficit on the Balance of Payments this year following three good surplus years, even as our strong foreign exchange reserves position may provide some relief. Our Story of the Month this time decodes states’ fiscal profile in the post-pandemic recovery phase by analysing budgets of 20 states that account for more than 90% of the country’s GDP. Our analysis shows that while states’ have been a tad more optimistic on the revenue front, they have generally been in sync with the Centre on pushing capital expenditure. That said, the quality of finances varies significantly across states, and understandably so, with Gujarat projecting the lowest 1.6% fisc. in FY23 and Madhya Pradesh the highest at 4.6%. States’ reliance on market loans to fund their deficits has increased manifold since 2015, more so during the pandemic, and remains an area of concern. With ESG gaining significant prominence in India over the last few years, we started with the endeavour in the last edition of Market Pulse to touch upon important facets of an otherwise wide field of research. As usual, the Insights section of the Market Pulse brings to the table summarised versions of research done on some though-provoking ideas in the field of financial markets. Insights from academic papers from the field of behavioural finance include the first featured paper by Nadine Strauss and Christopher Holmes Smith that shows that market reactions are driven by business events and expectations rather than the follow-up reporting by financial news media. The second highly cited paper from the same field by Ferri et al. experimentally investigates on implications that human Fast trading has on market outcomes. The section also features two highly cited papers from the field of general financial markets. The first one by Freyberger et al. proposes a non-parametric methodology to identify characteristics that provide incremental information on cross-sectional returns. The second by Dyck et al. examines whether institutional investors drive corporate social responsibility by providing international evidence. We are now just one week away from the “Call for Papers” deadline for submission of research proposals under the NSE-NYU Stern Initiative. The last ten years have seen this initiative blossom into one of the top finance conferences in the country. Times of stress necessitate focus on what is relevant, and a methodical approach, and the task is cut out for the next few months. Policy imperatives would be based on getting inflation under control with the lowest exit rate on rates without losing track of a nascent recovery, supporting the recovery with the optimal fiscal impulse despite tightening rates and managing the impact of an external environment that might stay turbulent in the near term. 

Inflation uber alles? It should be


June 2022  The inflation problem is not going away, it would take a while for central banks to get it back under control, and the price to pay might just be a recession, unavoidable after all, despite all the assurances to the contrary. Interest rates across major economies would need to rise higher, and possibly faster, if a re-run of That ‘70s show of high inflation and stagnant growth is to be avoided. A 75bps hike by the Fed, the highest since 1994, and closer home, a 50bps hike by the RBI would not do the trick, not yet. Markets across the world have finally woken up to the reality of high inflation, tighter monetary conditions and slowing growth, with the sell-off in May getting protracted into June and meaningfully so. The S&P 500 index fell 11?rlier this month, getting to bear market territory before a bounce-back in the third week of the month. As we write, most global indices remain in the red. The MSCI World index is down 20% YTD, as of June 28th, and the MSCI EM index only marginally better, down 16.4%. Indian markets reflected the sell-off and pullback in global equities, but to a smaller extent, thanks to sustained buying by domestic institutions and retail investors. Market benchmark NIFTY50 corrected by 3% in May, underperforming both developed and emerging counterparts, and by a further 4.4% this month and is down 9.7% YTD. After a brief respite in May, global bonds saw an extended sell-off, driven by the Fed’s 75bps rate hike with a promise of more to come and increasing signs of a US recession sometime next year. This led to rising yields across the board and a flattening of yield curves across all major markets. The extended Russia-Ukraine conflict and the sanctions that followed looked set to result in a Russian bond default for the first time since 1998, given the inability to service payments through the global financial system. Closer home, the RBI’s 50bps hike earlier this month following a surprise off-schedule 50bps hike in early May contributed to the steady, front-ended rise in yields. The spread between the 10-year and the 2-year bond has dropped to levels last seen in Mar’20. More on what has been an eventful month in our Market Roundup. Market movements this year have been on broad themes of global macro-driven FII sell-off with increasing share of domestic players. Our quarterly analysis of the ownership trends of the market shows retail share at near 15-year high levels (9.7%), and the combined share of domestic institutions (Banks, Insurance, Mutual Funds) and retail at 21.7% now compares favourably with the institutional share of foreign ownership. Our analysis of exchange turnover across market segments shows retail investors to be net buyers for nine consecutive months to May’22. Our 4QFY22 earnings review finds topline growth of ~22% for the NIFTY500 universe, with net profits rising ~25%, led by commodity sectors (Materials, Energy), and Financials, even as the growth momentum now moderates further, with rising input costs and consumption slowdown disproportionately hurting the smaller companies. Consensus earnings have been revised downwards by 1.4%/1.9% for FY23/24 in 2022 thus far, with the NIFTY50 Earnings Revision Indicator now deep in the negative territory. Inflation may be the single most pervasive issue in the economy, but latest MOSPI data allows us to illustrate how it differs across states in the country. We juxtapose price levels in May’22 vs. a year ago and find significant difference in the spread of inflation across the country, with some stand-out categories like Fuel & Light. We also illustrate how states differ in capital formation and fiscal balances. On the macro front, 4QFY22 GDP at 4.1% (vs. 5.4% in 3Q) reflected Omicron-related restrictions and rising inflationary pressures. Overall growth for FY22 at 8.7% was on a low, negative base (-6.6% in FY21). Real GVA growth was lower at 8.1%, netting off the tax-subsidy gap created in FY21. We maintain our FY23E GDP estimate at 6.5% with risks skewed to the downside, amidst deteriorating macro conditions. The May’22 CPI inflation print of 7% may have moderated from April’s eight-year high of 7.8% but remained outside the RBI’s tolerance limit of the 4+-/2?nd. The RBI’s Consumer Confidence Survey now finds a steadily rising trend of both current and prospective inflation expectations. Our Insights section this month spans ESG, market indices and insightful whitepapers from the literature. The first article from the EPR team looks at the state of sustainability reporting in India and the evolution of the BRR into the BRSR framework we see today. Our next article examines India’s positioning from another important segment of the ESG value-chain, the asset managers. We compare India’s stewardship codes from various regulators with that of other countries, and the implementation by mutual funds. A new paper by the NSE Indices team provides a thorough performance evaluation of the NIFTY Non-Cyclical Consumer Index over short, medium and long-term horizons. A highly cited paper summarised by the CBS team at IIM Ahmedabad examines how foreign firms in emerging markets deal with policy uncertainty. Another summary by the team explores the impact of internet memes on investor sentiments. A highly cited paper summarised by the CAF team at the Indian School of Business introduces us to the technique of IPCA (Instrumented Principal Components Analysis) and how it outperforms conventional factor models in explaining cross-sectional returns. Another paper by the team informs us that market momentum does exist, even at an intraday level. Our call for the 2022 NSE-NYU Conference received well over a hundred applications. Final grant announcements, six in all, would be made by the middle of July. We look forward to welcoming you in December. Recovery since the pandemic has been divergent across developed and emerging economies, with the latter only belatedly returning to pre-pandemic levels. The steadily rising cost of capital would engender a recession for some, much worse for others. India’s macro fundamentals are on a relatively better footing, but the heady combination of rising rates, commodity prices and high inflation have brought back the spectre of the twin-deficit problem we had so happily left behind in 2013-14. In the last seven years, the Indian economy has come a long way, from a vulnerability perspective. Our forex reserves have more than doubled, there is hardly any oil subsidy to speak of overall trade has bounced back strongly after the pandemic, and the RBI’s liquidity management, supply of credit, and steering the economic growth trajectory during the pandemic was exemplary. We are in a much better position to face these headwinds. However, CPI inflation rose during the pandemic and then remained high, despite having an MPC with an inflation targeting framework in place since 2016. While the debate on the growth vs inflation trade-off continues, it is to be noted that rising and steady inflation levels relatively affect emerging economies more, and within them, their economically vulnerable sections. Facing the macro challenges of the next few quarters would involve a clear choice in that trade-off.

