Indian equities have been amongst the best performing markets since Jan 2020; 2022 CY YTD has been a volatile start for Indian and global indices

Key Highlights

India's GDP grew 5.4% in Q3FY22 which was lower than expected estimates and is likely to grow at 8.9% in 2021-22.

Composite PMI came in at 53.5 in Feb 2022, and has remained above 50 in the last 6 months

GST collections in March was at record high at ₹ 1.42 lakh crs and it has been consistently been higher than ₹ 1.3 lakh crs for the past 6 months.

Selling pressure from FPIs in the secondary market in the last few months have resulted in net outflows

Forex Reserves have seen a dip from 629 Bn USD to 617 Bn USD on account of surging oil prices

Feb CPI inflation was at an 8 month high level and has inched past RBIs target inflation level of 2% to 6%

Trade deficit jumped to $18.7 Bn in Feb 22 from $12.6 Bn a year ago primarily on account of rising crude oil prices

Lending and Term deposit rates have been in line but tad bit lower than FY 20 numbers

Global growth in FY 22 to be led by key geographies

Global economies have showed recovery however Covid surge along with rising inflation rates has impacted the recovery path

PMI numbers reflect global recovery post omicron led COVID wave

Global Negative-Yielding Debt has come down to USD 2.9 Trillion from USD 5.7 Trillion last month

➢ Global liquidity has eventually began to normalize with tapering announcement by various Central Banks

➢ US Fed in the FOMC meeting had announced that it would ramp up the speed at which it pares its bond purchases, putting the nation's central bank on course to eliminate the emergency quantitative easing (QE) program a few months earlier than expected

➢ Federal Reserve and Bank of England had both resorted to interest rate hikes in the month of March.

Dollar Index has seen an increasing trend and has been at its strongest levels along with U S yields on investor concerns around Federal Reserve starting their withdrawal of policy support and hiking interest rates

Due to the geopolitical conflict, crude oil prices rallied with Brent crude touching 14 year high levels of $140 /bbl Crude oil prices have increased significantly over the past two months In FY 22 Brent crude oil futures moved from US$64 bbl to a high of ~US$140 /bbl

(1) The market is trading well above its long-term 12-month forward. The composition of the index has also changed in favor of high quality, higher P/E stocks in the past few years
(2) The yield gap (difference between bond and earnings yield) has increased with rise in bond yield

Majority of the benchmark and sectoral indices are currently trading at premium to their historical averages, while some sectors which have seen some correction are trading at a discount to their historical averages

A broader market recovery has led to recovery in Market Cap to GDP

Earnings recovery is expected to continue into FY23

US and MSCI Developed market Index are trading at relatively higher premium compared to the European counterparts

Indian markets are trading at relatively higher premium compared to their peers historical averages

India

• ➢ GDP
• ➢ CPI, WPI
• ➢ PMI
• ➢ Bond Yields

Global

• ➢ Services & Manufacturing PMI, CPI, WPI from various geographies

➢ Escalation of geopolitical tensions between Russia & Ukraine

➢ Sustained high crude oil and commodity prices could impact economy and earnings in some sectors

➢ Any negative surprise in Q4 FY 22 results

➢ Faster than expected policy tightening & stimulus withdrawal along with faster than expected interest rate hike by Global Central Banks

➢ Potential slowdown in Domestic Institutional buying in Indian markets who have till now been maintaining a balance in the market on the back of sell off seen from FII's in the last few months

• "Volatility has no bounds" - An action packed month yet again with global events (Russia - Ukraine Crisis and its impact on global markets) dictating domestic bond yield movements.
• Sanctions imposed on Russia after it invaded Ukraine had curtailed oil supply and sent the Brent crude oil contract to 14-year highs of near $140 per barrel in the month of March, a level last seen in July 2008.
• However, with easing tensions between Russia and Ukraine and announcement (towards latter part of the month) by China's financial hub of Shanghai that it would lock down the city in two stages to carry out coronavirus testing over a nine-day period after it reported a new daily record for asymptomatic infections brought down oil prices to close below $110 per barrel towards month end.
• 10-year US Treasury yields (hovering around 1.70% at start of the month) also joined the volatility race with crude oil prices. US treasury yields hit a three-year high of 2.56% before cooling down to close slightly above 2.30% as investors monitored progress of the Russia-Ukraine talks - Russia had agreed to scale down its military operations near Kyiv and surrounding cities, raising bets of a truce to end a five-week old conflict.
• The FOMC meeting providing a more hawkish guidance on rates, with the US inflation forecasts being revised upwards while growth downwards. Fed officials are now expecting six rate hikes (of 25bps each) in CY2022 and four in CY2023. The Fed Chair has also left the room open for more aggressive actions, if needed, to tackle inflation.
• While domestic bond yields were kept volatile throughout the month, short end of the curve up to 3 years ended the month range bound, and long end of the curve saw yields rise by 5 - 10 basis points. 1- Year securities remained an exception, with their yields falling by 10 - 15 basis points.
• March CPI inflation rose to 6.95% vs 6.07% in February, led by a broad-based sequential increase. This is the third consecutive month that CPI data has breached the RBI's upper margin of 6%.
• GST collection in March touched an all-time high of over ₹1.42 lakh crore (breaching an earlier record of nearly ₹1.41 lakh crore collected in January), an increase of 15% annually, on the back of rate rationalization and anti-evasion steps.
• Release of G-sec borrowing for 1HFY23 - The government's plan to borrow 59% of the FY2023BE gross borrowings of ₹14.31 lakh crore in 1HFY23 is broadly in line with historical trends, but marginally higher than market expectation of 50-55%. The government will borrow ₹8.45 lakh crore through dated borrowing in 1HFY23, 20% higher than 1HFY22. The net issuance for 1HFY23 would be ~₹6.2 lakh crore as against ₹5.6 lakh crore in the past year (which was also aided by ₹2.11 lakh crore of OMO purchases by the RBI)
• In the 8th April monetary policy, MPC voted unanimously to leave the policy repo rate unchanged at 4%. All six members voted for retaining stance at "accommodative" while focusing on withdrawal of accommodation to ensure inflation remains within the target going forward, while supporting growth (change in wording of accommodative stance).

• Rates have only seen an upward trajectory since October 2021, after a long joy ride since 2020. FPI's have withdrawn ~US$22 billion since October 2021 compared to US$4.3 billion inflow in 1HFY22.
• Even though some respite was witnessed recently with the rates stabilizing, given the unexpected dovish tilt of RBI signaling no hurry to normalize policy and cancellations of two G-Sec auctions in February, the future provides limited reasons for the bond markets to cheer.
• This can be attributed to (i) faster global policy normalization amid persistently high inflation; (ii) elevated energy prices; (iii) heavy domestic bond supply; (iv) FPI outflow risks due to adverse global financial conditions, geopolitical risks, and narrowing interest rate differentials.
• Elevated global price pressures in key food items due to global supply shortages impart high uncertainty to the food price outlook, warranting continuous monitoring. International crude oil prices remain volatile and elevated, with considerable uncertainties surrounding global supplies. Taking into account these factors and on the assumption of a normal monsoon in 2022 and average crude oil price (Indian basket) of US$ 100 per barrel, MPC inflation is now projected at 5.7% (vs 4.5% earlier) in 2022-23. Further, real GDP growth for 2022-23 is now projected at 7.2% (from 7.8% earlier).