Outlook for the Month of April’24

Economy Review

The key events in the month were –

Domestic Macro Economic Data

Inflation – India’s CPI Inflation in Feburary’24 was steady at 5.1%, similar to January’24 despite moderation in core inflation. India’s WPI inflation moderated to 0.2% in Feburary’24 from 0.3% in January’24.

Outlook for Equities

Indian markets ended March’24 on a high note. The Nifty was up 1.6%, while in FY24 it was up 28% which is best performance in more than 20 years. The midcap index was up 60% while the smallcap index was up massive 70% in last FY. US Fed in its March’24 meet maintained its status quo on rates. The minutes of the US FOMC meeting highlighted that members were not in a rush to start cutting interest rates since the fight against inflation is still not over. Brent crude oil prices rose to $89/bbl as near-term supplies remain tight.

On the domestic front, GDP growth in Q3FY24 came in at 8.4% much higher than estimates let by investment growth. India’s March’24 manufacturing PMI climbed to 16 years high at 59.1 vs last month at 56.9. The merchandise trade deficit narrowed to $17.5 bn in January’24 from $19.8 bn in December’23 due to decline in imports. FIIs bought equities worth $3.7bn in the month of March’24 while DIIs remained strong buyers to the tune of $6.8bn.

Indian Equity Market is currently in euphoric mode with strong momentum trading at all-time high. While the domestic flows have remained very strong throughout the last FY, market would also brace for volatility in Q1FY25 as India gets into election mode and anticipate rate cuts by developed economies. Post the recent rally, Nifty is 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.

Outlook for Debt

FY24 ended on an upbeat note for Gsec as borrowing calendar for H1FY25 gave a positive surprise to the market. Central Government plans to borrow 53% of total Rs 14.13tn of borrowings in H1FY25. Usually this is 58% for H1, hence lower supply added to constructive sentiment for market. FPI inflows in debt market continued at a robust pace, in calendar year 2024 so far FPI’s have invested $7.29 bn in debt markets, in the time period elapsed since index inclusion announcement over $12 bn has been invested by FPI’s in debt. Several investors who are not registered as FPI are taking the route of Total Return Swap for investment in India bonds.

Liquidity in the banking system also was augmented by strong Government spending towards end of fiscal year, this led to banking system liquidity coming into surplus mode in FY25 beginning. Overnight rates and interest rates on short term debt instruments also eased, with call rate moving towards repo rate of 6.50% from earlier SDF rate of 6.75%. Current account deficit in Q3FY24 moderated to 1.2% of GDP even as goods trade deficit increased. This was led by increase in net invisibles surplus as net services exports and transfers picked up. Capital account surplus also improved as banking capital flows surged, FPI and FDI inflows picked up. Q3FY24 BOP surplus improved to $6 bn, estimates for FY24 BOP surplus are at a robust $53 bn. CPI inflation in February’24 was unchanged 5.1% from last month. Core inflation in February’24 moderated slightly to 3.4%. WPI inflation in February’24 moderated to 0.2%.

Global markets witnessed the expected change by Bank of Japan as they moved to end the era of negative interest rates policy. Preparedness was high hence immediate reaction was muted; Yen however weakened in the aftermath. In the March’24 FOMC, key rates and dot plot were kept unchanged as expected. Subsequent strong growth related data in US have given rise to expectations of lower quantum of rate cuts in the year. Now market expects two rate cuts instead of three. This has led to hardening of yields with US 10 year reaching 4.40% against previous month close of 4.25%. Brent oil prices have galloped to $89/bbl as geopolitical tensions and lower inventory levels in US have resurfaced supply concerns.

In the near-term market will watch for RBI MPC, response to supply in Gsec market, FPI inflows and trajectory of inflation. Globally, changing expectations of rate cuts in US and Eurozone, changes due to BOJ end to negative rates and signs for slowing of quantitative tightening will be watched. 10 year Gsec closed at 7.06% on 28th March’24, 1bps lower during the month. In the fiscal year, 10 year has declined by 25 bps. 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 30 bps and likely to be between 30-40 bps.