Markets get a breather on recession fears


July 2022 Indian markets whipped around after a placid June, steadily rising through the month before profit-booking took some money off the table. Global markets followed a similar, albeit subdued trajectory after two months of negative returns, as expectations on the Fed raising interest rates by 75bps for the second consecutive month matched with recession worries in the US, followed by the rest of the developed world. Now that the Fed has indeed acted on expected lines, the trillion-dollar question is: If recession does materialize soon enough, would the central banks hike less than expected? And with that, would the relentless rise of the greenback stop? Inflation would continue to be the focal point for global central banks, but markets would do well with a lower dose of the bitter medicine of rates. Recession worries also weighed on commodities—Brent crude is down 6% in the month, and the greenback continues its inexorable rise, up 1.3% MTD, but 10% this year. The consequences of a hardening dollar range are visible in sovereign default (Sri Lanka), rising trade deficit (June trade deficit at an all-time high US$26bn), capital outflows (FX reserves down US$50bn and counting) etc. The S&P500 is up 4.1% this month (on July 25th)—rising through the month until the FOMC meeting scheduled later this week brought back the reality of a slowdown—but in 2022, the developed world remains close to bear market territory (-17% YTD), in 2022. Closer home, market benchmark NIFTY was up 5.4% for the month (as of July 25th), thanks to a pause in the hitherto relentless selling by FIIs (+US$53m MTD, vs. -US6.4bn in June, -US$28.3bn YTD), even as inflows from domestic players continued to ease, after two stellar years. The NIFTY is down 4.2% for the year, meaningfully divergent from the EM pack—the MSCI EM is down ~19.8% YTD. Part of this carnage is driven by dollar depreciation—the INR breached 80, and is down 7.3% for the year, and some of the EM counterparts have fared worse. The Euro and the Pound are down 10%, and the Yen, 18%. In line with the equity markets, global bond markets had a reckoning with the prospects of recession too, in their ongoing war against inflation. Rising rates across the board in the wake of tightening by global markets have led to the flattening of yield curves as markets account for a lower growth trajectory, eventually leading to an inversion, as the spread between the short- and long-end fell below zero. The US 2s10s—an early-warning indicator of a recession— briefly went negative in March—the first time since 2007—and then did so comprehensively in July. Would the US economy indeed go into a recession? If so, when, and would the rest of the world follow? Our Chart of the Month takes a deeper look at previous recessions in the US and the macro underpinnings surrounding such events. Indian markets reflected similar worries as the long end of curve eased despite the follow-through 50bps repo hike by the RBI in June. Our Market Round-up has more detail. We profile the primary markets in the country this month, in our Story. Capital raising through this important channel of the economy peaked out in FY22, after a steady seven years of growth. Rising rates led to debt mobilisations falling 23% to Rs6trn, while equities remained largely steady Rs2.3trn, but with a shift towards fresh listings and FPOs, by large companies. We also briefly discuss 10 years of SME listings since the platforms came up in 2012. On the macro front, industrial production remained high (+19.6%) on a low base, even as the realistic three-year CAGR growth remained at 0.6%. CPI inflation at 7% remained above the 6% tolerance bounds for the sixth month in a row, but has likely peaked out, with mild moderation, thanks to the excise duty cuts on auto fuels. Wholesale inflation fell to a three-month low of 15.2%, while the CPI-WPI gap widened. The RBI PMC minutes highlighted concerns on inflationary concerns becoming broad-based amidst optimism on growth. Members unanimously agreed to change the monetary stance to ‘withdrawal of accommodation’ to reflect the policy view going forward. Meanwhile the Southwest monsoon reached our shores in time and picked up after a sluggish overture. Overall rainfall has been above normal thus far, but quite divergent across states. It was a busy month on engagements, beginning with the NSE-ICRIER Conference on ‘Getting Agri Markets Right’ on July 6th, with a panel on optimal price discovery and risk management, and then another on the role of agri-tech start- ups and FPOs in the value-chain. Prof. Bidisha Chakrabarty from St. Louis University held forth on ‘Capital markets, trading and technology’ on July 11th. The NSE-Pahle India Foundation seminar series has had insightful sessions on ESG Ratings and on Green Bonds. Policy briefs from the discussions would be posted soon. A highly cited paper summarised by the CAF team at the Indian School of Business uses Bayesian Variable Selection and Markov Chain Monte Carlo to extract asset pricing characteristics from a set of 88 factors and then compares them with a few standard benchmark pricing models like CAPM and the Fama-French Five-Factor, and machine-learning based models using Principal Components and LASSO. Another highly cited paper summarised by the same team examines a facet of Kahneman and Tversky’s Prospect Theory, the disposition effect in behavioural finance, where investors sell profit-making assets while keeping loss-making ones.  Illustratively, rising retail interest in the markets has been one of the defining characteristics of the Indian markets for the past two years. Our detailed and regular provision of information on client category participation in the markets helps analyse this phenomenon in the light of the recent correction.

