Outlook for the Month of June’24

Economy Review

The key events in the month were –

Domestic Macro Economic Data

Inflation – India’s CPI Inflation in April’24 remained steady at 4.8% vs. 4.9% in March’24 while core inflation was also stable. India’s WPI inflation increased to 1.3% in Apri’24 from 0.5% in March’24.

Outlook for Equities

The Nifty Index ended flat during May’24 amid increased volatility due to Lok Sabha elections 2024, geopolitical tensions and significant FPI outflows. Sectoral indices closed mixed. Capital goods, Power and Metals were the major gainers and IT, healthcare and oil & gas were the major losers. The US Fed in its May’24 meet unanimously voted to hold the policy rate at the 23-year high mark, and said that there has been a lack of further progress toward the 2% inflation objective. Brent crude oil prices have moderated to $80/bbl during the month amid weak demand outlook in China and higher than expected inventory build-up in USA.

On the domestic front, GDP growth in Q4FY24 came in at 7.8%, much higher than estimates let by investment growth. India’s May’24 manufacturing PMI witnessed a marginal dip to 58.4 from 58.8 in April’24. However, it continues to remain strong and indicates healthy manufacturing outlook. The merchandise trade deficit widened to $19.1bn in April’24 from $15.6bn in March’24 driven by lower exports. FIIs sold equities worth $3.3bn in the month of May’24 while DIIs remained strong buyers to the tune of $6.4bn.

Markets remain volatile and appear to be at a near-term peak as the NDA mandate is weaker than the exit polls (292 seats for NDA and 240 seats for BJP). The new government will be dependent upon alliance partners, which implies the return of coalition government politics in India after 10 years of single-party majority. We expect the new government to focus on the rural economy, which has been struggling over the last few years. While the domestic flows have remained very strong throughout the last FY, market would also brace for volatility in Q1FY25 given the elevated valuations in certain pockets and the likely policy shift towards populism. Nifty is currently trading at ~21x FY25 P/E, +1SD above the long-term average. We expect Nifty earnings to grow at ~12-13% in FY25. Investors can continue to invest in equities from a long-term perspective although the near term might remain volatile.

Outlook for Debt

Election results were the most awaited event in the near term and rates market was surprised to say the least with the outcome. With the incumbent Government getting lower majority than expected yields saw a sharp pullback of 9 bps in 10-year Gsec after reaching a low of 6.94% just prior to results. This has raised many questions, especially from the perspective of fiscal deficit and fiscal consolidation path. Although it seems that Government’s policies might take turn for a relatively populist bias, it seems unlikely that fiscal consolidation would suffer. One of the main points here is bumper RBI dividend of Rs. 2.1tn received by Government. This amount exceeded budget expectations by a wide margin and gives a fiscal space of ~0.4% of GDP. It is possible that some amount of RBI dividend is used for expenditure within the budget to be presented in July and still achieve the target of 5.1% fiscal deficit to GDP ratio projected for FY25. In addition, final number for FY24 fiscal deficit to GDP at 5.6% against previously projected 5.8% of GDP adds to the possibility of maintaining fiscal deficit consolidation path.

Rating agency S&P Global upgraded India’s sovereign rating outlook to positive from stable and affirmed the 'BBB-' long-term local currency sovereign credit ratings. S&P also stated that on improvement of fiscal metrics they could look at upgrade of India’s rating in time period of two years. After remaining in deficit territory for an extended period of time banking system liquidity moved into surplus zone in May month end. Government surplus cash balance also reached a high of over Rs. 5.10 tn led by RBI’s bumper dividend transfer curtailed spending. Government also announced several tranches of buyback of securities on the shorter tenor of the curve but market response to these buybacks has not been enthusiastic. Given the comfortable cash position amid the limited ability of the government to spend during the election period, the RBI announced cuts to the T-bill borrowing calendar by Rs 600 bn for 1QFY25, this led to easing of T- Bill yields by 7-8 bps.

April headline CPI inflation remained broadly unchanged at 4.83% from 4.85% in March while core CPI inflation remained comfortable at 3.22%. April’s WPI inflation came at 1.3% from 0.5% in March led largely by food inflation increase. Infrastructure output growth in April 2024 came in at 6.2%. India’s industrial production growth in March moderated to 4.9%, all categories registered positive growth rates led by consumer durables. Goods trade deficit in April widened to US$19.1 bn with services trade surplus at US$12.6 bn. With 4QFY24 real GDP growth surprising on the upside at 7.8%, FY2024 real GDP growth was revised up to 8.2% led by investment growth while private consumption growth was weak.

On the global front data indicated pace of rise of inflation in US slowing as compared to earlier prints which indicated stickiness, labour market strength and consumption growth data also have shown waning trends. Rate cut expectations from FOMC however are of 25 bps in the current year 2024. Meanwhile ECB is expected to cut rates in the current week and move forward with caution. Brent prices slipped after OPEC+ meeting on June 2nd as details indicated that voluntary production cuts by 8 member states could be wound down from October 2024 onwards. Brent prices are down 11% from April end levels.

In the near term, markets await RBI MPC meeting scheduled later this week, ECB and FOMC meetings in June. The formation of Government and presentation of budget in July will be keenly watched. 10 year Gsec closed at 6.98% on May 31, 2024 declining by 17 bps during the month. In the near term 10 year Gsec is likely to be in a range of 6.90%- 7.20%. Spread of gsec with corporate bond is 51 bps and likely to be between 40-60 bps.