Chief Economist at the National Stock Exchange of India
The Russia-Ukraine war has entered a phase where the immediate outcome—however unfortunate that might be—has begun to cede space to the longer-term consequences. A world getting inured to the outrage and reasoning about the war, its terrible imagery has now settled in, and it is time to think of how life would change in its aftermath.
Markets across the world are waking up to the reality of runaway inflation and an impending slowdown that would hinder corrective action. Our fears and worries about a reality assessment in the March ’22 edition of the Market Pulse have now morphed into downgraded forecasts of global GDP by multilateral agencies, and in a sobering April for the markets thus far. The IMF now pegs global GDP growth for 2022 at 3.6%, down by 80bps, with prices slated to rise 7.4%. The World Bank expects 2022 growth to be 3.25%. Restricted supply from Russia—either due to the sanctions, or due to Moscow’s own punitive measures (cf. Poland and Bulgaria)—are likely to have debilitating impact on a fledgling global recovery, pushing already-high prices skyward, precipitating crises across countries. Sri Lanka today is reminiscent of the Middle East in the early 2010s when food shortages led to systemic changes. And lest the current events remind us of 20th century irredentism, other examples abound across the world. From a long-term perspective, the impact on the global economy would also be driven by redefined alliances in the wake of the Ukraine war.
Following a near-full recovery in March with a 2.5% gain, developed market equities (MSCI World Index) witnessed a landslide fall in April at the steepest monthly pace (-8%) in last two years. The EM pack continued to underperform their DM counterparts, falling by 2.5% in March and by another 8.6% in April thus far(As on April 27th, 2022). In addition to the Russia-Ukraine war and its unfortunate consequences, global markets have had to worry about another overhang, the impending slowdown in China, where major cities and industrial region remain under watch under the ‘zero-COVID’ policy followed there.
Indian equities have tracked global markets in terms of heightened volatility but have meaningfully outperformed emerging as well as developed market equities this year and that too by a wide margin. This has been supported by strong inflows by domestic institutional investors over last several months that have far exceeded massive outflows by FIIs. Sustained accommodative stance by the RBI, near-complete re-opening of the economy and strong fiscal support have kept sentiments of domestic investors buoyant. The Nifty 50 Index ended March with a gain of 4%—the highest in seven months but has fallen by 2.4% in April thus far (2022 YTD: -1.8%), primarily led by the IT sector.
Sell-off in global debt markets has gained further strength in the wake of worsening inflationary pressures owing to the Russia-Ukraine standoff and aggressive rate hike stance by the US Fed. The US 1–5-year treasury yields have risen by a steep 150-185bps in 2022, while the 10-year yield has moved up by 132bps to 2.8% (As on April 27th). Yields in other developed economies have also seen a sizeable jump but not as steep as seen in the US. Indian fixed income markets have remained under pressure too, with yields rising across the board, albeit by a much lower quantum. This possibly reflects muted expectations of a faster rate hiking cycle ahead despite a hawkish RBI tone in the April policy, thanks to the prevailing slack in the economy. Strong dollar, rising crude oil prices, worsening geo-political tensions and a hawkish Fed have all weighed on EM currencies including the INR (-2.95% in 2022TD to 76.5).
On the macro front, inflation continues to rise (6.95% in Mar’22), surpassing the RBI’s upper bound for the third month in a row. This forced the RBI to shift their narrative from growth to inflation in the April policy and raise inflation forecast for FY23 by a steep 120bps to 5.7%. There has been clear moderation in growth momentum—Manufacturing PMI in March came in at six-month lows; IIP growth at 1.7% in February fell short of market expectations. This has led to downgrades in growth forecasts across the board. Our estimate of FY23 GDP growth of 6.5% is far more sobering than the RBI’s 7.2% (down from 7.8%) and the IMF’s 8.2% (down from 9.0%) and assumes a rather severe impact of the ongoing geopolitical crisis on global trade and inflation. India’s external vulnerability has shot up meaningfully, with our estimate suggesting a widening of current account deficit by 170bps to 3.5% in FY23 if crude averages at $100/bbl.
This may impart depreciating bias to the INR, even as India’s strong foreign exchange reserves and active intervention by the RBI may provide some downside support.
As usual, the Insights section of the Market Pulse affords serious thought with its ideas. In this edition, we try and touch upon an important facet of ESG—the ESG reporting in India, it’s evolution over the years and transition to the much-awaited Business Responsibility and Sustainability Report (BRSR). With more quantitative and standardized disclosures on ESG parameters, the BRRR enables better comparability across sectors, companies, and markets. Insights from academic reports include the first featured paper by Daniel W. Richards and Gizelle Willows that examines how trading behaviour of individual investors varies across days and times within a day. The authors suggest that individuals gain more information during weekends, leading to higher frequency of trades on a Monday morning. Two other highly cited papers explore interesting ideas; the first analyses the underlying drivers of a mutual fund’s activeness and its performance and the second attempts to answer whether market timing affects capital structure.
While we are on insights, it would be remiss on our part not to reiterate our call for research proposals under the NSENYU Stern Initiative. The last ten years have seen this initiative blossom into one of the top finance conferences in the country.
Events of the past two months may have been sobering for the world in large; the greatly increased uncertainty adds to the two other game-changing trends of our time. Climate change as a theme, and secondly, the accelerated impact of technology in our lives. The lives of billions would be defined by these three in the near to medium future, and countries would be differentiated by their response. For all the current pain, India could among those that stand out.