Risk-off redux in August


August 2022 Market sentiments turned cautious in August, as questions on the US Fed’s next steps on arresting the inflation trajectory and linked recession fears returned, after July’s hopes on an earlier-than-expected ‘pivot’. While recent indicators have indeed pointed to an impending recession, wage growth in the US remains high enough to warrant further increases in policy rates. Inflation remains the focal point for central banks for now. For developed markets, the MSCI World Index fell 0.6% in August, and remains deep in the red this year (-15.5%). Emerging Markets fared similarly, with the MSCI EM index down 0.4% in August, 19.7% YTD, weighed down by the equity sell-off in China, where slowing growth in a zero-covid policy have weighed on sentiments, and the recent US$44bn stimulus announcement for an US$8.3trn economy underscored the need for balance between support and rising indebtedness. Thanks to investor optimism in the wake of relative economic resilience, and easing commodity prices, India has emerged as the best performing Asian market over the last couple of months, with the benchmark Nifty 50 Index rallying by 8.7% in July, followed by another 2.4% return in August thus far. FPIs (Foreign Portfolio Investors) turned modest buyers of Indian equities in July after nine months of incessant selling and bought equities worth US$5.7bn in August thus far—the highest monthly purchases in 20 months. With a modest YTD gain of 1.3% (As on August 23rd, 2022), Indian equities have outperformed its DM as well as EM peers. Global debt markets saw long-end yields falling sharply in July, reversing the trend seen over previous several months. The rally, however, was short-lived, with yields moving up in August as hawkish Fed minutes signalled further rate hikes ahead in their fight against inflation. The Indian yield curve continued to flatten with yields coming off at the mid and long end of the curve in July, and somewhat further in August, even as the short end continued to inch higher on expectations of front-loaded rate hikes, after the RBI’s 50bps hike earlier in August. Persistent dollar strengthening, along with rising recessionary concerns, has continued to weigh on EM currencies including the INR (-7.4% in 2022TD to 79.9 as on August 23rd, 2022). Please have a look at our Market Roundup for more information on the performance across asset classes and geographies. First quarter results of the listed universe continued to see top-line improvement on a continued recovery in investment demand and discretionary consumption, while an incomplete pass-through of input prices shrank margins and dragged operating performance lower. The Nifty50/Nifty 500 companies saw aggregate PAT growth 15%/19% in 1QFY23. Sector-wise, Financials saw improved asset quality, better lending rates and lower provisions; domestic sectors in general have benefitted from macro tailwinds, relative to global sectors (IT, Pharma, Commodities) that face a slowing macro environment. More detail in our Story of the month. Our Chart of the month section this time maps the digital transition of the Indian economy over the last few years. Regardless of your age bracket, the last few years can only be described as transformational, with the right use of technology leading to unprecedented development for the economy across multiple sectors. On the macro front, the index of industrial production rose 12.3% YoY in June, but importantly, the three-year CAGR at 2.2% is at 28-month high. CPI inflation for July remained above the 6% tolerance band for the seventh month running but was sequentially lower at 6.7%, with a narrower CPI-WPI gap as well. Food inflation remains high but dropped to a three-month low of 9.4%. Minutes of the RBI MPC showed a clear willingness to hike rates further, i.e., front-load them, even after the latest hike to 5.4% on the repo rate. Merchandise trade deteriorated further with deficit widening to an all-time high of US$30bn in July, and rains through the South-West monsoon this year were 9?ove the Long Period Average on August 23rd. Continuing with Behavioural Finance, we had a lively and informative conversation with Prof. Prachi Deuskar, again from the Indian School of Business, on her thought-provoking paper on Regret Theory using data from the Chinese equity markets. A recorded version of the webinar would be available soon. Our insight article tracks the advent of retail investors since the pandemic, spanning their activity and investment across segments of the market. Starting with the October 2021 edition of the Market Pulse we have continually explored this potentially long-term theme, based on India’s fundamentals and investor demographics. Our data section provides a rich set of data and insights across several dimensions. In the short term, markets and investor behaviour alike stand poised on central bank response to inflation.   

Back to the risky corner


September 2022  From optimism on a ‘pivot’ in July to caution in August to concern in September, markets have turned the corner in the last three months. A sequence of events points to hardening rates, further stress on EM and Frontier markets, and hardening of positions on the geopolitical front. The Fed’s 75bps hike with assurances of more to come, an entrenched slowdown in China—where growth has dipped below the rest of Asia for the first time since 1990—the announcement of a mobilisation drive in Russia, UK’s tax cuts—the steepest since 1972—and the resultant drop in the GBP, and a lifetime low for the INR stand out in an eventful month. Global developed equities resumed declines in August that intensified further in September. The MSCI World Index fell by 4.3% in August and by another 7.2% in September thus far (As on September 23rd, 2022), translating into a YTD loss widening to 24.5%. The emerging market (EM) pack outperformed in August and ended flat only to fall by a steeper 8.9% in September, with the YTD loss being only a tad higher at 26.5%. India equities continued to outshine global peers, supported by renewed foreign portfolio inflows, relative economic resilience and falling crude oil and commodity prices. The benchmark Nifty 50 Index rallied by 3.5% in August, followed by a 2.4% loss in September thus far. With a modest YTD loss of 0.2%, Indian equities have outperformed its DM as well as EM peers by a wide margin. Global debt markets have been reeling under pressure due to aggressive monetary tightening and hawkish forward guidance, with 10-year yields rising by 100-200bps across developed economies over the last two months. The Indian debt market, on the contrary, outperformed, with yields remaining steady at the short-end and falling at the long-end in August, thanks to renewed buying triggered by bond-inclusion news and low supply of SDLs and high-rated corporate bonds. The rally, however, was short-lived, with yields rising across the curve this month, and much more so at the short end, thereby leading to yield curve flattening further. Meanwhile, INR has touched record-high levels against the dollar (-8.9% YTD, as on Sep 23rd, 2022), thanks to persistent dollar strengthening, growth concerns and rising US yields. Please refer to our Market Roundup for more information on performance across asset classes/geographies. Our Chart of the month section this time looks at two inter-related themes. The first tries to assess the extent of policy transmission in the economy by examining movement of rates across market segments and comparing them with previous hiking/easing cycles. Our analysis shows that the transmission improved under the MCLR regime introduced in Apr’16, and more so post the introduction of EBLR in Oct’19. The second theme analysis the impact of tightened financial conditions on India Inc. Our assessment of the top 1000 NSE listed companies shows a steady drop in overall leverage over the last five years, making India Inc. better placed to weather the rising rate environment. However, MSMEs seem to be in a difficult position given their high dependence on bank borrowings (80% of debt) and greater EBLR-linked loans (58% of the total floating rate loans by SCBs). On the macro front, Indian economy grew at a four-quarter high of 13.5% in Q1 FY23, but missed market as well as RBI estimate by a wide margin. Industrial production growth also disappointed and grew by a modest 2.5% YoY, with the three-year CAGR faltering as well. Meanwhile, the headline CPI inflation snapped a three-month declining trend to climb back to 7% in Aug’22, breaching the RBI’s upper tolerance of 6% for the eighth month in a row. Merchandise trade deficit narrowed marginally but remained elevated at US$28bn in August. On the positive side, the South-West monsoon this year has recorded a 7% surplus vis-à-vis the long period average (LPA) till September 25th. Regardless of how many times we say it, the global economy is in an unprecedented state. Countries across the world are in varied levels of stress, and the interlinkages of the world we live in amplify that stress. Developed markets are overheating, emerging and frontier markets are having to tighten policy just after getting out of a global pandemic. India remains one of the economically resilient countries in this scenario. Fiscal and external balances remain in control, domestic demand continues to show signs of recovery, and the balance sheets of corporate and financial intermediaries have been through the trough. The next few quarters would help differentiate India further on the global stage.

