Outlook for the Month of June 2022

Economy Review

The key events in the month were –

  • Domestic Factors –

    a) GST – GST collections for April 2022 (collected in May) was Rs 1.41tn, up 44% yoy.

    b) Manufacturing PMI – India's manufacturing PMI came in at 54.6 in May’2022 showing sustained recovery.

    c) GDP – FY2022 real GDP growth came in at 8.7%, largely supported by a significant pickup in investments by 15.8% and private consumption by 7.9%. Q4FY22 real GDP growth slowed to 4.1% Vs 5.4% last quarter.

    d) Fiscal Deficit – Fiscal Deficit for FY22 came in at 6.7% of GDP against the revised estimate of 6.9% on account of higher nominal GDP and higher tax collection.

    e) Trade Deficit – Exports in May’2022 fell by around $ 3bn from April’2022 levels, and imports remaining unchanged, trade deficit widened to $ 23bn vs $ 20bn last month.

  • Global Factors –

    a) FED – FED increased interest rates by 50bps in May’2022. The May minutes stressed the need to raise interest rates by 50 bps each at the next couple of meetings.

    b) China – China saw a decline in Covid cases which led to easing of lockdown in the country.

    c) Crude Oil Prices – Brent crude prices saw a 15.4% increase in prices in the month of May’2022 on account of sanctions by Europe on Russian crude and reopening of China leading to stronger demand. OPEC+ is poised to increase the size of its oil-supply by about 50%.

Domestic Macro Economic Data

Inflation – CPI inflation surged to 8 year high of 7.8% in April’2022 Vs 7.0% in March’2022 due to food and fuel inflation. WPI inflation rose to 15.1% in April’2022 from 14.5% last month on account of high food and fuel inflation.

Market Outlook - June 2022

Outlook for Equities

Sensex and Nifty corrected 2.6% and 3.0% in the month of May’2022 after RBI raised rates in an off-cycle meet. Mid-cap and small-cap indices underperformed large-cap and were down 5% and 8%. Worries over a global economic slowdown amid aggressive policy tightening and ongoing Russia-Ukraine conflict dented investor sentiment. Crude prices softened to $115/bbl from the recent highs of $124/bbl as OPEC+ is poised to increase the size of its oil supply by 50%.

The Indian government unveiled a number of measures to control inflation- cut excise duty on petrol by Rs 8/ltr and on diesel by Rs 6/ltr, imposed a hefty export duty on steel products and raw materials, also lowered import duty on key raw materials for steel production, announced a curb on the export of sugar and wheat and allowed duty-free imports of crude soyabean oil and crude sunflower seed oil. Due to expectations of reduced global liquidity and rate tightening, FIIs continued being net sellers in the month of May’2022 to the tune of $4.7bn. On the other hand, DII’s strong buying continued in May’2022 totalling $6.1bn.

Corporate earnings in India continued to remain healthy in Q4FY22 and instilled a ray of hope amid the grim situation with no major cut seen in earnings. Nifty is currently trading at ~19x FY23 P/E currently. Economic recovery and underlying corporate earnings growth expectations are expected to continue to be strong. We expect Nifty earnings to grow at around 17% CAGR from FY22-24. Post correction, valuations of Indian stocks have come to attractive levels especially large caps stocks. Investors can continue to invest in equities from a long-term perspective.

Outlook for Debt

June month marks the beginning of monsoon season, predicted to be normal this year. Heatwave having had an adverse impact on crops a good monsoon will bring cheer to markets. This is within a backdrop of RBI’s May policy meeting minutes which highlighted MPC members concerns of spillovers from global inflation emanating from ongoing geopolitical conflicts and supply-side disruptions. RBI Governor in interviews has pointed out how growth has improved and come to above pre pandemic levels and the need to balance inflation and growth is in the stated order.

Liquidity in May’2022 dropped below Rs 3tn as GST payments, excise and lower government expenditure have driven liquidity lower. This has reflected in higher treasury bill yields and short-term papers yields. Real GDP growth for Q4FY22 came at 4.1%. For the full year FY2022 real GDP growth at 8.7% was largely supported by a significant pickup in investments and private consumption. Central government gross fiscal deficit to GDP ratio was kept in check at 6.7% in FY2022 with higher than estimated tax revenues.

In FY2022, RBI’s balance sheet increased by 8.5% on year, RBI transferred a surplus of Rs 303bn to the central government for FY2022 compared to Rs 991bn for FY2021 due to higher provisions. April’2022 WPI inflation rose by 60 bps to 15.1%. CPI inflation in April’2022 increased sharply to 7.79% led by increases in food and core inflation. IIP growth at 1.9% in March’2022 remained tepid.

To help cool domestic inflation government decided to allow duty-free imports for two years of 2 mn tons each of crude soyabean oil and crude sunflower seed oil. Government also capped export of sugar and wheat. This came post the central government announcement of excise duty cuts of for petrol and diesel and LPG subsidy. Customs duty cuts were also done for coking coal, naptha etc. and export duty hikes for select steel products.

Global markets reacted on higher inflation in Eurozone and minutes of the May’2022 US FOMC meeting which stressed the need to raise interest rates by 50 bps each at the next couple of meetings. Theme of possible slower rate hikes or a pause in September’200 by FED has been growing. Dollar index scaled back from multi year highs of 105 towards 101.46. Brent crude prices rose sharply towards $123/bbl as supply concerns remained elevated on Eurozone phase out of Russian crude by end of year as well as China reopening. OPEC+ is poised to increase the size of its oil supply by 50% more.

In the near term, June’2022 RBI MPC, demand supply absorption by market, inflation trajectory and currency movements will be watched by market. 10 year Gsec yield closed at 7.41% on 31st May’2022 rising 27 bps during the month. We expect 10 year Gsec yield to be in a range of 7.35%-7.55% in the near term. Corporate bond spread with 10 year Gsec is at 25 bps and likely to be near 25-45 bps.