Chief Economist at the National Stock Exchange of India
In our post-pandemic era that is replete with interesting stories of its own, the fall of Silicon Valley Bank and Credit Suisse in relatively rapid fashion and the uncertainty that followed brought back memories of 2008, and the foreboding sense of a GFC Redux. While such fears may have proven unfounded in the near term as investors realised SVB did not pose systemic risk, it was clear that the consequences of sudden withdrawal of expansionary monetary policy cannot be wished away and can be unexpected in where and when they hit. Central bankers are anxious not to repeat mistakes, but fear and uncertainty hurts credit flow and adds to the concoction of stubborn inflation, rising rates and geopolitical concerns. Recent worries on debt serviceability among countries have found mention in the latest IMF World Economic Outlook, where global GDP has been trimmed yet again, and a ‘hard landing’ with a ‘rocky recovery’ is expected. The RBI’s pause in the latest bimonthly MPC meeting is a case in point. While Governor Das made sure that it was a pause, but not a pivot, the challenges posed by a slowing economy (Growth in FY24 at 6.5% vs. 7.0% in FY23), and persistent inflation have not dissipated yet. That said, effects of the 250bps hike in rates beginning last year should be seen, and until then, a prudent pause made sense. Meanwhile, the war in Ukraine continues, with great power rivalry intensifying, and in the world of artificial intelligence promises come closer to our lives with the release of the GPT-4 LLM, an event important enough to elicit an unprecedented call for a pause on the training of such LLMs from people one would not call ‘Luddites’. Global equities marched higher in March despite volatility in the global banking sector induced by the SVB collapse in the US, followed by UBS’s takeover of Credit Suisse in Europe. The sharp sell-off seen in early March more than reversed over the rest of the month, on subsiding contagion fears. The rally was further fueled by strengthening expectations of a policy pivot amid easing inflation and a dovish Fed policy outcome. Developed equities (MSCI World Index) rose by 2.8% in Mar’23 (Q1 2023: +7.3%); emerging markets (MSCI EM Index) also performed in-line and ended 2.7% higher (Q1 2023: +3.5%). Indian equities paused, continuing to consolidate after the strong relative outperformance last year as rich valuations lured foreign investors to move to relatively cheaper investment avenues including China, Taiwan, and South Korea. On the positive side, strong Q3 corporate earnings, steady domestic participation and resilient economic performance limited the downside in Indian equities. The Nifty50 Index ended the month 0.3% higher even as it fell by a modest 0.6% in FY23, albeit much lower than 8.6% and 13.3% losses generated by developed and emerging market equities respectively. Global debt also bounced higher as easing inflation and banking crisis caused a shift in market expectations of a policy pivot from a pause to rate cuts in the latter part of the year. The benchmark 10-year sovereign bond yields across major developed markets fell 30-40bps last month. Indian debt moved in tandem, albeit less sharply so, weighed down by elevated inflation prints, followed by production cut announcement by OPEC+ in early April.
The IMF’s WEO India’s growth targets have been lowered to 5.9% and 6.3% for this year and the next. Developed countries are expected to fare worse. While the Indian economy would continue to fare relatively better, a global slowdown would not leave us untouched either. As we have mentioned above and later on in the note, policy imperatives at this point need to keep the delicate balance between supporting growth and management of inflationary expectations. On that cautious note, we bring you the April edition of the Market Pulse.