Outlook for the Month of January 2022
The key events in the month were –
Domestic Factors –
a) GST – November GST collections (collected in December) was in line with October collection at Rs 1,298 bn.
b) Manufacturing PMI – India's manufacturing PMI came in at 55.5 for December’21 vs 57.6 in November’21.
c) Trade Deficit – Trade deficit in December’21 came in at $22.0bn from $23.3bn in November’21. For the month of December’21, exports grew 37% yoy to $37.3bn while imports grew 38% yoy to $59.3bn.
d) Current Account – The current account registered a deficit of $9.6 bn (1.3% of GDP) in Q2FY22 against a surplus of $6.5 bn in Q1FY22 (0.9% of GDP) and surplus of $15.3 bn (2.4% of GDP) in Q2FY21.
Global Factors –
a) FOMC – The Fed accelerated the pace of tapering to $30bn from $15bn previously, revised inflation up and unemployment down. The Fed signalled three rate hikes in 2022.
b) Bank of England – The Bank of England became the first major central bank to raise interest rates and attributed persistent inflation to the surprise move.
c) Crude Oil Prices – Brent crude oil prices increased 11% during the month, due to supply side issues.
d) Coronavirus – US reported record high cases of 1mn as Omicron spreads rapidly. Most countries have imposed new travel restriction in order to curb the spread.
Domestic Macro Economic Data
Inflation – CPI inflation increased to 4.9% in November’21 Vs 4.5% in October’21. WPI inflation jumped to a 12 year high of 14.2% due to rise in food and fuel inflation.
Outlook for Equities
In the month of December’21, Nifty gained 2% amid concerns about surging cases of omicron leading to fresh curbs and rising inflation. RBI kept the repo rate unchanged at 4% with an accommodative stance. Union Cabinet cleared the PLI scheme for semiconductors and PM announced vaccination for 15 to 18 age group and booster doses for healthcare, frontline workers and senior citizens. During the month of December’21, FIIs remained net sellers and sold ~$1.7bn while DIIs bought ~$4.3bn of Indian equities.
Indian markets along with France and US outperformed global markets in CY2021. In CY2021 equity markets saw a bull run despite a number of challenges along the way like rapid spurt in Covid cases, shortage of medical supplies, imposition of lockdowns, supply chain disruption, Evergrande debt crisis etc. However, the situation improved with globally governments announcing relief packages to deal with Covid-led disruptions, accommodative stance by global central banks, rapid pace of vaccination, Indian government announcing a slew of reforms and strong corporate earnings growth.
Last 2 years equity markets saw a bull run driven by low interest rates and pumping of money by various central banks. This is expected to reverse this year and markets are likely to be choppy. Global central banks changed their stance to hawkish amid persistent high inflation. Many of the global central banks such as Brazil, Mexico, Russia, South Korea, Turkey and UK raised their key interest rates. The US Federal Reserve signaled three rate hikes in CY2022. Nifty is currently trading at ~21x FY23 P/E, overall valuations are not cheap. Economic recovery and underlying corporate earnings growth are very strong which will support high valuation multiples. We expect Nifty earnings to grow at 21-22% CAGR from FY21-24. Investors can continue to invest in equities from a long term perspective.
Outlook for Debt
December’21 was a month when RBI walked the talk on rebalancing liquidity. Surprise variable rate reverse repo operations were conducted and the 1-day reverse repo amount fell below Rs 1 tn on several days. RBI rebalanced liquidity conditions in a non-disruptive manner, but rates on short end galloped higher. 91-day treasury bill cut off yields moved to 3.70% from 3.50%. RBI enhanced the 14-day variable rate reverse repo auction amounts on a fortnightly basis upto Rs 7.50 tn on 31st December’21. These in most instances were undersubscribed as markets felt the pinch on liquidity withdrawal. From January 2022 onwards, liquidity absorption will be undertaken mainly through the auction route.
In the December’21 Monetary Policy Committee members highlighted the increased risks emanating from global factors, even as they expressed concerns on the durability of domestic growth, thereby reinstating the policy stance. Notably, the members seemed concerned on risks emanating from financial market instability, elevated and sticky core inflation and appeared ready to act swiftly once growth seems on a stronger footing. MPC minutes highlighted the uncertainties and the policy dilemma facing the MPC. Most MPC members considered it necessary to remain vigilant on the risks associated with inflation and financial instability. The recent actions of RBI through 3/4-day variable rate reverse repo auctions in the week when liquidity was expected to tighten due to advance tax and GST outflows suggest the discomfort and hence the necessity to swiftly normalize the operating target rate towards the repo rate.
The second batch of supplementary demands for grants sought legislative approval of a gross additional expenditure of Rs 3.7 tn with net cash outgo of Rs 3 tn. The major items for additional expenditure are- fertilizer and food subsidy, Air India related spend MNREGA related spends. Center’s fiscal deficit for Apr-Nov 2021 stood at 46.2% of budgeted estimates compared to 135.1% year ago. This is due to improvement in gross tax revenues by 50% while expenditure growth in 8MFY22 was 8.8%. November’21 GST collections (collected in December) was in line with October’21 collections at Rs. 1.3 tn. December’21 trade deficit came at a high $ 22bn as both exports and imports were the highest recorded to date. November’21 CPI inflation picked up to 4.91% while core CPI inflation remained at 6.3%. November’21 WPI inflation picked up further to 14.2%. October’21 IIP grew at 3.2% led largely by festive demand.
Globally, Federal Reserve decided to speed up its pace of monthly tapering to $30 bn starting January 2022. The decision came in light of highly persistent inflation and further improvement in the labor market. It also raised the expected rate hikes in 2022 to three. US 10 year though remained range bound near 1.55% mark in thin trading for December month. Crude oil prices continued to inch up as supply side pressures led to Brent being near $79/bbl.
In the near-term, further actions by RBI on managing system liquidity will be closely watched. Inflationary pressures seep through from input prices in headline CPI is another factor to look at. With higher-than-expected borrowing announced by states and Government firing all guns on expenditure side it will be worthy of note whether fiscal deficit to GDP target is closely met or missed for FY22. 10 year G-sec closed at 6.45% on 31st December’21 higher by 12 bps against previous month close. In the near term we expect 10 year yield to be in a range of 6.40%-6.60%. Corporate bond spread with Gsec is at 40 bps and likely to be in a range of 40-50 bps.