• Indian economy unlikely to have "V" shaped recovery from Covid 2nd wave, which was experienced after 1^st wave.

• Demand may remain muted for a while and situation will evolve depending on occurrence and severity of potential 3rd wave.

• However corporate profits and Nifty earnings may continue to grow as

• • Large part of Nifty earning not linked to domestic recovery (e.g. export driven sectors like IT, Pharma and global commodity prices linked sectors like Metals, Oil & Gas etc.)
• • Cost reduction measures, shift towards organised businesses and lower provisions by banks.
• • Q1FY22 results and FY22 & FY23 projections stays on track so far with some minor misses.

• With confluence of corporate earning growth, global liquidity and elevated valuation, we maintain the "Neutral" stance, i.e. equity allocation as per strategic allocation.

• Market cap orientation to start rebalancing towards 70% large cap funds and up to 30% mid and small cap funds by making fresh deployment more towards large cap funds.

• SIPs as a route and Balanced Advantage funds should be used to take advantage of any volatility.

• Risk & Concerns

• • Potential risk of Covid 3^rd wave, which can impact economy and earnings
• • Input cost inflation, slower growth than market expectations
• • Central banks may halt easy monetary policy due to rising inflation
• • Any sharp rise in bonds yields could result in de-rating of equities

• The belief is that the current policy direction is not to dismantle the Corporate or tech sector in China. These measures are considered for specific purposes like discourage monopolistic behaviors, data security, address inequality, fair pricing, promote competitiveness and encourage investments in areas considered primary by government.

• Such measures are taken by other governments also like US Antitrust, UK on Uber and Europe Antitrust etc.

• Education sector in China has special sensitivities; the move to convert non-profit and ban on foreign capital is extreme, but it should be regarded as an exception rather than a precedent for more sectors.

• Earlier in 2018 there was an intensification of regulation in areas such as pharmaceutical pricing and computer game approval, however investor attention gradually returned to focusing on the compounding of earnings and other fundamentals

• The recent regulatory regime is expected to create an uncertain environment & short term headwinds, but it shouldn't destroy the corporate strengths.

• While there can be some impact on earnings & growth of select companies and demand for higher risk premium, but market is already factoring it with significant correction in valuations.

• Further, we continue to prefer allocation to global markets through MF, to complement Indian equities and believe investors should diversify by participating in complementing themes which otherwise are not available or have minimal presence in domestic public markets.

In the domestic markets, the International Monetary Fund (IMF) has cut its economic growth forecast for India to 9.5% for FY22 (as against earlier estimate of 12.5%).

Nifty Index was flat despite some bouts of volatility, in July 2021. In the absence of any major economic prints, markets focused on corporate earnings and commentaries. Markets took note of strong results among construction materials, IT services and metal companies, even as automobile companies and banks posted disappointing results.

Among sectors, Nifty Realty gave highest return of 15.9%, followed by Nifty Metal (10.6%), Nifty IT (4.5%) and Nifty Pharma (1%) in July'21. On the other hand, Nifty Auto gave negative 5.2% return and Nifty Energy gave negative 4.5% return. Nifty small cap 100 index gave astonishing 8.1% return in July'21.

Infrastructure output (weight of 40.3% in IIP) rose 8.9% in June (May: 29.3%). Steel production increased by 25%, natural gas production by 21%, coal production by 7.4%, electricity production by 7.2%, cement production by 4.3%, refinery products production by 2.4%, and fertilizers production by 2%. On the other hand, crude oil production fell by 1.8%. Infrastructure output grew by 1.1% in June on a sequential basis.

On the positive side, normal monsoon, good progress in vaccination, upcoming festive period, reforms by the government and multi-year low-interest rates are supporting economic recovery.

On the revenue side, Gross tax collections for Q1FY22 increased by 97% over Q1FY21 with direct taxes and indirect taxes increasing by 112% and 85%, respectively. Fiscal deficit in Q1FY22 was at 18.2% of FY22BE.

