Chief Economist at the National Stock Exchange of India
“There are decades when nothing happens; and there are weeks when decades happen”. Lenin’s well-known quote is often invoked for situations when global events seem to be getting ahead of us. Arguably the world around has never remained static, even geopolitically (US leaving Afghanistan in ’21), but the Russia aggression in Ukraine would rank right up there. As we note in our Market Roundup section, the macro implications of the Russia-Ukraine conflict are likely to be far-reaching, reflecting in commodities and risk assets in general already, amid higher volatility across the board. Developed markets underperformed emerging markets (EMs) in January 2022—the first time in three months. While the MSCI World Index ended the month 5.3% lower, MSCI EM Index outperformed with a smaller loss of 1.9%. Selling continued in February, with MSCI World and MSCI EM Indices falling by 3.3% and 5.5% respectively in February thus far (As on February 24th, 2022).
Indian equities moved in tandem with the broader EM pack, with modest selling in January that intensified in February amid rising geo-political tensions, reducing earnings growth momentum, and worsening domestic growth-inflation trade-off. This was partly offset by abating fears on the COVID front leading to continued unlocking of the economy, a credible growth-focused Union Budget and unchanged policy stance by the RBI. The Nifty 50 Index ended January with a modest loss of 0.1%, outperforming its EM Peers, but has fallen by 5.3% in February thus far, led by a broadbased sell-off. Mid- and small-caps have sharply underperformed this year, pointing towards a strengthened risk-off environment. Strong buying by domestic institutional investors (DIIs) has failed to make up for heavy selling by foreign capital outflows over the few months. Apart from geopolitical news, rising inflation kept global fixed income securities on the hook, with yields rising through the term structure, leading from the front. US 1-5 year treasuries have risen 60-80bps YTD, while the 10-year have jumped 47bps to pre-pandemic levels of 2%.
The RBI’s unexpectedly dovish policy stance kept the lid to some extent on Indian paper, with antipodean effects, short-term yields stayed largely flat, while renewed growth concerns and heavy supply of government paper this year (FY23 fisc at 6.4% with new borrowing at Rs14.9trn) saw the 10-year yield rise 30bps. The pandemic continues to be clearer in the rear-view mirror, with the overall caseload in the country expected to drop below 100,000 soon. What is important now is the trajectory of the recovery that the economy would take and here, the RBI’s call to provide support for growth amidst global inflation and shying away from guidance on the planned path of policy normalisation bears testimony to the state of aggregate demand. The RBI expects FY23 GDP growth at 7.8%, a tad higher than our estimate of 7.5%, but lower than the 8.5% posted by the Economic Survey.
Notwithstanding a potential improvement in growth recovery, headline consumer inflation is expected to moderate in FY23, with RBI’s estimate for the fiscal pegged at 4.5%—lower than our estimate of 5%. Barring the Russian roulette in Ukraine, global central banks have been on the tightening path, and the RBI runs the risk of falling behind the curve on inflation, potentially exposing the economy to more stringent raises going forward. Case in point, crude prices have increased by 17% since November last year, but pump prices have fallen by 13%, thanks to continued excise duty cuts. The Union Budget FY23 is a continuation of the Government’s pro-growth vision and lays out a blueprint to drive India’s growth trajectory over the next 25 years (‘Amritkal’). There is a strong focus on supporting capital formation to guide the economy through the recovery from the damage caused by the COVID-19 pandemic until private investment resumes. The budget, however, refrained from announcing any direct sops for boosting consumption. At 6.9% of GDP, the revised fiscal deficit for FY22 is a tad higher than the budgeted estimate of 6.8%. Please see our detailed analysis.
Our analysis of corporate earnings in the third quarter of the fiscal finds weak domestic demand, thanks to recurring COVID spells, continued supply-chain disruptions, and intensifying input cost pressures. Top-line growth YoY has dropped from 41% in June’21 to 28% in September and now, a still respectable, but a lower 25%. Corporate earnings this year of the top 200 covered companies is now pegged at 41%/22% over FY22/23, a 31?GR that’s primarily led by commodities. Our analysis has many more interesting details across sectors, across all three levels (top-line, profits and margins). The Insights section has multiple interesting papers. The first by Majumdar and Singh (2020) finds communication on COVID-19 by firms across sectors to help in reducing information asymmetry. A highly cited paper by Forbes and Rigobon (2002) analyses contagion across markets and makes the subtle point that the increased interconnectedness seen during times of crises that we consider contagion could be largely explained by the correlation brought about by inevitably increased volatility during such periods. On a lighter note, if wars and related disruptions to the markets weren’t enough, a paper by Edmans, Garcia and Norli (2007), using a cross-sectional study across 39 countries finds that loss in an international football match has an economically and statistically significant negative effect on a country’s stock market. We live in interesting times, regardless of the antecedents of the expression. Thanks to the pandemic, or despite it, the world we live has changed substantially in the last few years, and such changes are not done yet.