Into the new storm


October 2022  If September was a month of never-been-seen events, then October continues to be interesting.1 The Russia-Ukraine war continues for now along lines both expected and unexpected, the proposed tax cuts in the UK have been reversed, but not before extracting their pound of flesh, as Ms. Truss demits office. The global chip shortage could worsen with the latest round of US sanctions, inflation continues to be front and centre in the economic and market discourse, with implications for global food and energy availability, and the Economics Nobel to Messrs. Bernanke, Diamond and Dybvig reminds us of the importance of banks as financial intermediaries. A concept note on CBDCs by our own central bank brings them into mainstream thinking. Global equities as well as bonds sold off sharply in September as central banks, notably the US Fed, reaffirmed their commitment to fighting inflation that continues to persist at multi-decadal high levels. All major central banks, including the US Fed, ECB and Bank of England, raised interest rates by 50-75bps in the month gone by. The MSCI World Index (Developed Markets or DMs) fell by a steep 9.5% in September—the highest monthly loss since the onset of the pandemic, but has retreated marginally this month, thanks to favourable valuations and strong corporate earnings. India equities also ended in red last month but significantly outperformed EM as well as DM peers for yet another month, aided by relative economic resilience, falling crude oil and commodity prices and strong domestic participation. The benchmark Nifty 50 Index fell by 3.7% in September, followed by a modest 2.3% gain in October thus far (YTD: +0.8%). Yields across the board have hardened meaningfully over the last couple of months as markets started pricing in a significant hike in policy rates in the coming months in the light of central banks’ strong commitment to bring down inflation within target bands. The Indian debt market was no different, with yields rising across the curve, as depreciating INR and attendant risks to inflation, surge in global bonds yields and slashed hopes of inclusion of Indian debt in global bond indices weighed heavily on investor sentiments. The INR has been touching ever lower levels as the relentless rise in the USD hits currencies around the world, some much more so than the others. Relatively better external balances, however, moderated the decline, vis-à-vis EM peers. That said, INR’s REER remains elevated. Our Story of the Month this time tracks some of these key indicators. And while intermittent showers continue in October, our Chart of the Month couldn’t wait any longer and sums up the South-West monsoon for this year. Please see our macro section for more on the macro front. The World Investor Week was celebrated last week, under the aegis of IOSCO and SEBI. Two webinars were organized at the NSE and NSE-IFSC. We began with the ‘Role of International Financial Centres’ in Sustainable Investing, followed by ‘Responsibility of Investment Profession towards Sustainability’.  

Inflation, geopolitics and Zeitenwende


Nov-Dec 2022  The COVID pandemic seem to be back where it began, and in force, following China’s rapid opening up after extended lockdowns. Far from writing an epitaph of the pandemic, we are masking up. Even accounting for the pandemic years 2020 and 2021, this has been a year of pivots. Many of the prisms with which we see the world need to be changed. We began 2022 expecting domestic levers to help as the global economy turned less conducive, little realizing the titanic nature of the shift in the environment facing us, a geopolitical Zeitenwende. While countries tried to realign their strategic choices, Russia’s invasion of Ukraine raised food and fuel prices globally, exposing vulnerable countries (some of which collapsed, like Sri Lanka) and forced central banks left with low rates and expanded balance sheets in the wake of the pandemic to factor in an unprecedented rise in inflation. The Fed raised rates in February when it found inflation to be anything but transitory. The resultant hike in rates saw the worst first half in 50 years for global equities. Some countries like India bucked the trend, partly due to new trends in household participation in markets since the pandemic. Demat accounts across the two depositories now total over 106m, a far cry from 50m in Dec 2020, even as the incremental figures are tapering off now. The Fed action on cooling down the red-hot US economy (Quarterly GDP growth @7% in Jan 2022, inflation 9.1% in June’22) meant a recession with peak rates construed as levels that led to one. Expectations of a Fed ‘pivot’ in June buoyed markets, until higher inflation prints brought them back to terra firma. In the UK, the government briefly floated above it with its tax proposals, before market realities set in. On Climate change, it was a Zeitenwende too, as the COP27 for the first time agreed to a Loss and Damage Fund to countries most vulnerable to climate change. Such cooperation is needed across countries in the post-pandemic, new global order world rising rates and a global slowdown could lead to multiple defaults. India’s current presidency of the G20 could be an ideal platform to drive a supportive and inclusive agenda. Expectations on peak rates remain high towards the year-end, even though inflation remains high (7.1% in November in the US) as well. US markets remain ~19% down YTD, while the Indian markets are up ~5%. Not just equities, 2022 has been hard on global bonds as well, the rise in rates drew the curtains on a multi-decade bull market. As we have written earlier, inflation remains front and center for the global economy, going into 2023. More in our market and macro sections in the report. Domestic resilience now matters to an India in a slowing global economy. While the struggle with inflation is indeed ‘far from over’, there are a few silver linings in an otherwise cloudy firmament. The banking system is out of the assetquality cycle, with balance sheets well-capitalised and in a position to provide for corporate balance sheets with reasonable leverage. Fiscally, tax collections have picked up in a meaningful manner, allowing scope for support next year as higher cost of funds hit a nascent demand recovery. Household savings diversification across asset classes places them in a better position to face an era of shifting return profiles. Our November/December double bill contains multiple interesting research papers. We have a total of nine papers in this edition, adding up to a total of 49 papers this year across engagements with partners ISB, IIM-A and NYU, and the interest of brevity we would refrain from individual mention. The tenth instalment of our annual NSE-NYU Conference is now scheduled for March 2023. Kindly see the Insights section for more on this. As we write this note, the war is Ukraine continues, although in a direction not foreseen in February. The pandemic seems to have returned in force to where it began. The Fed is not done with rate hikes, and the likelihood of a US recession is greater than ever. Governor Kuroda’s surprise pivot this week has meant the BoJ is now in line with major central banks. The IMF’s forecast for CY23 at 2.7% could see further downgrades for most geographic regions. For the Indian economy, inflationary conditions, rising rates and a resultant growth overhang would be the base case, steering out of which would require all hands on deck. One hopes the pandemic stays in China, but previous experience from its spread in an interconnected world has been different.

In the wake of the storm


January 2023  The worst year for global equities since the GFC, the year of the highest inflation in decades that began with a war (that continues today) and ended with a resurgent COVID in China—Most of us would be happy to see 2022 pass by. The new year should see respite on inflation, hopefully without a recession. China’s opening up has meant more to the world than its COVID figures, on the wane now. The Indian economy shone through the gloom last year, be it relatively high growth, or the benign markets. Steady macro fundamentals should see it weather the inimical macro environment this year, thanks to the rate hikes last year. The year 2022 concluded on a somber note for global equities—weighted down by a confluence of geopolitical (RussiaUkraine war, supply-chain bottlenecks), social (persisting COVID-induced uncertainty), economic (stagflation) and financial (tightened financial conditions) factors. Notwithstanding a significant rebound in Q4, developed (MSCI World: -19.5%) as well as emerging market (MSCI EM: -22.4%) equities ended the year with steep losses. Indian equities, on the other hand, outshined global markets (Nifty50: +4.3% in 2022), benefiting from relative economic resilience and strong domestic participation, with the latter more than making up for foreign capital outflows for yet another year. Last year was even more brutal for global debt that saw its worst performance in six decades. An unprecedented spike in global inflation, thanks to accentuated supply disruptions and rising food and fuel prices following Russia’s invasion of Ukraine, forced central banks across the globe to hike aggressively, leading to record surge in global bond yields last year. The US Fed, Euro area’s ECB and UK’s BoE hiked respective policy rates by 425bps, 250bps and 340bps to highest levels since the GFC. The RBI was no different, pre-emptively raising the repo rate by 225bps in 2022 to 6.25%. Notwithstanding high chances of a recession, global equities as well as debt have started the new year on an optimistic note, as dampening inflation fears and prospects of reduced pace of future rate hikes, coupled with China reopening, have boosted investor sentiments. With relatively rich valuations, Indian equities have had a somewhat weak start. More on this in our market section in the report. India’s economic resilience is well visible in the recent macro data releases. With a GDP growth of 7% in FY23 as per the CSO’s first advance estimate, India remains one of the fastest growing large economies. As per S&P Global, India is set to overtake Japan and Germany to become the world’s third largest economy by 2030. Inflation is slowly coming off, albeit far more sharply on the wholesale side thanks to easing commodity prices. Core consumer inflation (ex food and fuel), however, remains sticky, pointing to strong demand impulses. Favorable business sentiments—as reflected in the recent PMI readings, and surging credit demand is a testament of the ongoing recovery in private investment cycle, notwithstanding high lending rates. On the negative side, a significant deterioration in global demand has weighed on India’s export performance, thereby adding to the external vulnerability. As such, INR ended the year as one of the worst performing Asian currencies (-11.3% against the USD). Even as the Centre has remained focused on promoting growth via higher capital expenditure, states have chosen the path of fiscal austerity. Based on our analysis of monthly accounts of 20 states, aggregate capex by states grew by a meagre 6.1% during the first eight months of the fiscal, despite a ~23% growth in revenue receipts. Read “Story of the month” for our detailed analysis on state finances. With the upcoming Union Budget 2023-24 (Scheduled for February 1st) being the last full-year budget ahead of the general elections next year, the Centre’s fiscal stance while ensuring tax stability and judicious expenditure mix, coupled with measures to spur private consumption and investment, will be keenly watched out for.

