Chief Economist at the National Stock Exchange of India
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.