Chief Economist at the National Stock Exchange of India
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.