Another year of certain uncertainty


February 2023 As we adapt to some of the unfortunate events of 2022, viz., Russia-Ukraine war, persistent COVID scare, sky-rocketing inflation and tightening financial conditions, the consequences of some of which are going to be felt for long, the new year has brought in its own set of challenges. As if the humanitarian crisis caused by COVID and Russia-Ukraine war was not enough, the devastating earthquake in Turkey and Syria early this month—one of the deadliest in the history with a death toll over 50,000—shook the world, emphasizing more than ever the need to get serious about working together. What we have instead is a world more divided, with increasing recalcitrance about working towards a common purpose. Economic and market uncertainty has become a mainstay. A series of steep rate hikes last year has done little to bring down inflation in a meaningful manner, thereby casting a shadow on the future rate outlook. On the positive side, fears of a hard landing have nearly diminished as large economies continue to display resilience and sudden end to China’s zero-COVID policy paves way for a swifter-than-expected recovery—reflected in recent growth upgrades by the IMF.  Global equities responded positively to China’s swift reopening and rising odds of a slower pace of future rate hikes in the light of moderating inflation prints. While developed equities (MSCI World Index) gained 7% in January, emerging markets (MSCI EM Index) outperformed with a tad higher return of 7.9%, thanks to renewed investor optimism for Asian equities. Strong economic readings, however, played spoil sport in February, reversing the rally to some extent.  Indian equities, on the other hand, started the year on a weaker footing as muted earnings, business-group related news and stretched valuations weighed on sentiments. The Nifty50 Index underperformed the broader EM pack and ended the month 2.5% lower, thanks to renewed FII selling, even as strong inflows by DIIs provided some cushion. Tables, however, turned in February, with Indian equities outperforming EMs yet again by a wide margin, aided by a pro-growth Budget that had something for everyone, and sustained strength in economic fundamentals. While direct participation by retail investors has come off this year, as reflected from reduced net investment flows (Rs480bn during Apr-Jan’23 vs. Rs1.6trn/Rs684bn in FY22/21) and lower share in market turnover, indirect participation via the SIP route has remained strong. As per AMFI, equity mutual funds saw net inflows for the 23rd consecutive month in January, with net infusion at Rs125bn being the highest in last four months. This is also visible in a meaningful improvement in DII share in NSE’s cash market turnover this fiscal to 11.3%—the highest in at least 12 years.   Echoing the rally in equities, global debt also moved higher amid hopes of slower rate hikes, with 10-year yields for major developed markets falling by ~30bps in January. The rally, however, was short-lived as strong economic data in the US casted shadow on interest rate expectations. Indian debt remained under pressure ahead of the Union Budget, and sold off sharply in February, reflecting the impact of a hawkish 25bps rate hike, unfavorable global cues and a sharper-than-expected spike in inflation.  The Union Budget FY24 is a continuation of the Government’s pro-growth vision. Improvement in the quality of expenditure by bolstering capex (up 37% to Rs10trn), accompanied with continued transparency, has remained a focal point for yet another year. Notably, share of capex in Centre’s total expenditure at 22.2% is the highest in 24 years. This has been achieved with continued fiscal prudence, targeting a deficit of 5.9% in FY24BE (vs. 6.4% in FY23RE). The path to fiscal consolidation has been maintained, with a target of 4.5% for FY26. Additionally, tax benefits to middle class individuals, MSMEs and start-ups, absence of hike in capital gains tax as widely expected, and boost to the financial sector have been taken well by equity markets.  In a world facing an economic slowdown, the Indian economy stands apart for now, with steady domestic demand and macro fundamentals on a solid footing. Inflation remains a worry for now, and growth is likely to be lower than last year. However, it is higher than any large economy can expect this year, corporate balance sheets are well-placed, and as we have seen from the Union Budget, there is clarity about where to direct the fiscal impulse. Getting the economy back to its potential growth path requires nothing less. On that cautiously optimistic note we bring you the February blog.

