Chief Economist at the National Stock Exchange of India
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.