Outlook for the Month of September 2021
The key events in the month were –
Domestic Factors –
a) GDP – Q1FY22 Real GDP growth came at 20.1% yoy due to low base of last year. Real GVA growth rose to 18.8% with the industrial sector recording a growth of 46.1% led largely by construction and manufacturing.
b) GST – July’21 GST revenues collected August’21 increased 29.6% YoY to Rs 1.12 tn vs Rs 1.16 tn in July’21. The GST Collection for the first five months April-August of the fiscal year 2021-22 increased 57.4% over the corresponding period last year.
c) Manufacturing PMI – India’s manufacturing PMI came in at 52.3 in August’21 vs 55.3 in July’21.
d) Trade Deficit – India’s trade deficit increased to $13.9bn in August’21 Vs $ 11.0 bn in July’21 as imports rose 1.3% mom while exports declined 6.5% mom.
e) National Monetisation Plan – FM announced the National Monetization Pipeline (NMP) to monetize Rs6 tn of brownfield infrastructure assets over a period of four years. Assets identified include roads, power transmission and generation, gas pipelines, warehousing, railways, telecom, 25 airports, 31 projects in 9 major ports, coal and mineral mining, sports stadium and redevelopment of colonies.
Global Factors –
a) Jackson Hole – Fed Chairman Powell in its Jackson Hole commentary said taper could be sometime later this year which will depend on employment goal. Rate hike is still a distant possibility.
b) Eurozone – Eurozone manufacturing PMI came in at 61.4 in August’21 Vs 62.8 in July’21.
c) China – China plans to propose new rules that would ban companies with large amounts of sensitive consumer data from going public in the U.S.
d) Semiconductor Shortage – As per IHS Markit, the global shortage of semiconductors will cut worldwide auto production by as many as 7.1 million vehicles this year, and pandemic-related supply disruptions will hobble the industry well into next year.
Domestic Macro Economic Data
Inflation – CPI inflation in July’21 at 5.6% Vs 6.3% in June’21 as core inflation moderated. WPI inflation moderated to 11.2% in July’21 from 12.1% in June’21 led by lower fuel and food inflation.
Outlook for Equities
Indian equity markets touched a new high in the month of August’21. Nifty rose 8.7% in the month of August’21. Indian markets are buoyed as economy picks up after the ebbing of the second wave. Vaccination gathers pace in India with over 1cr doses being administered in a single day. The MPC kept the repo rate unchanged at 4% and continued with its accommodative stance for as long as necessary to revive growth on a durable basis keeping in view the inflation objective. Q1FY22 real GDP growth rose to 20.1% compared to 1.6% in Q4FY21. Global markets were mostly flat as the third wave is gaining steam globally. Fed Chairman in its Jackson Hole commentary said taper could be sometime later this year while rate hike is still a distant possibility. The recent takeover of Afghanistan by Taliban has led to geopolitical risk globally. FIIs bought $1.2bn worth of equities whereas DIIs bought $0.9 bn worth of equities during the month of August.
Nifty is currently trading at ~21x FY23 P/E, overall valuations are not cheap but next year is going to be about stock specific movements rather than the whole market moving upwards together. With government's focus on spending heavily on the economy to continue, strong GDP growth revival and corporate earnings momentum will likely keep the markets buoyant. We expect Nifty earnings to grow at 23-24% CAGR from FY21-23. Investors can continue to invest in equities from a long term perspective as corporate earnings are expected to bounce back.
Outlook for Debt
RBI monetary policy was different in August’21 as the course of guidance was changed in a subtle manner by outlining a path towards normalisation. This was quite visible as MPC revised inflation forecast for FY22 sharply upwards to 5.7% against 5.1% earlier. Although inflationary pressures were highlighted as being more driven by supply side transitory factors and not so much being driven from demand side, yet trajectory seems upward. RBI Governor stated on increase in the quantum of variable rate reverse repo auction amount in a phased manner to Rs 4tn by end of September’21, seeming to begin process of withdrawing excess liquidity in a gradual manner. One MPC member dissented on the accommodative stance as well as the level of reverse repo rate. RBI MPC minutes highlighted that few members opined normalisation could be started even while maintaining stance as accommodative. Few statements in this regard have subsequently been made by RBI members in the media stating liquidity withdrawal through variable rate reverse repos will be higher and for longer tenors but gradual, not intending to surprise markets.
Banking system liquidity surplus on daily and fortnightly basis has increased to Rs 8.00 - 8.50 tn in August’21. GST collections for the month of July’21 collected in August’21 have remained robust at Rs 1.12 tn. Fiscal deficit numbers for April-July’21 stood at 21.3% of budgeted estimates as gross tax revenue grew by 49% compared to July’20. GDP growth for Q1FY22 came at 20.1% on a YoY basis, but over quarter saw a fall of 42% due to impact of second wave. July’21 core infrastructure growth data came at 9.4% over previous year. CPI inflation moderated sharply to 5.59% in July’21 against 6.26% in June’21 amid favorable base effects as both food inflation and core inflation moderated. July’21 WPI inflation moderated to 11.2% from 12.1% in June’21 but remains high due to low base effects and high prices of crude oil and manufactured goods. June’21 IIP increased by 13.6% led by a gradual pick-up in sequential momentum as it increased on a mom basis
In global markets, Fed Chair, Jerome Powell, in his Jackson Hole Symposium speech clearly outlined that the “substantial further progress test has been met for inflation” and “there has also been clear progress toward maximum employment”. He reiterated the July’21 policy view of most participants that if the economic conditions evolve as expected, the Fed would start reducing the pace of asset purchases this year. However, rate lift off guidance was stated as unlikely to begin soon and be separate from tapering. These signals were considered dovish on the margin and US 10-year remained near lower end at 1.30% while dollar index gave up gains made post FED minutes. Brent prices lifted off lows as demand side concerns eased.
In the near-term markets will await change in amount and tenor of variable rate reverse repo auctions and follow guidance on liquidity by RBI. Upcoming inflation prints and progress of fast moving growth indicators will be watched for gauging comfort on progress of growth. Progress of Government securities acquisition program will also be watched by markets. 10-year Gsec closed at 6.21% on 31st August’21, 1 bp higher than close of previous month. In the near term we expect 10-year yield to be in a range of 6.10% to 6.40%. Corporate bond spread for 10-year is at 60 bps and likely to be in a range of 60-70 bps.