Pause: Not, post SVB; Yes, for RBI (but not a pivot); Sought, after GPT-4


March-April 2023 In our post-pandemic era that is replete with interesting stories of its own, the fall of Silicon Valley Bank and Credit Suisse in relatively rapid fashion and the uncertainty that followed brought back memories of 2008, and the foreboding sense of a GFC Redux. While such fears may have proven unfounded in the near term as investors realised SVB did not pose systemic risk, it was clear that the consequences of sudden withdrawal of expansionary monetary policy cannot be wished away and can be unexpected in where and when they hit. Central bankers are anxious not to repeat mistakes, but fear and uncertainty hurts credit flow and adds to the concoction of stubborn inflation, rising rates and geopolitical concerns. Recent worries on debt serviceability among countries have found mention in the latest IMF World Economic Outlook, where global GDP has been trimmed yet again, and a ‘hard landing’ with a ‘rocky recovery’ is expected. The RBI’s pause in the latest bimonthly MPC meeting is a case in point. While Governor Das made sure that it was a pause, but not a pivot, the challenges posed by a slowing economy (Growth in FY24 at 6.5% vs. 7.0% in FY23), and persistent inflation have not dissipated yet. That said, effects of the 250bps hike in rates beginning last year should be seen, and until then, a prudent pause made sense. Meanwhile, the war in Ukraine continues, with great power rivalry intensifying, and in the world of artificial intelligence promises come closer to our lives with the release of the GPT-4 LLM, an event important enough to elicit an unprecedented call for a pause on the training of such LLMs from people one would not call ‘Luddites’. Global equities marched higher in March despite volatility in the global banking sector induced by the SVB collapse in the US, followed by UBS’s takeover of Credit Suisse in Europe. The sharp sell-off seen in early March more than reversed over the rest of the month, on subsiding contagion fears. The rally was further fueled by strengthening expectations of a policy pivot amid easing inflation and a dovish Fed policy outcome. Developed equities (MSCI World Index) rose by 2.8% in Mar’23 (Q1 2023: +7.3%); emerging markets (MSCI EM Index) also performed in-line and ended 2.7% higher (Q1 2023: +3.5%). Indian equities paused, continuing to consolidate after the strong relative outperformance last year as rich valuations lured foreign investors to move to relatively cheaper investment avenues including China, Taiwan, and South Korea. On the positive side, strong Q3 corporate earnings, steady domestic participation and resilient economic performance limited the downside in Indian equities. The Nifty50 Index ended the month 0.3% higher even as it fell by a modest 0.6% in FY23, albeit much lower than 8.6% and 13.3% losses generated by developed and emerging market equities respectively. Global debt also bounced higher as easing inflation and banking crisis caused a shift in market expectations of a policy pivot from a pause to rate cuts in the latter part of the year. The benchmark 10-year sovereign bond yields across major developed markets fell 30-40bps last month. Indian debt moved in tandem, albeit less sharply so, weighed down by elevated inflation prints, followed by production cut announcement by OPEC+ in early April. The IMF’s WEO India’s growth targets have been lowered to 5.9% and 6.3% for this year and the next. Developed countries are expected to fare worse. While the Indian economy would continue to fare relatively better, a global slowdown would not leave us untouched either. As we have mentioned above and later on in the note, policy imperatives at this point need to keep the delicate balance between supporting growth and management of inflationary expectations. On that cautious note, we bring you the April edition of the Market Pulse. 

US inflation below 5%, relieved markets, and a fresh look at India’s financial system


May 2023 US consumer inflation is probably the world’s most observed economic indicator. Its relentless rise over the past three years has either been the driver, or signal for macro policy globally, with the policy response from central banks differing in degree not direction. While the sub-5% print might lead to hopes of a pause in the current cycle by the Fed, the US debt ceiling looms (again), with the pall of a default. That said, inflation across the world has shown welcome signs of easing over the past two months. Beyond macro, the G20 meetings through the year have helped us understand the role and importance of diplomacy in what seems to be an increasingly fragmented world. The forthcoming G7 meetings face the same headwinds. Geopolitics remains front and center in the mid-term global macroeconomic outlook. Global markets took comfort from macro tailwinds and on reduced contagion risks from US regional banks but eased after the strong gains of March. While we remember Silicon Valley Bank and lately First Republic, there are over 4000 commercial banks in the States, over 2100 of them with assets of US$300m, so no (further) news is good news for now, in this context.  Developed equities (MSCI World Index) rose by 1.6% in April (YTD: +8.4%; As on May 5th, 2023), while Emerging market equities (MSCI EM Index) ended the month 1.3% lower (YTD: +2.6%), with the latter weighed down by huge sell-off in Chinese equities. Indian equities outshined developed and emerging market counterparts in April. Resilient economic performance, an unexpected pause by the central bank for the first time since the commencement of rate hiking cycle last year, and a good start to the fourth quarter earnings season helped investor sentiments. Incrementally, attractive valuations brought back foreign investors. The Nifty50 Index ended the month 4.1% higher, with mid and small caps outperforming by a wide margin. Global debt showed a mixed performance in the month gone by. The US sovereign yield curve inverted further as elevated core inflation and a resilient job market kept short-end under pressure, while the long-end eased off marginally amid strengthening recession worries. Indian debt rallied further in April, as an unexpected policy pause, easing inflation and an anticipated moderation in global monetary policy tightening aided investor sentiments. India’s benchmark 10-year G-sec yield fell by 20bps in April on top of a 14bps decline in the previous month. Rising growth concerns have continued to weigh on the greenback, with the dollar index falling by another 0.9% in April (6M: -8.9%), thereby providing support to EM currencies including the INR (+1.1% against USD in 2023 till date). Precious commodities continued to rise on global financial contagion fears, while prices of agriculture, industrial and energy commodities remained under pressure.

India and US inflation at 4%: Are we at the peak?


June, 2023 May inflation prints have been around 4.2% in both India and the US; the RBI’s MPC decided to keep policy rates unchanged in its June meeting and markets expect a pause from the Fed this time too. Markets in both economies have risen in anticipation of a peak in this cycle, or somewhere close to it. ‘Sell in May and go away?” Not this time. That said, central bank commentary clearly reflects inflation in either country remains well above comfort levels. Global equities remained under pressure for the second consecutive month in May as uncertainty around the resolution of US debt ceiling, slower pace of recovery in China and a technical recession in Eurozone made investors jittery. Meanwhile, elevated inflation trajectory across major developed economies and tight labour market in the US dampened expectations of a cut any time soon. Developed equities (MSCI World Index) fell by 1.2% in May (YTD: +10.9%; As on June 9th, 2023), while Emerging market equities (MSCI EM Index) underperformed with a loss of 1.9% (YTD: +4.8%), with the latter weighed down by continued sell-off in Chinese equities. Indian equities outshined developed and emerging market counterparts for the second consecutive month in May. Resilient economic performance amidst an uncertain global environment, coupled with reasonable valuations, translated into strengthened FIIs buying last month that more than made up for weak domestic participation. The Nifty50 Index ended the month 2.6% higher (YTD: +2.5%), with mid and small caps outperforming by a wide margin. Global debt sold off in May as the central banks’ strong commitment to bringing down inflation to target levels kept rate hike expectations alive, with losses led by the UK and US. The Euro area, however, saw a modest drop in yields during the month, finding support from weak incoming economic data. The rally in domestic bond markets continued for the third successive month in May, supported by easing of headline inflation to sub-5% for the first time in 17 months and resultant expectations of an extended pause as well as strong demand from domestic institutions.  Domestic yields declined across the curve, with the benchmark 10-year G-sec yield falling by 13bps in May on top of a 34bps decline over the previous two months. The fading likelihood of rate cut this year drove the dollar index higher by 2.5% in May, thereby weighing on EM currencies including the INR (-1.1% against USD in May). Commodities remained under pressure, reflecting weak global demand and slower-than-expected recovery in China. The rally in Indian equities over the last two months is also reflected in improved trading activity, with average daily turnover (ADT) in NSE’s cash segment rising by a strong 16% MoM in May to Rs601bn. While direct retail investments into Indian equities have been coming off, participation in the form of new investor registrations, active investor base and turnover (ADT up 17%) improved last month. New investor registrations stood at 1.1m in May, with Uttar Pradesh alone accounting for ~15%, followed by Maharashtra at 13.5%. Further, following a steady drop over the previous four months, active investor base—people with at least one trade every month on NSE—rose to a five-month high of 8.4m in May. This is slightly less than 10% of the total registered retail investors on the Exchange. Notwithstanding a significant drop from the post-COVID peak of 11.7m in January 2022, it is still much higher than the active investor base of ~3m prior to the onset of the pandemic. Indirect participation, however, has continued to strengthen as reflected from a record-high monthly SIP inflow of Rs147bn last month. In this edition, we explore the transmission of the 250bps hike in the policy repo rate delivered by the RBI in the current cycle across different channels. We observe a significant diversion across them, with the money market and shortterm instruments witnessing a far bigger increase in yields as opposed to that seen in lending and credit channels. India seems to be on a strong footing amid an uncertain global backdrop, with economic growth showing resilience and inflation subsiding. Strong capex push by the Government over the last few years and healthy balance sheets of corporates and banks have facilitated the start of a long-awaited revival in private capex cycle. Improving capacity utilization and a strong medium-term demand outlook ensures sustenance of this recovery over the coming years. Not to mention, significant advancements made on the digitization front over the last few years have put India ahead of several large digital economies of the world and is likely to be a major driver of India’s growth over the next decade.    

