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’.