Chief Economist at the National Stock Exchange of India
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.