Inflation comfort and market movements


July 2023 The June print of CPI inflation at 4.8% makes it clear that the central bank’s concern on prices has been well-founded. Core inflation has remained entrenched at 5.2%, and parts of the food basket remain high, thanks to erratic rains. The MPC has rightly concluded that the recent pause in the policy rate action should not be construed as the end of the tightening cycle. Our June report had highlighted the distinction between Indian and US inflation, while they nudged the 4% figure. In contrast with the Indian data, US inflation has dropped to the 3% figure, levels last seen in Mar’21. To get a sense of how far (and fast) events have unfolded there, note that in between these two 3% prints, inflation there had jumped to 9% in Jun’22, the highest since May’80. Given the cautionary note from the Fed, it may not (yet) be the end of the tunnel there as well. Markets, however, seem to have other ideas, going by the trajectory of the US markets this year. In fact, the last two months have seen global equities pricing in the scenario of easing inflation without an incremental tilt towards recessionary conditions. Recovery in the US and Euro Area have led to growth upgrades by multilateral institutions, even as questions remain on the Chinese recovery after the recent 2Q GDP print. The other global macro story is the US dollar’s sustained drop this year. More on this in our macro roundup. While the jury is out on how long the downward trend would play out, the macro implications are significant. Closer home, the South-west monsoon began erratically this year, a week late from the long-term average, then covered the country rapidly. A deficient June (-9%) was followed by excessive rainfall in July, bringing the total to parity by mid-month. That said, the distribution this year has been uneven, with parts of northern India receiving well above average (+47?ove LPA), normal rainfall in Central India and a 22?ficiency in the Southern peninsula. Indian markets, while lagging early in the year, are playing catch up as foreign inflows returns after the exodus last year. The rising trend of the last three months, after a lull of more than a year as easing inflation, a better GDP print than expected and relatively robust macro fundamentals have showcased India’s attractiveness to global investors. The market benchmark NIFTY 50 is at 19700 levels as we write. Across the listed universe, small and midcaps have outperformed vis-à-vis the broader market. More on this in our market roundup. Our Story of the Month this time analyses the 4th quarter (Q4FY23) corporate earnings for Nifty 50 and Nifty 500 companies. The analysis shows that while topline growth moderated for the third quarter in a row, weighed by weakening external demand and falling commodity prices, operating profit margins improved on easing cost pressures. Our analysis of earnings revisions for the top 200 companies by market capitalization points to modest downgrades for yet another quarter, even as the extent has come off, led by export-oriented and commodity sectors (IT, Pharma and Materials). We also take a close look at the overall and sector-wise distribution of Nifty 500 companies across major financial parameters.  Among new investors, Uttar Pradesh continued to lead for the fifth month in a row, while Maharashtra has picked up in the past two months. Overall active investor participation—defined by at least one trade in the month—rose to 8.9m for the CM segment and remained around 3m for derivatives. Average no. of such investors in the market has remained on an upward trend over the past few years, even if the monthly retail net investment figure has been muted. Meanwhile, the monthly SIP inflows have been around Rs140bn for the past few months; also signifying the increased retail interest in the markets since the pandemic.

Inflation, markets, rains and investor behaviour


August 2023 Inflation continues to ease off across the world, with some exceptions (India), and too much in some countries (China). The US inflation trajectory continued due South in July, raising expectations of a pause by the Fed in September, even as growth remained resilient. Meanwhile the Sino-US dissension continued with fresh restrictions on China. Closer home, floods in the capital but large parts of country saw deficient rains. Global equites advanced further on the anticipation of a more favourable growth-inflation equilibrium, raising hopes of a soft-landing. Developed markets rose 3.3% in July, with a ratings downgrade of the US by Fitch on fiscal concerns and acrimony over debt-ceiling restriction seeing a muted response. Emerging markets did better, rising 5.8%, led by China, expecting policy support for the real estate industry and consumption in general. The benchmark NIFTY 50 index rose 2.9% in the month, driven by sustained buying by foreign portfolio investors (US$5.7bn in July; FYTD US$18.2bn). Small and midcaps performed even better—despite a mixed earnings season that has yet to see demand moderation from higher rates and tepid global environment—with the NSE Midcap 150 and NSE SmallCap 250 rising 5.6% and 7.8% respectively. Global debt remained under pressure in July. Hawkish FOMC minutes in the early part of the month, strong jobless claims data and stronger-than-expected Q2 GDP growth in the US and Europe resulted in surge in global bond yields at the long-end. Yields at the short end, however, remained steady amid easing inflation. Indian debt market moved in tandem with global markets and sold off marginally, weighed down by a sharp spike in vegetable prices, surge in crude oil prices following a production cut by OPEC+, and adverse weather conditions. On the macro front, CPI inflation rose marginally to 4.8% in July, pointing to a justifiably cautious stance taken by the MPC when it voted for a pause earlier this month, keeping the policy repo at 6.5%, and raising inflation targets for the year. Vegetable prices, esp. tomatoes, remain on the boil for now. Mopping up excess liquidity in the system due to sustained portfolio inflows and return of Rs2000 notes required an additional measure, the ICRR (details in the note). Growth likely remains strong for now, with consensus 2QFY24 estimates at 6.2%, and the IMF raising FY24 growth to 6.2% (vs. 5.9?rlier). Activity-wise, Services PMI at 62.3 is the highest since June 2010, and Manufacturing PMI remains buoyant too. The South-West monsoon picked up sharply in July and August, leading to normal rains (vs. LPA), as of Aug 8th. Plentiful rains in July were not an India-wide story, however. While the North and North-Western India received significantly higher rainfall than usual—over 50% from the LPA—leading to floods in Gujarat, and the capital seeing rainfall not seen since the late 70s, the rest of India was not so lucky, where rainfall has been deficient thus far. Indian agriculture remains rain-fed to a large extent, and with over the three-fourths of the overall precipitation, the SouthWest monsoon is diligently tracked through the weeks, across the country. Its variation over the years has been a matter of much study, given the wide-ranging economic implications. Our Story of the month takes a step back for a better look. It begins with temperature, for its role in determining long-term climatic conditions, including the monsoons. Tracking monthly temperatures for over a century makes some sobering observations. Barring June and August, we find median temperatures rising for each month of the year. Rainfall patterns over the years have become divergent and likely harder to predict. These changes appear to be accelerating—the monsoon now routinely extends till October, with larger deviations. More details in the note, where we also track how this has affected cropping patterns. We have mentioned FPI interest in equities this fiscal above. In contrast, domestic players, both institutional and retail, reflect a measured view, with net inflow at Rs 55 bn (As on August 10th, 2023) and outflow of Rs 214 bn (As on July 31st, 2023) respectively this fiscal. Retail interest in terms of new investors, however, continues unabated with the July figure at 1.5m—the highest since May’22, led again by the North region. New investors this fiscal at 4.7m are in line with FY23. A total of 9.7m retail investors—the highest in ten months—traded in the cash segment, where the turnover rose to Rs 726bn (ADT). 3.7m investors traded in the derivatives segment where the stock futures notional turnover touched a record Rs2.0trn on July 27th. The world is likely to see higher than expected growth this year, cf. IMF’s recent upgrade to 3.0% for 2023, vs. 3.5% last year. The IMF now expects global growth to be the same next year as well, i.e., 3.0% in 2024, but there is some cheer on the inflation front. Global inflation this year is expected to drop to 6.8%, vs. last year’s 8.7%; and then drop further to 5.2% next year. The attendant risks of the war in Ukraine and broadly, of climate change, continue to pose headwinds. The latest WEO from the IMF notes that we may no longer worry about the pandemic, supply chains have recovered, shipping costs and delivery times are back to pre-pandemic levels. While that should bring cheer, the slowdown in China, and continued instances of Sino-US rivalry and emerging geopolitical alliances are adding to a world morphing before our eyes. Pervasive technology has blurred borders, yet protectionism is rising; global trade has started rising again after the pandemic but remains below 2008 levels to this day (-7%), even as the world economy is 56% larger. Back to the macro scene, rates remain high across the world and central bank commentary does not provide much cause for comfort at present. The consequences such rates are likely to play out in slower growth in the bigger economies and worse in their weaker, indebted peers. For India, resilient domestic consumption, stable macro fundamentals and resurgent services remain tailwinds in this scenario. 

