Chief Economist at the National Stock Exchange of India
September 2022
From optimism on a ‘pivot’ in July to caution in August to concern in September, markets have turned the corner in the last three months. A sequence of events points to hardening rates, further stress on EM and Frontier markets, and hardening of positions on the geopolitical front. The Fed’s 75bps hike with assurances of more to come, an entrenched slowdown in China—where growth has dipped below the rest of Asia for the first time since 1990—the announcement of a mobilisation drive in Russia, UK’s tax cuts—the steepest since 1972—and the resultant drop in the GBP, and a lifetime low for the INR stand out in an eventful month.
Global developed equities resumed declines in August that intensified further in September. The MSCI World Index fell by 4.3% in August and by another 7.2% in September thus far (As on September 23rd, 2022), translating into a YTD loss widening to 24.5%. The emerging market (EM) pack outperformed in August and ended flat only to fall by a steeper 8.9% in September, with the YTD loss being only a tad higher at 26.5%. India equities continued to outshine global peers, supported by renewed foreign portfolio inflows, relative economic resilience and falling crude oil and commodity prices. The benchmark Nifty 50 Index rallied by 3.5% in August, followed by a 2.4% loss in September thus far. With a modest YTD loss of 0.2%, Indian equities have outperformed its DM as well as EM peers by a wide margin.
Global debt markets have been reeling under pressure due to aggressive monetary tightening and hawkish forward guidance, with 10-year yields rising by 100-200bps across developed economies over the last two months. The Indian debt market, on the contrary, outperformed, with yields remaining steady at the short-end and falling at the long-end in August, thanks to renewed buying triggered by bond-inclusion news and low supply of SDLs and high-rated corporate bonds. The rally, however, was short-lived, with yields rising across the curve this month, and much more so at the short end, thereby leading to yield curve flattening further. Meanwhile, INR has touched record-high levels against the dollar (-8.9% YTD, as on Sep 23rd, 2022), thanks to persistent dollar strengthening, growth concerns and rising US yields. Please refer to our Market Roundup for more information on performance across asset classes/geographies.
Our Chart of the month section this time looks at two inter-related themes. The first tries to assess the extent of policy transmission in the economy by examining movement of rates across market segments and comparing them with previous hiking/easing cycles. Our analysis shows that the transmission improved under the MCLR regime introduced in Apr’16, and more so post the introduction of EBLR in Oct’19. The second theme analysis the impact of tightened financial conditions on India Inc. Our assessment of the top 1000 NSE listed companies shows a steady drop in overall leverage over the last five years, making India Inc. better placed to weather the rising rate environment. However, MSMEs seem to be in a difficult position given their high dependence on bank borrowings (80% of debt) and greater EBLR-linked loans (58% of the total floating rate loans by SCBs).
On the macro front, Indian economy grew at a four-quarter high of 13.5% in Q1 FY23, but missed market as well as RBI estimate by a wide margin. Industrial production growth also disappointed and grew by a modest 2.5% YoY, with the three-year CAGR faltering as well. Meanwhile, the headline CPI inflation snapped a three-month declining trend to climb back to 7% in Aug’22, breaching the RBI’s upper tolerance of 6% for the eighth month in a row. Merchandise trade deficit narrowed marginally but remained elevated at US$28bn in August. On the positive side, the South-West monsoon this year has recorded a 7% surplus vis-à-vis the long period average (LPA) till September 25th.
Regardless of how many times we say it, the global economy is in an unprecedented state. Countries across the world are in varied levels of stress, and the interlinkages of the world we live in amplify that stress. Developed markets are overheating, emerging and frontier markets are having to tighten policy just after getting out of a global pandemic. India remains one of the economically resilient countries in this scenario. Fiscal and external balances remain in control, domestic demand continues to show signs of recovery, and the balance sheets of corporate and financial intermediaries have been through the trough. The next few quarters would help differentiate India further on the global stage.
