Outlook for the Month of November 2024

Economy Review

The key events in the month were –

1. Domestic Factors –

a) GST Collection – India’s GST collection in October’24 rose 8.9% yoy to 6-month high of Rs 1.87 tn, reflecting the resilience of the Indian economy.

b) Manufacturing PMI – India’s Manufacturing PMI recovered to 57.5 in October’24 after falling to eight-month low in September’24. This was led by traction across both new orders and international sales.

c) Fiscal Deficit – India’s fiscal deficit stood at 29% of BE in Apr-Sept’24 against 39% of BE a year ago, mainly on account of higher RBI dividend and sluggish capital expenditure (down 15% yoy).

d) GDP – IMF has retained its FY2024 GDP growth forecast for India at 7.0% while pointing out that the decrease in ‘pent-up demand’ due to the pandemic is subsiding as the economy regains its potential.

e) MGNREGA Scheme – Work demand under the GOI's flagship rural employment programme fell for the 12th month in a row in Oct'24, reflecting strong economic activities, especially in rural areas. The scheme data showed that 2.0cr people demanded work in Oct'24, down 9.2% from a year before.

2. Global Factors –

a) FED – The US Fed in its upcoming meeting is likely to cut its key lending rate by another 25bps after having implemented a 50bps reduction in September’24, the first reduction since February 2020. Economists are expecting another quarter point rate cut in December’24..

b) Eurozone PMI – Eurozone Manufacturing PMI at 45.9 remained below the 50 mark in Oct’24, reflecting continued deterioration in the region’s manufacturing sector. However, Services PMI continues to expand and stood at 51.2 in Oct’24 vs. 51.4 in Sept’24.

c) Crude Oil – Brent crude oil prices remained sideways and stood at $75/bbl despite the escalation of geopolitical conflicts in the Middle East and the OPEC agreement to push back its Dec’24 production increase by one month. Weak demand in China and rising supplies from the USA could exert downward pressure on crude prices going forward.

Domestic Macro Economic Data

Inflation – India’s CPI in Sept’24 rose to 5.5% vs. 3.7% in Aug’24 owing to a higher vegetable prices. However, India’s WPI remains weak and stood at 1.8% in Sept’24 vs. 1.3% in Aug’24 as manufacturing WPI continues to remain benign.

Outlook for Equities

The Nifty ended October with a loss of 6.2%, its largest monthly decline since March 2020. Mid-cap and small cap fell 6.7% and 3.0%. The worst performing sectors were Oil & Gas (down 14%), followed by auto (down 12%) and consumer durables (down 10%). The weakness was driven by the continued FPI outflows, weak 2Q results, geopolitical tensions and uncertainty surrounding the upcoming US presidential election, all of which weighed on investor sentiment. 2QFY25 results suggest a broad-based slowdown in the Indian economy.

On the domestic front, India’s fiscal deficit stood at 29% of BE in Apr-Sept’24 against 39% of BE a year ago, mainly on account of higher RBI dividend and sluggish capital expenditure (down 15% yoy). India’s GST collection in October’24 rose 8.9% yoy to 6-month high of Rs 1.87 tn, reflecting the resilience of the Indian economy. IMF has retained its FY2024 GDP growth forecast for India at 7.0% while pointing out that the decrease in ‘pent-up demand’ due to the pandemic is subsiding as the economy regains its potential. FIIs sold equities worth $12.4bn during the month of October’24 while DIIs continued to be buyers to the tune of $12.8bn.

We expect Nifty earnings to grow at ~12-13% CAGR over the medium term. While the domestic flows remained very strong throughout the current fiscal, markets have corrected led by huge FII selling due to the elevated valuations. Post the recent correction, Nifty is currently trading at ~19x FY26e P/E and valuations have turned attractive. Hence, we believe that although the markets will consolidate for some time before the next up move, investors can continue to invest in equities from a medium to long-term perspective. However, weak quarterly results, geopolitical tensions and uncertainty surrounding the upcoming US presidential election remain major risk factors.

Outlook for Debt

RBI MPC in October meeting gave a pleasant surprise to the markets by changing the stance to “neutral”. Governor Das stated the change in stance as an enabling factor which will provide more flexibility to the MPC even as they remain focussed on process of disinflation. CPI inflation targets were kept unchanged, but Governor highlighted that near term higher prints would not derail lower inflation expectations in Q4. Food inflation is anticipated to come lower as good monsoon, buffer stocks and reservoir levels augur well for food prices. MPC had a dissenter from among the new external MPC members arguing for a cut in repo rate. RBI remains positive on growth led by private consumption and optimism on rural demand. MPC minutes highlighted that risks were balanced on both growth and inflation with the confidence on the disinflationary trend providing members comfort to shift the monetary policy stance to ‘neutral’.

Center’s fiscal deficit remained in check in 1HFY25 at 29% of FY2025BE. Much of this control continued to stem from weak pace of capital expenditure. It will be a tall task to meet budgeted capital expenditure target without outsized payouts in the latter part of the year. With lower deficit, possibility of lower borrowings is also increasing toward end-FY2025. Goods trade deficit in September narrowed back to US$20.8 bn from US$29.7 in August due to a decline in non-oil imports, led by normalization of gold imports. Services trade surplus remained steady at US$14.3 bn. September CPI inflation rose to 5.49%, the headline index accelerated led largely by a sharp rise of food prices. Core inflation also rose sharply to a nine-month high of 3.6% as the base effects fade. IIP growth in August was at a negative level by (-)0.1% against July number of 4.7% growth.

October month however has been volatile in terms of factors beyond the borders impacting financial markets. Over $10 bn of outflow was seen from equity markets and debt FPI flows also turned into a marginal negative. These have put pressure on the local currency as USDINR touched a lifetime low of 84.09/dollar while other Emerging Market currencies also depreciated. DXY index gained in October at over 3.5%. Political landscape in US with bets being placed on a Trump victory led dollar index higher along with US government bond yields spiking. Chinese monetary policy easing, and expectations of large fiscal stimulus in China has led to significant capital outflows from the EM countries.

US nonfarm payroll (NFP) additions for September 2024 came in significantly higher than consensus expectations. Data thus led to repricing of interest rate cut expectations by the market. From market pricing over 30% chance of a 50 bps rate cut moved towards pricing out completely the chances of a large move. Now markets are pricing in a near certain chance of 25 bps cut by FOMC in November and do not expect 2 consecutive cuts in 2024. The Minutes of the FOMC meeting held on September 18 indicated a divided house on the quantum of rate cut with some participants supporting a 25 bps cut. The ECB reduced policy rates by 25 bps while signalling a declining path for borrowing costs. Gold touched new highs on geopolitical risks and gained nearly 6% during the month. Brent oil came off October highs to end the month at $72.81/bbl as middle east tensions eased.

Markets await CPI data, FPI flows data, liquidity directions, US NFP data, US presidential elections and FOMC. New benchmark 10 year gsec closed at 6.80% on October 31, 2024. Yields rose by 9 bps during the month. 10 year gsec yield is likely to be in a range of 6.70%-6.90% in the near term. Spread of 10 year Gsec with corporate bonds is nearly 40 bps and likely to remain between 35-55 bps.