India@G20, Nifty@20k


September 2023 The recently concluded G-20 summit at New Delhi was not the first, but the eighteenth summit since the inception of the group in 1999, and its presidencies are chosen by rotation. Seldom, however, has its annual stewardship aligned so closely with a country’s global leadership positioning. In the emergent multipolar world, India is a voice to be heard from one sixth of humanity. This is a voice of inclusivity at multiple levels, ranging from finance (multilateral development institutions) to society (women-led development) to countries (inclusion of the African Union), and has resonated with our view of ‘Vasudhaiva Kutumakam’ (The World is one family), our ancient civilizational mantra, in these fractured times with the concomitant difficulties of international cooperation. The fight against Climate Change, for instance, is bigger than any the world has ever seen, and India’s support to the cause—despite its low per capita incomes—is a testament to its commitment. Coinciding with the country, has been a new high for the national benchmark, the NIFTY 50. Reaching 20,000 has taken nearly 28 years since 1995, with three-fourths of that period for first 10,000. Like the broader macro environment that they represent, markets have an underlying theme of continuity about them, beyond the thresholds and landmarks that help us understand them. Nevertheless, it is opportune to reflect awhile on the journey of the NIFTY50 since then. Before we do that, however, let us discuss the rest of the fare in this month’s Pulse.  Global equities broke their rallying spree and sold off in August, accompanied with heightened volatility, thanks to renewed stress in the Chinese property market, slowdown in China and rising global bond yields. Developed equities fell 2.6% in August, while Emerging equities underperformed, with the MSCI EM Index generating a much higher loss of 6.4%, thanks to heavy sell-off in Chinese equities.  Indian equities moved in line and ended in red for the first time in six months, with the benchmark Nifty50 Index falling by 2.5% in August. That said, continued, albeit tapered, buying by FIIs, renewed buying by DIIs, economic resilience, and robust corporate earnings for Q1 FY24 provided some downside support, with India outperforming the broader emerging market pack. Interestingly, small, and mid-caps continued to rally, ending the month 3.3% and 4.6% higher respectively. In terms of market activity, the average daily turnover in NSE’s cash market segment rose for the fifth month in a row to a 21-month high of Rs 766bn in August, with the share of proprietary traders rising meaningfully over the last few years. Direct investments by retail investors have come off this year, with their share of total cash market turnover in FY24 thus far falling to eight-year lows. That said, registrations are rising, with new investor registrations at 1.6m in August being the highest in the last 19 months. Indirect retail participation, however, has remained robust—evident from record-high SIP inflows in August and surge in new investor accounts with depositories. Global debt remained under pressure for the second month in a row. The US rating downgrade, announcement of higher-than-expected borrowings and strong economic data resulted in bond yields rising in the US, particularly at the long-end. Indian debt market also sold off at the short end amid a sharp spike in inflation reading, surge in crude oil prices and dry spell in August. The US Dollar strengthened against all major currencies in August, benefiting from resilient economic performance and higher bond yields. This, in turn, resulted in EM currencies depreciating last month, including the INR that ended the month 0.7% lower at 82.8 against the dollar. Our Story of the Month takes a deep dive into FY24 budgets of 21 states—contributing 93% to India’s GDP. Key takeaways include a) Tapering support from the Centre, which in turn could put pressures on states relying heavily on the Centre, b) Strong capital spending for the third year in a row, leading to capital to revenue expenditure ratio improving to a six-year high of 21.7% in FY24BE, and c) Reducing reliance on market borrowings, even as inter-state disparity remains huge. Overall fiscal deficit for these 21 states is pegged at 3.2% of GSDP vs. 3.5% in FY23RE, but with a wide range of 1.8% (Gujarat) to 5% (Punjab). A detailed version of this analysis will be released in due course.  On the macro front, GDP growth in Q1 at 7.8% was in line with expectations, supported by a pick-up in consumption demand, front-loaded capital expenditure by the Centre as well as states and, recovery in real estate demand. Other high frequency indicators such as eight core output and PMI show that economic activity is holding up well in the current quarter as well. Headline inflation, on the other hand, unexpectedly spiked to a 15-month high of 7.4% in July, led by a sharp surge in vegetable prices, particularly tomatoes, only to ease to 6.8% in August, bettering expectations. Interestingly, vegetables contributed nearly 65% to headline inflation in July, excluding which inflation rose by a modest 20bps MoM. After the driest August in the last 120 years and consequent dip in reservoir levels, inflation woes may linger on for a while, keeping rate cut expectations at bay for now. As promised at the outset, it is instructive to recount the journey of the economy and the NIFTY50 since its inception. In 1994-95, India ranked 15th globally in GDP, at US$333bn, 1.8% of the total output; we are today the fifth largest economy in the world with an annual GDP of US$3.8trn, 3.6% of global output. The market capitalisation of NSE listed companies has seen a growth of ~17% on an annualised basis since 1994 in rupee terms. The number of companies traded on NSE at the end of 1994 was 351, which has grown to 2168 by end of 2022, an increase of more than 5x in last 29 years. These companies have raised ~Rs11trn from the markets, which today touch a bigger slice of India than ever before—India has over 7.5 crore unique investors. Regardless of the impressive achievements in the journey thus far, the scope for improvement remains, as does the opportunity, for both the economy and its reflection, the markets.