The Balance sheet (ECB+US Fed+BOJ) expansion since Feb'20 has been of the magnitude which took 6 years before Feb

10-yr Govt Bond Yields - the bond yield have further dropped to 1.15% amid delta variant concerns.

► Market is going through a consolidation phase; whereby time correction could lead to moderation in valuations.
► Markets are optically at premium given depressed earning due to Covid impact. The economic recovery and earning delivery is key for future returns

• Markets witnessed the much awaited issuance of the new 10 year G-sec benchmark, with RBI setting a higher than expected coupon of 6.10%, indicating central bank's comfort with slightly higher yields rather than keeping the benchmark anchored to around 6.00% levels.
• Even though 10-year US treasury yields ended around 15 basis points lower at 1.23% on month end, back home, government bond yields ended the month higher by 5 - 10 basis points. Corporate bond yields throughout the curve also inched higher with only exception to short maturity assets of up to 3 months maturity.
• Earlier this month, there were news reports which stated that RBI had eased the hold on bond yields to price in the increased supply of gilts to fund the GST compensation shortfall. This, along with frequent devolvement of dated securities at weekly auctions, higher than expected coupon setting of new 10-year G-sec benchmark and RBI's move to purchase illiquid securities under G-SAP program kept bond market sentiments weak.
• Even though July CPI inflation marginally moderated to 6.26% vs 6.30% in May and lower than market's expectation of 6.60%, this was the second consecutive month of CPI breaching RBI's inflation tolerance band of 2%-6%. This print was backed by lower core inflation this month, helped by favorable base effect.
• June GST revenues (collected in July) were higher than May as economic activity picked up following the easing of state-wide restrictions. Total GST collections for this month was 1.16 lakh crore as compared to around 0.93 lakh crore in the previous month.
• Normalization was also witnessed on the trade deficit front. Exports in July increased 48% to US$35.2 billion over July 2020 and by 8.2% over June 2021. Exports continued to remain strong as commodity prices and global demand remain strong. Imports in July increased 59% over July 2020 to US$46.4 billion and by 10.8% over June 2021. Domestic demand continues to improve though much weaker compared to global growth.
• On the global front, the Federal Open Market Committee (FOMC) made one more baby step towards tapering of bond purchases. In previous meetings, it was only the "talks about taper" but this time it was "deep dive into timing, pace and composition of taper" - a typical Fed style of preparing markets.

• The RBI Monetary Policy Committee (MPC) voted unanimously on 6th August to leave the policy repo rate unchanged at 4% and continue with the accommodative stance as long as necessary.
• RBI's guidance on CPI inflation was also keenly eyed by market participants with the last 2 CPI readings breaching RBI's tolerance band of 4% +/- 2%. The MPC estimates headline CPI inflation at 5% for 4QFY21, 5.2% for 1QFY22, 5.2% in 2QFY22, 4.4% in 3QFY22 and 5.1% for 4QFY22. We will be watchful of (1) high global commodity prices, (2) higher logistics cost, (3) monsoon-related developments, and (4) supply-side risks emanating from any prolonged localized lockdowns.
• RBI governor's media comments in the month of July gave further credence to this fact citing the current spike in inflation as by and large transitory in nature and inflation could moderate by the third quarter. "What is transitory in nature needs to be watched very carefully. Any hurried or hasty action could completely pull down the economy, at a time when the revival is nascent and hesitant."
• On the government expenditure front, Center has transferred Rs. 75,000 crores (without additional borrowing) to the States for GST compensation shortfall. However, clarity is still awaited on whether the entire Rs. 1.59 lakh crore will be financed through borrowings in 2HFY22.
• In long maturity tax free bonds space, yields have now started to inch higher with few institutional players (banks & insurance companies) coming to book profits and trim their holdings this month with the view that yields have now bottomed out.

The steepness in Sovereign yield curve is more evident than corporates with SDLs being most attractive.